Surfactants Monthly Review
April 2016 - of Bowie and Bonds
With May underway, I’m focused now on our 6th ICIS World Surfactants Conference in NYC, which I feel duty-bound to shill for just a little bit here. This is the first of our conferences to feature a pre-seminar, this one on bio-surfactants. We’ll have over 200 people at the conference and 100 at the seminar alone. Among many other things, we’ll have the chance to hear an investigative reporter from the Wall Street Journal talk about what she found when she looked into consumer cleaning product marketing and label claims. You’ll be pretty surprised to hear about some superb old-fashioned sleuthing and what it uncovered.
Tangentially surfactant related: I’ve been spending a lot of time thinking about David Bowie recently. That he was a musical inventor who stretched boundaries and crossed over many markets, is well known. Lesser known is his financial innovation of being the first musician to securitize and sell future cashflows from music royalties in the form of what came to be known in the financial world as “Bowie bonds”. This enabled the music icon to enjoy the fruits of his labors “today” while not losing actual ownership of the music. Does such an innovator have anything to teach the chemical industry and more specifically, our surfactant industry? Innovation, inventiveness, niche marketing - yes I think so, but it goes much much deeper than that. There is something fundamental that was possessed and used by Bowie, that every surfactant company needs to possess and use and each manager needs to think carefully about this resource, how much of it to use, and in what way. What is it? I will give you my perspective on the first day of the conference next Thursday (May 12th) at 9.00AM.
Now onto the markets: At the beginning of the month ICIS reported that spot Asia fatty alcohol ethoxylates (FAE) offers of petrochemical product had risen, on the back of more competitive production costs. They quoted a southeast Asia-based producer offered synthetic FAE-7 and FAE-9 at $1,900/tonne CIF SE Asia on a drummed basis in the week. It offered $2,000/tonne CIF SE Asia for the oleo equivalent. They also reported that a separate southeast Asia-based producer refrained from making offers of oleo product. Its sister plant out of Asia offered petrochemical product (presumably lauryl alcohol) at $1,400/tonne CIF China on bulk basis. I’m going to admit some skepticism about any “trend” here but there is no doubt that across many markets and applications, the products are fungible and price competition exists among fungible products as in fact, that is part of the definition of “fungible” in this case. Nonetheless, let’s keep an eye on this.
In a linked report, ICIS noted that Asia fatty alcohol ethoxylates (FAE) prices are likely to continue on an uptrend in the second quarter, Prices had been bolstered in the first quarter on the back of stronger feedstock fatty alcohol and ethylene oxide (EO) prices. The mid-point for FAE-7 and FAE-9 CIF China prices was at $1,100/tonne CIF China in the week ended 6 January according to ICIS data. Prices remained largely stable until 9 March, when prices started an uptrend to $1,425/tonne CIF China by the end of March. Market participants attributed this surge to the feedstock increases. Fatty alcohol prices had been strengthened by upstream palm kernel oil (PKO) prices while EO prices had been supported by upstream ethylene prices. Looking forward to the second quarter, market participants expect the increases to continue, on the back of typical demand peaks during this quarter, as well as an optimistic outlook on the upstream markets.
Meanwhile over in Europe, EO contract pricing increased from March by €49/tonne, following the confirmed upstream ethylene settlement. This means EO prices may jump to €1,058-1,225/tonne FD NWE and €1,113-1,270/tonne FD Mediterranean. In the US EO pricing for March rose by 5.9% on the back of a nearly 16% jump in the feedstock ethylene contract price, as assessed by ICIS on Friday. March EO contract prices were assessed at 52.80-62.30 cents/lb ($1,164-1,373/tonne) FOB from 49.60-59.10 cents/lb FOB in February. ICIS further reported that the US supply of EO is expected to be less tight in the second quarter as Indorama Ventures’ Clear Lake, Texas, plant is back on line in the first week of April. Demand for EO is expected to improve as the downstream monoethylene glycol (MEG) market picks up in the spring. Spring and summer are seasonally strong for polyethylene terephthalate (PET), a major downstream market for MEG.
LAS prices settled at $1,075/tonne FOB northeast Asia in the week ending 6 April 2016. This is more than 15% higher than its trough $925/tonne FOB NE Asia earlier this year, according to ICIS data. Besides the seasonal uptick factor, industry players said that a recent price surge for Fatty Alcohols C12-C14 has also boosted demand for LAS among detergent makers in the region. Given strong upstream crude palm kernel oil prices, Fatty Alcohol C12-C14 prices surged nearly 50% higher in the last month, pushing detergent makers to look for cheaper alternative ingredient such as LAS. To capitalize on the higher demand, LAS producers in northeast Asia are looking to raise offer levels higher, possibly by another $20-50/tonne FOB NE Asia, in the coming months. As prices had been lackluster for much of the first quarter of 2016, sellers said that it was time for LAS to recover some lost ground. Sellers also expected LAS prices to receive more support in view of a looming shortage in the region of feedstock linear alkylbenzene (LAB), which may in turn tighten LAS supplies as well.
