Surfactants Monthly – July 2016
Of Bucks Fizz, Kim and a Pricey Razor
Herewith our summary for the month of July, as always, with the much appreciated help of the news team at ICIS. I strongly urge readers who want real-time news across the whole chemicals value chain to subscribe to the dashboard.
“We’re from the government and we’re here to help” – words to cast a chill over any industry and the US cleaning industry is no exception. As reported at the beginning of the month, the American Cleaning Institute (ACI) wants to reduce or eliminate the government encouraged, use of animal fats in biodiesel. The reason is that its members are losing out to biofuels under EPA's Renewable Fuel Standard (RFS). Animal fats are a key feedstock for oleochemical producers, which help supply makers of soap, laundry detergents, fabric softeners, hard surface cleaners, dish detergents and personal care products, as well as many other everyday consumer and industrial products. "The proposed (RFS) volumes would continue to divert large quantities of a finite, inelastic supply of animal fats to the biofuels market, thereby critically disadvantaging the domestic oleochemical industry," said Jacob Cassady, ACI associate director of government affairs. "EPA has a responsibility, if not duty, to equally protect all industries that rely on animal fats to produce goods. Agency mandates should not choose winners and losers [my emphasis]." The ACI said the price of animal fats has increased 95% since 2006 under the combined policies of the RFS and tax incentives for biofuels. Since 2011, the price of animal fats has exceeded that of Malaysian palm oil, which was a historical first, the trade group said. "The RFS and biodiesel production tax credit is pricing the domestic oleochemical industry out of the market and forcing it to find cheaper and more plentiful foreign-sourced palm oil, which, over time, will drive this industry overseas," said the ACI. "EPA must use its discretionary authority [my emphasis] to ensure adequate supply of these feedstocks for all industries, not just biofuels." I have to say, an outstanding defence of the industry (and sensible economic policy) by the ACI. Those bolded words above though really worry me, especially "discretionary authority". In a country of laws, should not discretionary authority be minimized and reside primarily with the judiciary, in their interpretation of said laws when called upon to do so? An agency with too much discretionary authority is judge, jury and, in this case, executioner. Is the ACI, a lonely voice crying out in the wilderness, to let markets work in today’s economic environment? It sounds like it.
But the biodiesel boys are, of course, not without their reasons to moan. As expected the chemical press was full of Brexit doom and gloom at the beginning of the month, but this ICIS news piece in particular caught my eye. Apparently, the UK’s vote to leave the EU may make it difficult for UK biodiesel players to import used cooking oil methyl ester (UCOME – yes apparently it has its own acronym).
The newspaper then went on to interview someone (who wisely chose to remain anonymous) who, presumably, makes his living importing used Dutch (or whichever type) kitchen grease into the UK. This, UK "greaser", let’s call him Sidney, went on to say “The UK is big on UCOME. Things are a bit shaky at the moment (says Sidney) – they can't import UCOME as it's too expensive amid the recent sterling drop. The exporters in the UK will be fine as their books were in dollars,” Sidney said.
The pound sterling dropped to its lowest level in 31 year following a referendum in the UK where around 52% of voters voted to leave the EU.
Sidney suggested that premiums for UCOME were around $170-180/tonne above those of fatty acid methyl ester (FAME) , which were assessed at $390-400/tonne FOB (free on board) Rotterdam this week.
OK I can’t resist it; if you can’t stand the heat…Ah Bucks Fizz, little did we know, some 34 years ago, how prophetic you were....
In EO news: the AFPM just published it quarterly report and 2nd-quarter production of US EO rose by 5% year on year to 1.625 Bn lbs. EO production was also up quarter on quarter, with a 7% increase in Q2 from Q1 2016.
