Surfactants Monthly Review – February, 2017
The Russians are Coming!
Before the bulk of our surfactants news, a quick personal update. As many of you know, I have been spending an increasing portion of my time as CEO of a venture-backed technology start-up, P2 Science. In February, we closed on our B round of equity financing, bringing in $9.55 Million of new investment into the company. This was accomplished primarily by bringing in two large new investors, BASF Ventures and Xeraya Capital. BASF, I think everyone knows. Ventures is their venture capital company. Xeraya is based in Malaysia and is very active in the life sciences and health sectors. P2 is their first chemical investment. With this new capital, the company starts to build our first commercial manufacturing plant for F&F ingredients. The proprietary chemical manufacturing technology ( no bugs, algae, yeast, enzymes etc..) has been developed and patented over the last five years at our labs in New Haven and Woodbridge, CT. To learn more you can read the PR on our website and on BASF’s.
OK back to surfactants, with the news courtesy largely of ICIS. Subscribe to their dashboard to get the rest of the stories that are mentioned here. And, again, if you like what you read here, please consider our conferences; two days of wall to wall surfactant business learning and networking. This year in New York, May 17-19, at our flagship event, a couple of hundred industry leaders will take part in the first surfactant industry awards. You will be pleasantly surprised at the work and preparation which went into the nominations and entries to this first of its kind event. The red carpet evening will be hosted by yours truly and PWC will not be tabulating results. End of commercials.
At the beginning of the month, ICIS reported upward pressure on ethoxylates on the back of firmer C12-14 fatty alcohol feedstock. Offers for FAE’s for February loading cargoes were heard at $1,800/tonne CIF China/southeast Asia (SEA) and above. Spot prices for FAE (moles 7 and 9, drummed) were last assessed at $1,680-1,800/tonne CIF China and at $1,700-1,800/tonne CIF Southeast Asia on 25 January, according to ICIS data.
According to ICIS’s Judith Taylor, in early February, C12-14 fatty alcohol spot prices in Southeast Asia moved up almost weekly on pressure from higher feedstock prices. Mid-cut C12-14 natural alcohol spot prices Feb 1 week on FOB Southeast Asia basis are up again, now at approximately USD 2,700-2800/tonne. The short supply PKO situation in Asian is underpinned by challenges imposed on palm growers by the El Nino effect seen in 2015-2016, still lingering on the oil and kernel output into 2017. Some published industry sources mention moderating palm oil prices but target the time for this to come into effect as the latter part of 2017. US buyers saw a significant market price correction across 2016, including double-digit contract increases on mid-cut alcohols in the third and fourth quarters of the year. First-quarter 2017 mid-cut alcohol contracts also increased, but by single digits.
By mid month, however, (PKO) prices had dropped sharply, losing over $100/tonne in the span of a few days, according to ICIS data. On 13 February 2017, PKO prices closed at $1,680.60/tonne, a drop of around $114/tonne compared to the closing price of $1,794.57/tonne on 10 February. At noon on 14 February, PKO prices were recorded as $1,672.60/tonne. The significant drop in raw material prices have moved some buyers onto the sidelines in expectations of further softening. PKO prices started to fell before the Lunar New Year holidays, dropping from $1,886.79/tonne on 26 January 2017 to $1,829.85/tonne on 7 February 2017.
By the end of the month, Malaysia's palm oil prices had plunged on 20 February following a steady decline over the last two weeks as production has recovered. As at noon on 20 February 2017, palm kernel oil (PKO), palm stearin and crude palm oil (CPO) prices were recorded as $1,372.94/tonne, $730/tonne and Malaysian ringgit (M$) 3,220/tonne. PKO prices saw the most significant drop compared to the closing prices of $1,541.99/tonne on 17 February, losing almost $170/tonne. Although some participants of the oleochemical market anticipated further softening of palm oil prices as production recovers, few expected such a sharp drop.
