December 2017 – Surfactants Monthly Review
We’re playing it straight this month, with just the news. If you are looking for some commentary and a few music videos, then you’ll find plenty in our 2017 editorial – Work Success and Love.
Actually not 100% straight, I’m still going to make a couple of unpaid endorsements; first for ICIS news, who provide most of the news content for these monthly updates.
ICIS Pricing reported that US ethylene oxide (EO) contract prices for November went down by 2.0% on the back of a 4.3% decrease in the November contract settlement for feedstock ethylene. November EO contract prices were assessed on Friday at 55.6-65.1 cents/lb FOB a decrease of 1.2 cents/lb from October. US November ethylene contracts were assessed at a 1.5 cent/lb decrease.
Now and again, we like to talk about the Baker Hughes Rig Count: The average rig count in the US oil and gas industry was 911 in November – down by 11 from October, but and up by 331 from 580 in November 2016, oil services major Baker Hughes reported . In Canada, the average rig count was 204 in November - unchanged from October, but up by 31 from 173 in November 2016. The worldwide rig count for November 2017 was 2,057 - down 20 from October, but up 379 from 1,678 in November 2016. The rig count data are seen as an important indicator of activity and investment in the oil and gas sector. The data also reflect demand for oilfield chemicals, including hydrochloric acid (HCI), epoxy resins, triethylene glycol (TEG) and certain types of surfactants. The Baker Hughes rig count monitors the number of drilling rigs exploring for, or developing, oil or natural gas in the US, Canada and the international market.
ICIS News published an excellent commentary by Joseph Chang on the outlook of key private equity investors on the chemicals industry. A nugget in there relating to surfactants: Joe noted that AkzoNobel’s specialty chemicals business is on a dual track process – a sale or an initial public offering (IPO) – and private equity firms are rumoured to be among the likely bidders. The specialty chemicals business, which in 2016 generated sales of €4.8bn and €953m in EBITDA, includes surfactants, polymer additives, salt and chlorine products, and pulp and performance chemicals. AkzoNobel estimates the value of the business at €8bn-€12bn. Such a large asset with a diverse slate of product categories is less digestible for a strategic buyer, and so would most likely to go to a consortium of private equity firms, who could then sell the businesses piecemeal at a certain point, according to a number of Joe’s sources in the financial community.
Further on in the same issue of the magazine, we have an in-depth analysis of the Akzo situation as of the end of the year. We have a short piece in our Work, Success and Love blog on Akzo – mainly editorial. Here is an excerpt from the much more factual piece by the ICIS News team: A series of increasingly hostile approaches to Akzo from PPG triggered a frenetic succession of events that saw the planned carve-out of AkzoNobel’s specialty chemicals business, a court battle with shareholder Elliott Advisors, the decimation of its management board, and the collapse of merger talks with Axalta. The stress of the battles with PPG and rebel shareholder groups led to former CFO Maelys Castella stepping down from her role and taking a leave of absence, and CEO Ton Buchner resigning, leaving Thierry Vanlancker, who had joined AkzoNobel from DuPont to head its specialty chemicals business just a few months earlier, to step up as CEO. With PPG out of the picture and Axalta in talks to be acquired by Nippon Paints, the last milestone for the company in 2017 was determining the plan for its specialty chemicals business and transforming itself into a pure-play paints and coatings business. The issue was resolved at an extraordinary general meeting in early Decmeber, with shareholders asked to vote on whether to split the division, but not how to split the division. 99.87% of voting shareholders backed the deal.
Focused on the chlor-alkali chain, bleaching chemicals, surfactants and functional chemicals, with revenues broadly split between the four divisions, the specialties business is being groomed both for sale and public float simultaneously on a dual-track process. Around €2.8bn of AkzoNobel’s liabilities are associated with the specialty chemicals unit, according to a shareholder at the EGM, against €953m in earnings before interest, taxes, depreciation and amortisation (EBITDA. From January, the division will essentially operate as a separate company, with a divestment expected in the first quarter or just after.
The sales process is being carried out as a closed auction, with binding offers due in the first quarter of the year. Reuters has reported on several consortia of blue chip private equity houses circling the business, with CVC, KKR and Carlyle in one group and Apollo and Blackstone in another.. A private equity buy-out could be the best outcome for the business, according to Bernstein Research, which estimated that the unit could fetch €10bn if a buyer is found, representing a 10x multiple on projected 2018 EBITDA. The division is a prime prospect for a buy-out firm, with sufficient fat still on the business for cost-cutting, and an internal configuration that offers a variety of options to provide a return. According to equity analysts at Bernstein, a new owner could extract €200m of cost reductions over the course of three years through removing inefficiencies, and the relatively even split between the unit’s four divisions could also provide scope for the subsidiaries to be sold off piecemealWith such a tight turnaround time anticipated on the sales process, AkzoNobel may benefit from the current scale of valuations for chemical sector acquisitions, which have risen from an average of 10x EBITDA in 2007 to up to 14x this year for high-tier speciality chemicals companies, according to mergers and acquisitions (M&A) advisor Valence Partners.
