In 2005, for the second consecutive year, the surfactants industry was caught between sky-high raw material costs and large multinational customers that were unyielding on price. With no end to the squeeze in sight, companies that make surfactants and their intermediates are starting to take defensive action.
The starkest move came in August when Sasol, the South African oil and chemical firm, announced that it had reversed strategy and decided to sell the multi-billion-dollar-a-year olefins and surfactants business it had acquired just five years earlier. Other firms have also taken their own restructuring steps in the past 18 months.
For example, Akzo Nobel announced early last year that it wants to sell its oleochemical business and focus on a smaller portfolio of surfactants operations. Then in December, Akzo disclosed that it would shut down its McCook, Ill., cationic surfactants plant, part of the operation it is keeping, and consolidate cationics production at other U.S. facilities.
In November, Cognis signed a deal to put its oleochemicals business into a joint venture with Malaysia's Golden Hope Plantation. Dow Chemical exited the sarcosinate surfactants business in late 2004. And during 2005, Huntsman Corp. wrapped up a restructuring of its surfactants business that included the closure of plants in Whitehaven, England, and Guelph, Ontario.
According to Don Stanutz, president of Huntsman's performance products division, which includes the $1 billion-per-year surfactants business, demand for the surfactants industry's products is rising by several percentage points a year. "The challenge hasn't been selling product," he says. "It's been earning any profit on the product that is sold."
This challenge is largely due to cost increases during the year for crude oil and its derivatives. Prices for ethylene, a basic feedstock for detergent alcohols and other surfactant intermediates, rose 35% in 2005, according to Dave Nelson, a marketing leader in Dow's surfactants business. Prices for kerosene and benzene-raw materials for linear alkylbenzene (LAB)-also escalated in 2005, says Mark Quintyn, commercial director at Spain's Petresa, one of the world's largest LAB producers.
Although surfactants manufacturers tried to raise prices in response to the raw material run-up, they lament that the results have been mixed. Quintyn says Petresa recovered part of the higher raw material cost with LAB price increases, "but not to the extent of returning to healthy and acceptable margins." Likewise, BASF says, "despite significant price increases passed on to the marketplace, BASF still was not able to cover the increased raw material costs completely." The hurricanes that hit the U.S. Gulf Coast in August and September only made a trying time more difficult, Nelson adds.
In addition to generally high prices for all raw materials in 2005, the surfactants industry grappled with constrained capacity to carry out ethoxylation, according to Rob van der Meij, global business manager for alcohol and derivatives at Shell Chemicals. Such capacity is needed to convert alcohols, alkylphenols, and other surfactant starting materials into ethoxylates, the form in which they are frequently deployed in finished products. Van der Meij says access to ethoxylation capacity will be critical for surfactants producers as new alcohol capacity is added in 2006 and 2007.
Even producers of oleochemical-based surfactants, which are typically made from tropical oils, felt the impact of higher crude oil prices during 2005. Van der Meij notes that the rising demand for biodiesel, a motor fuel derived from fats and oils, has siphoned off raw materials that otherwise might have gone to manufacture oleochemicals.
At the same time, a flood of glycerin made as a by-product during biodiesel manufacture caused glycerin prices to fall worldwide. Producers of oleochemical surfactants also make glycerin as a by-product and are not happy about this turn of events. "The decline in glycerin prices has been a huge hit to the bottom line for oleochemical producers," says Norman Ellard, director of global sales for Procter & Gamble Chemicals, a leading oleochemical producer and marketer.
On balance, though, the profit picture in 2005 was probably a little better for oleochemical-based surfactants than for those made from petrochemicals, and investment in the business reflected this difference. Petrochemical-based products have not provided a good return on investment during the past couple of years, Dow's Nelson says. In contrast, a combination of consumer interest in "green" products with generous government subsidies has spurred a wealth of new oleochemical capacity in the Pacific Rim, he says.
One such investment is P&G's project with the Domba Mas Group to add 160,000 metric tons per year of detergent alcohol capacity in Indonesia. Ellard says the project fell somewhat behind schedule but is now proceeding well and is on track to open late this year or early in 2007.
Other projects in the works include Evergreen Oleochemicals' 60,000-metric-ton detergent alcohol plant in Indonesia and Kao Corp.'s 100,000-metric-ton alcohol plant in the Philippines. Although little synthetic alcohol capacity is being added, the upshot of the Pacific projects, according to Shell's van der Meij, is that global alcohol supply will exceed demand starting in 2007.
Faced with a harsher competitive landscape, surfactants producers are trying to change the way they do business. Starting next month, Dow's polyglycol and surfactants business will divide its customers into three tiers of service. According to Nelson, one tier will offer a full-service "total solution"; one will be "no frills"; and one, for small accounts, will be served by distributors.
Stanutz says Huntsman has begun approaching customers about a different business relationship in which the company acts more as a toll converter of raw material purchased by the customer than as a seller of a finished product. This way, Stanutz says, customers share in the raw material volatility that otherwise is borne almost entirely by Huntsman.
Huntsman is also boosting efforts to develop surfactants for nondetergent uses. Although cleaning products account for 50-60% of surfactant consumption, Stanutz wants his company to develop more noncleaning surfactants like the emulsifier it recently launched that works in concert with vegetable-oil-based metalworking fluids.
Specialized products like these are not high-volume sellers, but they are not so prone to the downward price pressure imposed on commodity surfactants by Procter & Gamble, Unilever, Henkel, and other big cleaning product companies.
In fact, the specialty surfactants maker Uniqema says it has been able to maintain the fair profit margin required to invest in the business. As if to prove the point, the company, a unit of ICI, recently opened several new specialty surfactant production lines at its New Castle, Del., facility.
Rick Hanson, vice president of sales and marketing, says the expanded facility's output will include Arlasilk phospholipids, Monamid fatty acid alkanolamide surfactants, Monateric amphoteric surfactants, and Monasil organosilicones. The plant will be fully operational in the second quarter, Hanson says, and will complement an existing Uniqema oleochemical facility in Chicago.
Many of Uniqema's products are made with oleochemical feedstocks and thus cater to a consumer desire for biodegradability and natural product origins, adds Rob Pifer, sales development manager. Thanks to products that are more environmentally benign than many alternatives, he says the company has been able to help large customers meet internal mandates to minimize risks in everyday consumer products.
While Uniqema has the luxury of marketing a product line composed of specialty products made partly from natural raw materials, petrochemical producers like Huntsman, Shell, and Petresa compete in a cutthroat commodity business in which powerful consumer product companies are out to buy at the lowest price possible.
It's a challenging business, but Huntsman's Stanutz says that he is committed to it and that the company's restructuring moves, while painful, are intended to marry that commitment with acceptable profitability. And although Stanutz is more optimistic about the surfactants business today than he was a year ago, he understands the retrenchments other firms are making.
"Capital is probably the most global commodity of them all, and money flows to where the returns are," he explains. "Companies like Sasol are looking at their overall portfolios and seeing better returns in areas other than surfactants and surfactant intermediates."