Surfactants Monthly Review – February and March 2018
Regular readers know my fondness for Stepan and Huntsman, two companies which have generated a fair bit of news this month. My admiration for Stepan goes back to the days of competing directly with them in the surfactant market. However, it was my analysis of Stepan’s performance during the 2009 financial crisis that I presented at the 2013 World Surfactant Conference in Jersey City, that really illuminated for me their resilient business model. In fact, I borrowed Naseem Taleb’s term “anti-fragile” as the apt descriptor for their focused, single-hitting, deeply embedded business strategy. Huntsman was one of the first raw material suppliers I did business with. The ethical behavior of the company was unquestioned. A number of years ago, I had the privilege of meeting and talking to Jon Huntsman at the University of Pennsylvania, an encounter which left its mark as I outlined in last month’s blog. The common thread for me though is that both companies and the families and people behind the companies, love surfactants and work hard at that love for the business, 24/7. You have to admire that. I mean not just the love of surfactants per se, but the granular dedication to building a business over decades. We’ll talk more about this together at our conference in Jersey City in May.
In ethylene oxide (EO), contract prices for January went up by 0.3% on the back of a 0.8% increase in the January contract settlement for feedstock ethylene. January EO contract prices were assessed at 55.2-64.7 cents/lb ($1,217-1,426/tonne) FOB (free on board), an increase of 0.2 cent/lb from December. US January ethylene contracts were assessed at a 0.25 cent/lb increase. Later in the month of February, BASF declared force majeure on US purified EO due to an unexpected equipment failure, causing the shutdown of its ethylene oxide (EO) unit at its site in Geismar, Louisiana. In March we learned that US ethylene oxide (i) contract prices for February went down by 3.7% on the back of a 8.4% decrease in the February contract settlement for feedstock ethylene. February EO contract prices were assessed on Friday at 53.0-62.5 cents/lb ($1,168-1,378/tonne) FOB (free on board), a decrease of 2.2 cent/lb from January. US February ethylene contracts were assessed at a 2.75 cent/lb decrease.
There’s probably only one country in the world that could generate the following news. In a superb example of central planning, the province of Hubei, China has listed a total of 144 chemical plants that will be relocated or re-engineered before 2025, a step toward its goal of keeping production of toxic chemicals away from densely-populated areas.
Small and middle-sized plants are required to compete the relocation/re-engineering before 2020, according to a document released by Hubei provincial government in late December 2017. Some 28 producers are rejecting the option to move their operations into chemical parks, according to a local government official, adding that their plants are at risk of permanent closure.
China's central government in September last year ordered all provinces to work out a detailed plan on relocating plants of dangerous chemicals away from cities. A table of all the chemical plants affected was published by ICIS. It looks like there are 2 surfactants companies in there. That is Hubei New Universal Chemical and Jingzhou Longhua Petrochemical. Aah China; things get done, the air gets clean, the trains run on time, politics is stable, where does it all end..? There’s leadership and just telling people what to do and there’s a fine line… to borrow the immortal phrase. Time will tell where this policy falls.
Fatty alcohol ethoxylates (FAE) import markets were reported by ICIS generally steady in early February amid stable regional supply in Asia. Some transactions for February drummed cargoes for FAE-7,9 occurred at around $1,700-1,750/tonne CIF (cost, insurance and freight) SE (southeast) Asia. In the week ended 7 February, FAE-7,9 import prices were assessed stable at $1,650-1,750/tonne CIF SE Asia, according to ICIS data. Later in the month, prices softened a bit at around $1,650-1,750/tonne CIF (cost insurance and freight) SE (southeast) Asia. For the week ended 14 February, FAE-7,9 import prices for drummed cargoes were assessed steady at $1,650-1,750/tonne CIF SE Asia. Later in March; Tradable levels for drummed cargoes were at around $1,580-1,680/tonne CIF (cost, insurance & freight) China. For the week ended 14 March, FAE-7,9 import prices were assessed down at $1,610-1,710/tonne CIF China and stable at $1,650-1,750/tonne CIF SE (southeast) Asia, week on week. Overall in Asia, there were limited concrete discussions heard. FAE participants were slightly cautious considering the recent fluctuations in upstream markets. Regional supply was sufficient, with producers maintaining operating rates in the week. Many sellers were monitoring the markets of C12-14 fatty alcohols and ethylene oxide (EO) closely, in order to seek pricing direction. Current market sentiment declined to some extent, especially on the buying side, given the prior substantial declines in the C12-14 alcohol markets.