Elsewhere in European M&A, ICIS reported that Elementis agreed to sell its surfactants business located in Delden, the Netherlands, to Swiss-headquartered chemical producer Kolb Distribution (a unit of palm giant KLK) for €39m, the UK specialty chemicals firm said on Tuesday. Elementis had previously announced its decision to divest the business as part of a strategic review as it concluded its surfactants business did not fit with its wider strategy due to a “lack of scale and material capital” requirements, it said. The Delden facility also manufactures a limited range of products sold by Elementis’ specialty products segment. As part of the transaction, Elementis is entering a long-term supply agreement with Kolb for continued sourcing of products. The company said that factor will “modestly impact” the specialty products segment’s operating margin in 2018. “This action is consistent with our reignite growth strategy. By exiting surfactants we not only generate cash, but eliminate a strategically disadvantaged business for us, simplify our supply chain and are free to reallocate material capital and internal resources to focus on higher margin growth opportunities,” said Elementis’ CEO Paul Waterman. The proceeds of the sale, which is subject to completion of employee consultation processes as well as receipt of regulatory approvals, will be used for general corporate purposes and towards debt reduction, the company added.
An update from Oxiteno as it told ICIS that it plans to complete its new ethoxylation unit in Texas in the first half of 2018. The plant will have a capacity of 120,000 tons/year. The plant will make surfactants used in agrochemicals, personal care, home care, industrial and institutional (I&I) chemicals, paints and coatings and oil and gas. The plant was discussed as part of the 2018 investment plan of Oxiteno's parent company, the Brazilian conglomerate Ultrapar. Ultrapar's investment plan calls for reais (R)2.68bn ($802m), more than half of which will be spent by fuel distributor Ipiranga. ($1 = R3.34).
Some excellent analysis and prognoses on the LAB market from the talented Yuanlin Koh of ICIS: Asia/Middle East linear alkylbenzene (LAB) prices are likely to be stable-to-firm in 2018 on the back of higher feedstock crude and benzene costs, according to market players that Yuanlin interviewed. Feedstock benzene in Asia is expected to mirror the performance of the US, with prices there continuing to set the pace for Asia. Chinese buyers are expected to pick up cargoes in the domestic sector as local prices still trail import numbers. As local Chinese prices move higher, import values are expected to rise as well, provided the key FOB Korea market stays firm. LAB suppliers in Asia and the Middle East expect prices to remain stable-to-firm in the near term on higher production costs. Currently, there is a wide buy-sell gap between buyers and sellers, especially in southeast Asia, where customers are looking to buy LAB at November’s prices. According to ICIS data on 20 December, the southeast Asian assessment was at $1,230-1,300/tonne CFR (cost and freight) SE (southeast) Asia. In November, the assessment was at $1,200-1,240/tonne CFR SE Asia. However, market players are confident that buyers will eventually have to accept the price increases. A need to replenish depleting stocks and strong downstream demand provides further support for the increase in LAB prices.
According to TATA Strategic Management Group, large surfactant capacities have been built up in Asia in anticipation of a growing demand. One such surfactant, LAB, sees a huge demand in Asia with its growing economy. South Asia, particularly India, is a key market for LAB and LAS. The country is seen as a generally under supplied market and imports are needed to supplement production by the four main Indian domestic producers. Market sources said about 200,000 tonnes/year of imports are needed to meet India’s demand. The introduction of anti-dumping duties on LAB imports from Qatar, Iran and China in April 2017 has had little impact on the Indian import market so far, according to market sources. A reduction in the goods and service tax (GST) applicable on detergents lent a stronger outlook to LAB demand in the near-term, as the Indian government slashed GST rates from the highest 28% slab to 18%. “Demand will pick up [in the near term] as people can buy more with lower GST taxes,” said an Indian supplier. Improved acceptance of the new workflows around the recently-implemented GST structure in place since 1 July this year also upheld expectations of stronger detergent demand, supporting LAB off take. LAB demand in the country has remained weak since June, with the absence of a seasonal uptick even after the end of the monsoon season, market sources said. However, a need to replenish inventories coupled with stronger downstream demand is likely to lend support to firmer LAB discussions and prices in the near term, market players said. Although India has not exported LAB in recent years, it does, however, continue to export LAS to Pakistan, Africa and southeast Asia. China is also a key growth region but is believed to be sufficiently supplied. With recent stricter environmental regulations, many Chinese producers are concentrating on the more lucrative domestic market. As a result, supply may become tighter in other Asian markets that depend on LAB imports. In southeast Asia, LAB demand is largely supplied with Thai Oil and Japan’s Mitui & Co’s 100,000 tonnes/year Labix. With other major Asian producers also supplying to the region, demand is considered more or less covered. Saudi Arabia’s state-owned Farabi Petrochemical Complex will open a new LAB plant in the western industrial city of Yanbu in 2020. It will produce more than 120,000 tonne/year of LAB and 246,000 tonne/year of n-paraffins, as well as de-aromatised specialty oils, asphalt, sulfonates, mining chemicals, process oils and lubes. Tufail Chemical Industries Ltd is planning to raise its capacity of LAS to 100,000 tonnes/year by the middle of next year from the current 60,000 tonnes/year, according to an earlier news on ICIS.
That’s it for December and 2017. I’ll wrap up with the second unpaid endorsement and that is for the 2018 series of surfactants conferences. We start in NYC, May 9 – 11th for our biggest and best World Surfactants Conference yet. We then got to Europe, India and finishing up the year in Singapore in November. We have a new ICIS team with fresh new ideas and the most interesting speakers and engaged attendees you will find anywhere. I am really excited about this year. I hope to see you at one of our events.