Staying at the back end of the supply chain: Malaysia’s palm kernel oil (PKO) prices have been on a strong upswing since 19 July, gaining around $110/tonne in a span of eight days. After experiencing a steady decline at the start of July, dropping from around $1,275/tonne on 1 July to around $1,228/tonne on 12 July, PKO prices fluctuated between $1,230/tonne and $1,270/tonne for the next week. From 19 July, PKO prices started to gain a strong upward momentum, rising from around $1,239/tonne to around $1,351/tonne on 27 July. The recent uptrend of PKO prices was in direct contrast to that of crude palm oil (CPO), which has been on a steady downtrend since 21 July. CPO prices dropped from around $616/tonne on 4 July to around $582/tonne on 12 July. Subsequently, CPO prices rebounded slightly to around $596/tonne on 21 July before going on another downtrend, dropping to around $580/tonne on 28 July. How come? This is certainly not usual. Some market participants in Asia’s oleochemical industry said that the gains in PKO prices were supported by shorter supply and better export figures. Some of them said it unusual for the two oils to be moving in completely opposite directions and this has created an uncertain outlook for raw material price trends. As a result, some buyers, especially for mid-cut C12 lauric acids and C14 myristic acids, and mid-cut C12-14 alcohols, were said to have moved to the sidelines. In the week ended 27 July, prices of C12 lauric acids, C14 myristic acids and C12-14 alcohols were assessed firmer at $1,500-1,550/tonne FOB (free on board) SE (southeast) Asia, $1,400-1,450/tonne FOB SE Asia and $1,750-1,800/tonne FOB SE Asia respectively, compared to $1,400-1,450/tonne FOB SE Asia, $1,350-1,400/tonne FOB SE Asia and $1,700-1,750/tonne FOB SE Asia a week prior.
This firmness in fatty alcohols rippled forward through the supply chain and, ICIS reported, China’s fatty alcohol ethoxylates (FAE) prices may extend gains on the back of higher feedstock fatty alcohol and ethylene oxide (EO) costs. On 27 July, prices of FAE-7 and FAE-9 were assessed at $1,350-1,400/tonne CIF China, up by $20-50/tonne week on week according to ICIS data. . Prices of feedstock EO in China were stable at yuan (CNY) 9,100/tonne EXWH (ex-warehouse), after rising for two consecutive weeks.
They’re back – fatty alcohols via E. Coli fermentation! A news article in ICIS, noted that US-based Renewable Energy Group (REG), the country's largest biodiesel producer, is developing strains of E coli that can produce fatty alcohols by fermenting various sugars – including crude glycerine and those found in biomass. Now, readers may recall that REG acquired LS-9 back in January of 2014. More astute readers will also recall that in late 2011 the company actually shipped 1 MT of lauryl alcohol, made via fermentation to P&G. Older readers may still associate E. Coli with a certain fast-food chain’s horrific experiences of the early 90’s. In any event, if this re-launch is successful, this would not only give REG an alternative feedstock (sugars), it would also give the company another stream of products, many of which could, possibly, earn higher margins than biodiesel. Moreover, it could give REG another use for its crude glycerine. Many of REG's biodiesel plants rely on waste oils (see above!), and this produces a crude-glycerine by-product that is used mostly as animal feed or in industrial applications. Eric Bowen, the head of the company's Life Sciences subsidiary, talked about these and other projectsrecently in an interview with ICIS. REG Life Sciences is in charge of developing such new technologies. The article is outstanding and I encourage you to read the whole thing for insights into the “new LS-9”.
Stepan’s continuing consolidation of the surfactant market continues, in Brazil. Late July, Stepan announced the acquisition of a 25,000 tonne/year sulfonation plant and business in Brazil. The sellers are Brazilian firms PBC Industria Quimica (PBC) and Tebras Tensoativos do Brazil (Tebras). The business has annual sales of about $32m.
Pilot Chemical, by contrast continued its measured diversification strategy with the acquisition of TX based Liquid Minerals Group. The company makes organometallic fuel additives. I’d not heard of them but looking at the website, it seems like a specialty business somewhat complementary to the lubricant additive business at Pilot.