ICIS reported that Oxiteno’s Q4 2017 net operating income was Brazilian real (R) 33.5m ($10.2m), quadrupling year on year, as the Brazilian surfactants producer announced. Net sales in Q4 2017 were R1.13bn, up by nearly 36% from the same quarter of the previous year. Cost of sales was R913.7m, up by 38% year on year. Nevertheless, gross profit in Q4 2017 were R216.3, up by 29% year on year. Oxiteno sold 201,000 tonnes of chemicals in Q4 2017, up by 16% from the same quarter of the previous year. The company said it had an increase in volumes of specialty chemicals and commodities, as well as pre-marking sales ahead of the operational start-up of its new alkoxylation plant in Pasadena, Texas, which is expected to start up in 2018. Oxiteno invested R168m in Q4 2017, mainly allocated to the new alkoxylation plant. The company invested R463m in 2017.
Stepan’s fourth-quarter net and operating profits improved, with sales rising 13% year on year to $474m, as reported by ICIS. The sales increase was primarily due to higher selling prices, which were mostly attributable to the pass-through of certain higher raw material costs. Net income for the three months ended 31 December rose 17% year on year to $9.9m while segment operating income rose 40% to $49.5m, led by Stepan’s surfactants business. Surfactants operating income nearly doubled to $28.3m, from $14.6m in the 2016 fourth quarter which included an $8.3m non-recurring expense. Also driving the year-on-year improvement in surfactants were a favourable settlement of a European product claim, savings from a Canadian plant shutdown, growth in key global markets, and improved internal efficiencies. In its polymer segment Stepan recorded Q4 operating income of $19.0m, up from $16.5m in the prior-year period, with the increase mostly attributable to higher European rigid polyol and global specialty polyol volumes. In Stepan’s specialty product business operating income fell to $2.3m, from $4.2m in the 2016 fourth quarter, primarily due to the timing of orders in the flavour business and lower volume and margins in the food business.
In more Stepan news: the company closed on the acquisition of BASF Mexicana’s surfactant production facility and a portion of their associated surfactants business in March. The facility near Mexico City has more than 50,000 tonnes of capacity, the company said.
Huntsman’s fourth-quarter income more than doubled year on year to $287m as spiking polyurethanes demand more than offset weaker performance products earnings, the US-headquartered producer said on Friday. High methyl di-p phenylene isocyanate (MDI) prices drove a year on year increase in polyurethanes division adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA) to $294m on the back of a 27% increase in division sales. Fourth-quarter performance products adjusted EBITDA fell 31% year on year to $47m, due in large part to the sale of the company’s European surfactants business to Innospec in 2016. Advanced materials division earnings firmed slightly over the same period to $53m. The company also booked a $10m one-time cost during the quarter from the scrapped merger with Clariant. The strong profitability during the year and some restructuring left the company with its strongest ever balance sheet metrics at the close of the year, according to CEO Peter Huntsman “Combined with our cash flow and the $1.7bn in net proceeds from [spun-off former additives business] Venator, we were able to pay down approximately $2.1bn in debt during the year,” he said. “This debt reduction enabled Huntsman to enter 2018 with the strongest balance sheet in its history, with a net debt to EBITDA ratio of 1.4x, which is well within investment grade metrics,” he added.
In further news, that ICIS reported from the earnings call, Huntsman continues to look for bolt-on acquisitions. The company will focus its search on epoxy resins, amines, surfactants and downstream methyl di-p-phenylene isocyanate (MDI), said Peter Huntsman, CEO, during the Q1 earnings call. "We are looking at a number of projects before us right now," Huntsman said. Any targets should have some element of integration to it before the company can justify acquiring it, he said. "In the past, I think we've been very successful in buying and integrating smaller bolt-on acquisitions," Huntsman said. “As I look across the board, I don't really see a need to go out and be spending money to build new grassroot facilities," Huntsman added. The company does have some room for some minor debottlenecks for maleic anhydride (MA), Huntsman said. But the company has excess capacity in its surfactants and amines businesses.
In an interview with ICIS (my thoughts inserted in italics), Peter Huntsman provided further context on M&A. Huntsman would not rule out a larger transformational deal for the company, but he said these are becoming more difficult to close, in part because of activist shareholders (those pantomime villains). Huntsman has made three large deals over the years with Texaco (thereby getting into LAB), ICI (ethoylates etc.) and Rockwood. When Huntsman bought Rockwood's pigment business, the intention was to spin it off with Huntsman's titanium dioxide (TiO2) division to create a new company. That spin-off came to fruition in the form of Venator Materials (very nice deal). The Texaco acquisition came through because the company wanted a speedy and certain deal, which Huntsman was able to provide, he said. ICI was concerned about legacy and value. Huntsman’s planned merger of equals with Switzerland-based Clariant was scuttled last year (not a surprise) because of opposition from activist investor White Tale (booo!), which bought a 24.99% stake in Clariant, which it since sold to Saudi Arabia-based SABIC. (We wrote about this in our blog at the end of 2017, citing the unrequited love of the two star cross’d lovers from opposite sides of the track. Was the dice loaded from the start?)