Over in Europe, ICIS reported that ethylene oxide formula contract prices increased from January to February. February EO prices increased by €29/tonne to €1,182-1,364/tonne FD (free delivered) NWE (northwest Europe). The EO movement followed a confirmed upstream ethylene contract settlement this week. Market conditions in Europe have been stable since the start of the year. Market players have noted steady supply and demand fundamentals week on week, with no other factors said to be impacting the European market.
Back in the US, Fourth-quarter production of US ethylene oxide (EO) rose by 9% year on year, according to the latest data made available by the American Fuel & Petrochemical Manufacturers (AFPM). EO production was also up quarter on quarter, with a 14% increase in Q4 from Q3 2016. EO production was up 5% in 2016 year to date, compared to 2015 year to date.
AFPM EO production (in thousands of pounds)
US ethylene oxide (EO) contract prices for January also rose by 1.7% on the back of a 3.9% increase in feedstock ethylene contracts for January, as assessed by ICIS. January EO contract prices were assessed at 55.80-65.30 cents/lb ($1,230-1,440/tonne) FOB from 54.80-64.30 cents/lb FOB in December. The increase in EO contracts is based on the settlement in January ethylene contracts. US ethylene contracts settled at 33.50 cents/lb DEL (delivered), a 1.25 cent/lb increase from 32.25 cents/lb in December.
China’s ethylene oxide (EO) prices also advanced to two-year high levels earlier the month, on the back of strong ethylene values. Domestic Chinese EO prices rose to yuan (CNY) 10,100/tonne ($1,472/tonne) EXWH (ex-warehouse) in the week beginning 6 February, CNY500/tonne stronger than where market closed on 26 January. The China market was shut from 27 January to 3 February for the Lunar New Year holidays. Previously, EO prices in China had held flat at CNY 8,800/yuan from October to December, before rising steadily in January to eventually cross the CNY 10,000 yuan/tonne mark. The last time EO traded at above CNY 10,000 yuan/tonne was in November 2014, according to data compiled by ICIS. This uptrend in EO came on the back of a parallel rally in prices of upstream ethylene. Ethylene demand in China had increased in the last few months as downstream plants stepped up utilization rates to capitalize on strong performance in derivatives markets. Ethylene prices were assessed at $1,240/tonne CFR (cost and freight) northeast Asia in the week ended 3 February, according to ICIS data. This is 29% higher than its last low point of $960/tonne CFR northeast Asia in early November. The stronger EO prices are in turn expected to lift pricing sentiments in various downstream markets in China, including ethanolamines.
We occasionally dip into the Baker Hughes rig count data here. The average rig count in the US and Canadian oil and gas industries for January was up from December, and it rose year on year from January 2016. The average US rig count for January was 683 – up from 634 in December, and up from 654 in January 2016. The average Canadian rig count for January was 302 – up from 209 in December, and up from 192 in January 2016. January’s worldwide rig count was 1,918 – up from 1,772 in December, and up from 1,891 in January 2016. Rig counts are obviously an important indicator of activity and investment in the oil and gas sector. The rig count also reflects demand for oilfield chemicals, including hydrochloric acid (HCI), epoxy resins, triethylene glycol (TEG) and …. surfactants.
Company news: Oxiteno has appointed ex Lubrizol exec, Timothy Earl Madden as Chief Operating Officer (COO) of its US company. The company also opened a new commercial office in Houston, with some 40 + staff onsite there. The blog’s best wishes to Tim in this new role.
Oxiteno additionally announced the construction of an alkoxylation plant just outside Houston with a planned production capacity of 170,000 tons/year (154,221 tonnes/year). The Texas plant is scheduled to be complete near the end of 2017.
