Surfactants Monthly Review – February 2016
February saw a number of earnings reports, which we’ll take a look at below. As always, most, but not all of the key data for this blog is sources from ICIS and I remind readers that if they really want to have this kind of data available in-depth and on a real time basis (that means, as it happens), then they should subscribe to the ICIS services. A further reminder is also necessary that, although I have a conference and training course business with ICIS, my recommendations of their news and price reporting services, result in no financial or other benefit to me. End of disclaimer:
Beginning the month, ICIS reported that North American EO contracts fell 1.5% on an ethylene decline. January EO contracts were assessed at 48.80-58.30 cents/lb ($1,076-1,285/tonne) FOB from 49.60-59.10 cents/lb FOB in December.
Similarly in China, EO prices declined, although a bit more sharply, that is by 8%. Prices of EO were assessed at yuan (CNY) 6,900/tonne EXWH (ex-warehouse) during the week ended 3 February, down from CNY7,500/tonne EXWH the previous week, according to ICIS data.
Back on the Forces Majeure front, ICIS reported that Shell will likely restart its Singapore cracker only in the second half of 2016. As a reminder, Shell had said on 8 December that maintenance works are being done at the Bukom cracker complex in Singapore “to rectify accelerated external corrosion in specific areas”. Shell declared force majeure on the supply of base chemicals from its Singapore site on 1 December, and this was progressively extended to the supply of high purity ethylene oxide (HPEO), ethylene glycols, propylene oxide (PO), monopropylene glycol (MPG) and polyols.
An intriguing tidbit out of Shell courtesy of a regulatory filing. Apparently, according to ICIS sleuths, Shell is developing an ethylene oxide pilot plant at its technology centre in Houston. The pilot plant had released ethylene into the atmosphere, causing Shell to report the emissions to the Texas Commission on Environmental Quality (TCEQ). Shell shut down the pilot plant as a result of the emissions, it told the TCEQ. There were few details about the pilot plant in the TCEQ filing. One can only conclude that the pilot plant is there to support larger EO projects, slated for perhaps Monaca PA or maybe back in the Gulf Coast area.
Meanwhile on February 15th, Indorama declared Force Majeure on monoethylene glycol (MEG) and purified ethylene oxide (PEO) due to a delayed restart of its plant in Clear Lake, TX. While conducting a planned turnaround and catalyst change in January, the company found additional and unexpected issues with its reactors that prevented completion of the catalyst change on schedule. Indorama expects delays of an additional four to five weeks from 15 February. Meanwhile, the catalyst extraction process is continuing, but at a slow rate. Is this further support for our decrepit plant hypothesis as put forth in last months blog? Hard to say without more data and I certainly don’t wish to tar this Indorama plant with the same brush that was applied to the Pemex capacity last month. However, let’s also keep an eye on this and other Forces Majeure throughout the year.
In other feedstock news: At the beginning of the month, Asia prices of C12-14 alcohol were down on weak demand, according to ICIS. Prices averaged around $1,200-1,250/tonne FOB SE Asia. As the month wore on, however, pricing firmed on the back of rising feedstocks prices, thus suggesting, to me at least, that alcohol producer margins were squeezed. ICIS reported that palm oil production in Malaysia dropped around 20% in January due to weather conditions. Offers for C12-14 alcohols were mostly heard at $1,300-1,350/tonne FOB SEA. Similarly with fatty acids: Most suppliers increased their C12 lauric acid offers to $1,250-1,300/tonne FOB SEA. Also, as a result of higher palm stearin prices, most suppliers have increased their offers for C16 palmitic acids and C18 triple pressed stearic acids (TPSA) to $700-750/tonne FOB SE Asia and $750-800/tonne FOB SE Asia respectively.
The earnings season is well underway and we learned recently that in at least one case, low oil prices are bad for the surfactants business. How come? Well, in an earnings call, Peter Huntsman, CEO of Huntsman Corp., noted that margins for ethylene and other olefins fell significantly in Q4, 2105. ICIS data backs him up. Year-to-date ethane-based spot ethylene margins stand at 12.10 cents/lb ($267/tonne) in the US. That is roughly half that (23.60 cents/lb) in 2015 and a quarter of that (48.76 cents/lb) in 2014. As such, ethane-based spot ethylene margins are down 75% from those in 2014. Unlike the rest of the world, low oil prices reduce US ethylene margins because the US relies predominantly on ethane as a feedstock vs naptha elsewhere. Now, about a third of the earnings for Huntsman's performance products segment is usually generated from surfactants and ethylene intermediates. As a result of the drop in US ethylene margins, surfactants and ethylene intermediates contributed less than 20% of the of the division's EBITDA in the fourth quarter. The remaining two-thirds of the segment's earnings is usually generated from amines and maleic anhydride. Earnings from this portion of the segment rose because of strong margins for amines. Nonetheless, it was not enough to offset the lower olefin margins and unfavourable exchange rates. Fourth-quarter revenue for the performance products division was $552m, down from $712m from the same time in 2014. Adjusted EBITDA was $76m, down from $111m. So as long as oil is low, Huntsman’s North American gas feedstock advantage and the surfactants and ethylene derivatives business does not do as well.