Huntsman continues “Nowadays, shareholder activists have a laser focus on getting the best price (heaven forfend!), which would make those earlier deals more difficult to achieve”, Huntsman said. Huntsman does not believe that such a strategy will always provide shareholders with the best value. Huntsman said his company's failed merger-of-equals with Clariant would have provided just that – a multi-year value creating opportunity the he said would have created a great value. "Looking at it from afar, it's a shame it didn't go through," Huntsman said. "They ruined what would otherwise have been an opportunity to create a lot of value and secure a great company.". As noted in prior blogs, I am not sure I buy this argument. It most likely would have been a good deal for Huntsman shareholders, but Clariant shareholders thought otherwise and the management eventually listened to them. Love was found by Clariant, just not in the right place in Huntsman’s opinion
Operationally, Huntsman is planning a turnaround at its facility in Port Neches, Texas. The turnaround should be contained to the second quarter, and the company should a hit of $15m in terms of earnings before interest, tax, depreciation and amortisation (EBITDA). That is the only turnaround that the company will conduct in 2018 that will have a significant effect on earnings. The specific unit was not specified but the site makes ethanolamines, ethylene, ethylene glycols, ethylene oxide (EO), methyl tertiary butyl ether (MTBE), propylene oxide (PO), propylene, propylene glycols and surfactants, according to the ICIS plants database.
We don’t often write about Poland here so it is a pleasure to report that Elpis, a subsidiary of Poland’s PCC Exol and PCC Rokita, has acquired 100% of the shares in PCC Oxyalkylates Malaysia.
Elpis and Malaysia’s Petronas Chemicals Group Berhad have cooperated in the past year in creating PCC Oxyalkylates Malaysia.
Under the terms of the agreement, Petronas is entitled to purchase up to 50% of the new company within two years from the start of its production.
Petronas has been contracted as the supplier of ethylene oxide to PCC Oxyalkylates Malaysia.
Elpis is registered in Brzeg Dolny, southwestern Poland, while the PCC Oxyalkylates Malaysia plant will be located in Kertih, Terengganu state in northeast Malaysia.
Both companies are subsidiaries of Duisburg, Germany-based energy, logistics and chemicals group PCC, which has operations in 17 countries.
PCC Exol is a producer of surfactants.
PCC Rokita produces polyols and polyurethane (PU) systems, along with chlorobenzene, chlor-alkali, surfactants, phosphorous derivatives and napthalene derivatives.
PCC is also a regular participant in our surfactants conferences. Poland and Malaysia; a dynamic Eastern European country and one of the true Asian tiger economies. Kielbasa and Nasi Lemak. An intriguing match on which we will be keeping a close eyes in the coming months. Expect to hear more, especially at our Asian conference in November.
Finally, more news in the unrequited love category; as we noted in our year end, work, success and love blog post, another of those pantomime villain activists, Elliott Management, convinced Akzo to do something to increase shareholder value. That something ended up being a sale of its performance chemicals business to a private equity company, Carlyle and GIC, Pte, the sovereign wealth fund of Singapore.
The Wall Street Journal reported the deal to be worth €10.1 billion ($12.6 billion) including debt. Akzo’s chemicals includes a good range of surfactnats. The sale fits into the Amsterdam-based manufacturer’s plan to boost its share price after fending off a $27.6 billion takeover bid last year PPG —a stance that irked Elliott Management Corp., the U.S. activist hedge fund, and other shareholders. In 2017, revenue for Akzo’s chemicals business rose 4% to almost €5 billion, while operating income gained 10% to €689 million.
In 2017, Akzo’s paints and coatings division increased its revenue by 2% to €9.61 billion, but operating income fell about 11% to €825 million. Invesment Bank Bernstein sees shareholders getting somewhere around €6 billion from Akzo Nobel’s sale of its specialty chemicals unit to Carlyle, representing 80% of the €7.5 billion sale proceeds, with the rest going to growth opportunities. “We think investors expected the successful sale of the division at a multiple of 9-10x given the competitive bidding process with Apollo, Hal Investments and a Bain and Advent consortium contending. It is difficult to say whether the €7.5 billion net proceeds were better than expected,” says Bernstein, “given the uncertainty around tax and pensions.”
That’s it for now. As always, I thank the ICIS News team for all the news items this week. I encourage you to join me in Jersey City in May (10 – 11th) for our 8th Surfactants Conference and 2nd Awards Ceremony. It's not just a beautiful location and an enjoyable time. You’ll learn a lot and you’ll meet new people, old friends, customers and suppliers. See you there.