In other Oxiteno news, the company reported on Wednesday a Q4 operating income of reais (R) 8.2m ($2.7m) down sharply from R131.1m reported for the same time in 2015 because of a sharp drop in sales. Fourth-quarter sales were R831.6m, down 23% from R1.09bn from the same time in 2015. Oxiteno attributed the decline to a strengthening real and a lower sales prices in terms of dollars. The decline in sales came despite an increase in overall volumes. Total sales volumes were 173,000 tonnes, up from 167,000 tonnes from Q4 2015. Of this, specialty chemicals made up 151,000 tonnes, up from 142,000 from the same time in 2015. Glycols were 22,000 tonnes, down from 24,000 tonnes in Q4 2015. Among the geographic mix, Brazilian sales were 124,000 tonnes, up from 122,000 tonnes in Q4 2015. Foreign sales were 49,000 tonnes, up from 45,000 tonnes in Q4 2015. Meanwhile, cost of sales were R663.8m, down 11% from R749.2m from the same time in 2015. Oxiteno attributed the decline to a stronger real and lower personnel expenses. These were partially offset by higher sales volumes and increases in some of the company's feedstocks. Because sales fell so much faster than costs, Q4 gross profit was R167.8m, down 50% from R337.0m from the same time in 2015.
In the LAB market, ICIS reported some interesting dynamics: The latest round of price hikes in late January by northeast (NE) Asian producers of linear alkylbenzene (LAB) have met with resistance from buyers who were unable to pass on the higher costs to their customers. LAB offers have been inching higher since October 2016 due to the cost of raw materials. Offers for March shipments of LAB in the current week ranged from $1,270/tonne CFR SE Asia up to $1,300/tonne CFR SE Asia. These prices marked the highest levels for LAB on a CFR SE Asia basis since August 2015. Suppliers justified the higher offers by saying their profit margins were being squeezed by stubbornly high benzene prices while prices of other raw materials such as n-paraffin were also gaining due to tight supply conditions. Benzene prices were at $1,035-1,045/tonne FOB Korea in the Asian morning of 8 February. Buyers, however, were pushing back against the latest round of increases, saying they were facing losses due to the lack of demand and low prices of the end product LAS. Buyers in Asia indicated they were only willing to pay as high as $1,220/tonne CFR SE Asia and would refrain from buying LAB parcels at higher prices.
By the end of the month, Import prices of LAS in the southeast Asian market increased for the second time in February as producers secured orders at higher prices. Deals for NE Asian-origin LAS were transacted at $1,150/tonne CFR SE Asia in the week ended 22 February.
In news hacked from Russia, SIBUR-Neftekhim increased production of ethylene oxide (EO), mono-ethylene glycol (MEG), ethylene (C2) and propylene (C3) last year.
In more US ethane cracker news, with potentially huge relevance for surfactants, ICIS reported that Thailand’s PTTGC expects to make a final decision on its proposed ethane cracker project in the US late this year. The planned ethane cracker complex at Belmont County, Ohio, will have an ethylene capacity of 1m tonnes/year and will have two 350,000 tonne/year high density polyethylene (HDPE) units; will produce 500,000 tonnes/year of monoethylene glycol (MEG); and 100,000 tonnes/year of ethylene oxide (EO) (in Ohio – big deal for surfactants, potentially!). PTTGC needs to discuss further with the two engineering, procurement and construction (EPC) contractors it is working on the design of the complex. PTTGC America said that it has made commercial arrangements with various parties for the project, including feedstock and utility suppliers, product marketers and logistics providers. We’ll try to keep tabs on this one.
Lot’s of change for Huntsman this last year and now some interesting results as Huntsman’s 2016 fourth-quarter net income rose sharply to $137m from $9m in the same period of 2015 as the company's debt reduction strategy strengthened its balance sheet. ICIS reported President Peter Huntsman as saying, “We delivered a record $686m of free cash flow in 2016, including $117m during the fourth quarter. We used this cash, together with proceeds from the sale of our European surfactants business, to repay $560m in debt, significantly strengthening our balance sheet.” Huntsman completed the $225m saleof its Belgium-based surfactants business to Innospec in December last year. Revenue was also up in the fourth quarter, rising to $2.40bn from $2.33bn in the same quarter of 2015, while diluted income per share was $0.53 compared to $0.02 in the same period a year prior. Net cash from operating activities was $240m in the quarter as free cash flow generation reached $117m, Huntsman said in its earnings statement.