The theme continues in the US market according to ICIS, with C1214/1215 detergent range fatty alcohol second-quarter contract pricing increasing by 13-16 cents/lb for the second quarter in an assessed range of 66-78 cents/lb on bulk delivered basis. Mid-cut contract increases began at 8-10 cents/lb on natural alcohols just ahead of the Palm Oil Conference (POC) in Asia during March, but offers jumped sharply following the conference. PKO prices rose from about $800/tonne in late December to over $1,300/tonne early April. In Europe, the continuing PKO volatility has led to a bit of a stand-off and I certainly encourage readers to follow the ICIS almost-daily reports to get a full picture of this, once again, exciting market.
After its initial greeting with skepticism and not a little derision, even at my own conferences few years ago, the RSPO continues its steady march to respectability and acceptance. Solvay recently announced it has obtained a Mass Balance certification of its UK manufacturing site in Halifax in accordance to the Roundtable on Sustainable Palm Oil (RSPO) guidelines. All products manufactured at this site with palm oil and palm kernel oil derivatives will now source from certified producers. This brings the UK plant in line with its sister sites in Zhenjiang and Zhangjiagang, China and Itatiba in Brazil. Clearly, Solvay has run the numbers and believes that the cost is worth it. No mention of the US or Euorpean plants in this report though.
Despite depressing economic, thrilling political and some downright criminal news out of Brazil recently, the parent company of our good friends, Surfachem, that is 2M Holdings, announced that Surfachem Brasil has signed a joint venture deal with Brazilian distributor, Metachem Industrial Comercial. The deal - which was signed the week beginning 18 April - gives 2M broader access to the Brazilian personal care market through Metachem’s warehouses and marketing infrastructure. Metachem – a $43.5m sales distributor of specialty chemicals, food ingredients and polymers - has taken a 35% stake in Surfachem Brasil, and aims to use 2M’s expertise in personal care to expand into this sector in Brazil. Surfachem’s reasoning (in strictly my own paraphrasing) is that Brazil is hardly likely to go the way of Venezuela and the market in cosmetics is robust now and will be great again (to coin a phrase). I tend to agree. Once the political swamps are drained and Brazil has a better Olympics than they did a World Cup, we’ll see some of that old Brasilero swagger return.
It’s quarterly results time:
Clariant’s first-quarter sales rose by 1% year on year to Swiss francs (Swfr) 1.48bn (€1.35bn) on the back of higher volumes. EBITDA before exceptional items rose by 11% year on year to Swfr229m in the first quarter. Its EBITDA margin rose to 15.5%. It’s target is 16 % to 19 % according to Hariolf Kottman, which he says puts the company in the top tier of specialty companies. My rule of thumb has always been that the top tier starts at 20% but then I suppose it depends on how you define a “tier”. Surfactant heavy, Care Chemicals’ sales rose 5% in the first quarter year on year to Swfr411m, while EBITDA before exceptionals increased 7% during the period to Swfr75m (18% EBITDA margin. For surfactants and such – very good). The company went on to say that growth is anticipated to be accompanied by new capacity such as in Clearlake, US, with ethoxylation, which came on stream in the first quarter of 2016.
Croda released what they call a Q1 “trading update” at the end of the month. Sales rose by 7.7% year on year to £306.8m. Reported sales at its personal care business rose by 3.0% year on year. Life sciences was up by 31.6. Performance technologies rose by 3.2% and industrial chemicals down by 7.8%. The ongoing economic crisis in “South America” (i.e. Brazil – as I noted above) also took its toll on Croda’s business in the region, with underlying sales sharply down by 11.5% year on year. So nothing on EBITDA for Q1. However, if you look at the Croda FY 2015 report, you see that they generated £302m of EBITDA on £1,082m of sales. That’s a 28% EBITDA margin. Now that’s top tier. Croda, by the way, will be all over our conference next week. We’ll have detailed perspective on the new Bio-EO project direct from the company at our bio-seminar on Wednesday. Then on Thursday morning, the recently retired Croda personal care leader, Kevin Gallagher will give the keynote address.
Stepan's first-quarter net income rose 30% year on year to $27.7m on the back of lower raw materials costs. Sales actually declined slightly by 3% to $445.9m. "The quarter benefited from higher surfactant and polymer volumes, increased asset utilisation, reduced raw material costs and enhanced internal efficiencies," said CEO Quinn Stepan. Although sales at the Surfactants division fell by 6% to $310m, its operating income rose by 10% to $37.2m. Quinn went on to say “We expect raw material costs to rise which may compress margins... Costs associated with a planned 30 day shutdown of our plant in Germany, decommissioning costs for our ethoxylation production in Canada and lower demand from reduced construction activity in China should negatively impact the balance of 2016. Nothing on EBITDA for the quarter. If I back out interest of $3.6m and depreciation and amortization of $18m, I get EBITDA of ~$62m, that is a 14% EBITDA margin for Q1 ‘16. Not bad at all for a high volume surfactant heavy business. As I’ve said before, what Stepan is top-tier at is consistent, flawless execution. And a stock that’s outperformed the S&P by a factor of 4 over the last 10 years (btw I don’t own any).
That’s it for April. I want to leave you with something to think about. As a surfactant user or producer, how do you find growth in this market and what actually is “commercial excellence” or “top-tier” (to borrow a phrase) performance? Mckinsey will be with us in Jersey City next week to lead a discussion and analysis on these questions. For my part, I’ll be considering what exactly is the connection between David Bowie and surfactants. It’s not what you think.