Stepan also announced a very solid set of Q2 results. Second-quarter net income rose 65% year on year, to $27.9m, driven by increased surfactants and polymer sales volumes, which offset lower selling prices. Stepan’s overall second-quarter sales were up marginally, to $454.6m, from $452.4m in the 2015 second quarter. Total sales volumes were up 12%, with particularly strong growth in the North American surfactants business. Stepan’s second-quarter surfactant operating income was up 12%, to $27.2m. Surfactant net sales were $298.6m for the quarter, $1.2m less than in the prior-year quarter; primarily a raw material pricing effect.
To me it often seems like the real excitement in our industry is in the consumer goods sector. In our last two blogs we have used heavyweight boxing analogies to look at the battle in North America between P&G and Henkel. This month, from the front end of the value chain, some interesting channel news. P&G has launched the Tide Wash Club. It involves shipping of Tide Pods (its highest-priced laundry detergent) at regular intervals. The Tide Wash Club is currently only available in Atlanta. It costs either $15.99 or $20.99 depending on the size of the order. P&G has also been testing its delivery laundry service — Tide Spin — in Chicago. Tide Spin is a service that will pick up, wash and fold, and then deliver laundry. Tide Spin costs $1.59 per pound for wash-and-fold service, but offers free pickup and delivery.
Perhaps these moves are tentative explorations for a solution to what a recent article in the Motley Fool, termed P&G’s “Walmart Problem”. This laid out the problems faced by P&G’s reliance on Walmart as a channel to consumers while Walmart pushes, aggressively, its own brand (private label) equivalent of P&G products under labels such as Sam’s Club. This Motley Fool piece was in turn inspired by a Wall Street Journal article in June headlined “Wal-mart and P&G, a $10 Billion Marriage Under Strain”. Like Kanye and Kim, they need each other for strategic and business reasons. But clearly access to consumers is more paramount today for a brand company like P&G, than it is even for a Kardashian, especially since they have shed 100 brands, taking them down to 65 core brands which they are committed to grow globally.
Look at these moves alongside the recent very highly valued purchase (6.7X revenue is one heck of an expensive shave!) of Dollar Shave Club by Unilever and you see a real battle shaping up for the mind, heart and wallet of the consumer between the CPG companies and the retailers (and folks like Amazon). So what is the Dollar Shave deal all about? Unilever paid $1 Billion for a company selling razor blades with $152 Million in sales. They reckon they have a little over 2 Million customers, spending about $72 per year for 48 razors each. Looking at it another way, Unilever paid $10 for each razor sold by the Shave Club for $1.50 each. That seems rich no? But don't focus on the revenue or the blades. It's the consumers that Unilever covets. How come one of the most successful consumer marketing companies in the world paid so highly for a bunch of blokes buying razors? The key is that the Shave Club managed to build up a very loyal base of consumers buying staple goods (razor blades!) - and Wal-mart (and CVS and Amazon and etc..) are not in the picture at all. This is between the company and the consumer. Now, that is what Unilever is paying for. It's not about the blades; it's about the business model. Direct consumer engagement is huge for companies like Unilever and P&G. Just as the Kardashians use, but don't rely on, TMZ, ABC, CBS, People Magazine etc., preferring to engage directly with their followers via their own channels, so too Unilever. I know I am torturing this metaphor, but I hope you get my point.
What this means for surfactants, I am not sure. The products themselves are not necessarily changing. The supply chain, however, must continue to get more efficient and streamlined. Maybe this means fewer suppliers and greater alignment with the big customers (whoever they end up being). Can more educated readers than I am, please chime in on this question?
To wrap up, I have to acknowledge that my Brexit musings of last month attracted some feedback, decidedly mixed in nature. I am biased and will freely admit that. If you are looking for an incisive and objective look at the impact of Brexit on the European Surfactant industry, I urge you to come along to our conference in Berlin in September, where Dr. Evripidis Lampadarios will present a paper on this very topic and an engaged audience of surfactant industry executives will discuss and debate. I hope to see you there.