In a world awash with ethane and ethylene, more woe from State-owned Pemex which has decided to halt production of high density polyethylene (HDPE) injection grade at its 100,000 tonne/year Asahi plant, in an effort to match PE production to its available ethylene, due to shortages of ethane. The shortages of ethane ensued when Pemex started delivering contracted supplies of ethane to Braskem Idesa. The shortage of ethane/ethylene has affected several other ethylene derivatives such as ethylene glycol/ethylene oxide (EG/EO), styrene and surfactants. Al Greenwood’s award-worthy coverage of this state-induced mess has been featured in our blog previously. A cautionary tale for those who instinctively put their faith in the government rather than markets.
More company news: Our favourite surfactant company, Stepan reported that for the full year, 2016, net income was up 13% year on year from $76.0m in 2015 to $86.2m. Net sales remained relatively flat year on year, decreasing by 1%. For the full year, the Surfactant segment delivered $99.8 million of operating income while overcoming certain non-recurring items. Operating income improved in the US, Asia and Latin America. However, Q4 income down by 35% to $8.4m as a result of pre-tax, non-recurring costs. Environmental remediation expenses in the US along with European product claim commitments negatively impacted the surfactants division by $8.3m, while other non-recurring costs affected the polymers division to the sum of $0.6m. The quarter also included $4m of post-tax expenses related to shutdowns and write-downs of production sites, including final decommissioning costs for a Canadian unit, a write-down for its Bahia, Brazil, site. The company also booked a write-down related to its Louisiana ethoxylation investment as a result of a decision to produce ethoxylates at the site in Pasadena, TX that it acquired from Sun Products. Net sales for the quarter remained relatively flat at $420.6m compared to $419.3m in 2015 as higher sales volumes were offset by the stronger US dollar. Net sales in Stepan’s largest division surfactants fell by 1% during the quarter, while polymers and specialty products saw year-on-year increases in net sales of 2% and 5% respectively. Operating income in the surfactants division dropped by 40% to $14.6m, down from $24.3m the year before on the back of the aforementioned one-time costs.
Some drama downstream this month as Kraft-Heinz launched and then withdrew a hostile bid to acquire Unilever, over the course of a weekend. How odd. (the swift withdrawal, not the bid). Much has been written about Lever’s sub-par margins that made it ripe for such an approach. The WSJ captured it best in this superb graph:
However, an interesting piece by a fund manager here, pointed out how the loss of Unilever by acquisition would have been a blow to millions of income investors who appreciate the company’s long-termist culture. In any case, none of this explains the swift and somewhat embarrassing withdrawal by Kraft. Barbarians at the gate, they are certainly not. Readers encouraged to opine. In my opinion, the bid was never going to succeed for financial and political reasons. Still I was looking forward to an 80’s style mega-hostile-buyout playing out across the front page of the WSJ and cable news. Along with the Russians back in the news (see below), perhaps it’s time to dust off those 80’s Bon-Jovi and er- Bananarama albums!
In conclusion: Word of the month? Russia. Blog readers know I enjoy reminiscing about my interesting and exciting youth back in England. At that time the Russians were the bad guys. We had the old USSR aiming nukes at us, seeking to overturn Western civilization and impose communism worldwide; and they had a good run at it. Numerous jokes and, sometimes crude, commentary evolved around what you would do if the four minute (nuclear bomb) warning sounded. Conservative hawks railed against the deadly creeping influence of the Soviets while liberals counseled that they were just like us and “loved their children too”.
Maggie and Ronnie were both heroes and villains to these opposing conservative and liberal groups. Then toward the end of the 80’s Mikhail Gorbachev started his public ministry and was anointed man of the year, man of the decade and finally Nobel peace prize winner for dismantling the USSR and achieving world peace.
Suddenly the man with a map of a Russian archipelago on his forehead, loomed as large as Elvis in the popular imagination. The Russians could do no wrong! Fast forward to the present, however, and I have to say that Russia is well and truly back as a global bad guy. Not so much as a propagator of a sinister communist ideology but as a meddling electronic hacker. More pantomime villain than Bond villain.
And now the Western roles are reversed. Liberals whip up a frenzy of Russo-phobia while conservatives point out common ground with the former former-superpower. Interesting times..
See you in May!