Also on the earnings front: Deteriorating economic conditions in Brazil ended up indirectly boosting reported results by Oxiteno who reported reais (R) 180m ($45m) in earnings before interest, tax, depreciation and amortisation (EBITDA), up 84% from R97.8m in Q4 2014. The company attributed this to a 51% decline in the value of the real against the US dollar. Partially offset by lower sales volumes (down 14% more or less across the board, that is in Brazil and outside) and increases in the cost of raw materials, due again to a debilitated currency but also to an outage at Oxiteno’s Maua plant, which in turn was due to a fire at next door’s Braskem plant. So, in summary, depressed trading in harsh conditions ended up netting a decent bottom line due to a crash in the domestic currency. And who said the surfactants business was boring?
Stepan’s earnings report came out late February. Unaided by forex vicissitudes, adjusted net income was up 38% to $79.4 M. Drilling down a bit, Surfactant operating income was $104.1 million, a 71% increase versus prior year. The Polymer segment delivered record operating income of $80.9 million, a 33% increase. Specialty Product operating income was $4.4 million, a 58% decrease. According to Quinn Stepan Jr, CEO, surfactant income increased on strong volume growth and an improved global product mix. The segment benefited from savings from the previously reported restructuring charges and actions to improve earnings going forward through the dissolution of the Enhanced Oil Recovery joint venture (Tiarco) and discontinuing ethoxylation in Canada. Further colour on the surfactants segments as noted in Stepan’s release as follows: North American surfactants sales volume increased 14% mostly due to higher consumer product sales from the Sun supply agreement (discussed in our July 2015 blog). Strong volume growth in Latin America and Asia, 17% and 9% respectively, was slightly offset by lower volumes in Europe. Surfactant operating income increased $12.2 million or 101% versus the prior year quarter. All regions delivered operating income growth in the quarter. North America principally benefited from the new volumes in consumer products and the improved capacity utilization associated with this business.
Stepan’s surfactant profitability by region: I have talked a lot about the different characteristics of the surfactant markets in different parts of the world, particularly contrasting North America to Europe. I have used Stepan’s reported results to illustrate the substantially greater competitive intensity of the European surfactant market. This year’s results from Stepan continue to support the view that continued consolidation in the North American surfactant market (often initiated by Stepan, as in the most recent case of the Sun Products supply and asset purchase agreement) ensures a healthier business for surfactant manufacturers vs the chronically over-capacity European market. A market, for which one assumes are cultural reasons, seems unable to go through a similar sort of consolidation as that recently enjoyed, by certain manufacturers at least, in North America. The figure below updates 5 years worth of Stepan margin results for surfacants in North America and Europe.
Another favorite company of ours, in terms of its suitability for case studies is Croda. They reported net profit after tax up by 9.32% year on year to £180.7m (€232m) in 2015 amid record sales up by 3.35% to £1.08bn. CEO, Steve Foot highlighted the new EO project in Wilmington, DE in the earnings report.
Speaking of Croda: I’m pretty sure we’ve never written about the company Nitech in the 6 or so years the blog has been running. Early in Febuary, the company signed a deal with Croda to “design, build and trial new technology for continuous production for its surfactants business”. Apparently the technology invovlews a “continuous oscillating baffle reactor” and attracted funding from The Centre for Process Innovation and The University of Cambridge’s Institute for Manufacturing (and presumably Croda, although that is not quantified). According to Nitech, the collaboration will establish technical and commercial viability of the NiTech process in Croda’s surfactant applications, and aims to de-risk future commercial investment in the technology by Croda. Let’s keep an eye on this. There are a lot of processes that could benefit from intensificiation and conversion to a continuous basis. Many of these apply to surfactants.
In personnel: Our surfactant alma mater, Pilot Chemical as expected, named a new president, Michael Scott at the beginning of the month. Scott was previously regional president for acrylics and general manager for organic peroxides at Arkema. This key hire enables Pam Butcher to transition to a board role at Pilot, while the chairmanship remains, we assume, with Paul Morrisroe. Good luck to Michael and welcome to the industry.
Finally, Poland’s Boruta-Zachem continues to make news as well as, it seems soon, surfactants. The company has commenced the technological start-up of its new bio-surfactant plant located in Bydgoszcz, northern Poland, the company said late February. The start-up phase involves optimizing production parameters, enabling full output to be achieved by the end of March. OK stay tuned then and if you ever wondered about bio-surfactants, what they are and what they do, then you really have to come to our seminar which has been added to the close to sold-out, 6th ICIS World Surfactants Conference.
If you like what you read in these blogs, I encourage you to attend at least one of our conferences per year. Next up is New York on May 12 – 13th with the first bio-surfacant seminar on May 11th. If I don’t see you there, we’ll have Europe and Asia later in the year.