Surfactants Monthly Review – October and November 2017
We’re covering two months for the price of one today, for reasons primarily of sloth and procrastination on the part of your correspondent. I could point to the orphanage I’m building on the African subcontinent and the heavy tutoring load I’m carrying in the New Jersey inner cities as reasons for the lack of a blog in October. Unfortunately I am not doing either of those things, so that would not fly. Only a vague “too much to do with work and travel” will have to suffice. The reason for this rather pitiful preface is that, I don’t know about you, but I’ve spent a bit of time on Linkedin recently and I’ve noticed that it has increasingly become the domain of supermen and superwomen. Unless you are carrying 4 jobs (3 of them unicorn-valued start-ups) along with a charity engagement that makes Mother Theresa look like a self-absorbed narcissist, then the business / social media complex is just not interested in you. My fervent hope is that the people I see in my Linkedin feed today are either a virtual construction of a devious Microsoft algorithm designed to get me to hand over all my money to their advertisers, or that it will eventually be revealed that these folks’ lives are actually fueled by a potent daily dose of adderall and methamphetamines, thus enabling such superhuman achievement. I’m going with the latter for now and comforting myself with the sure knowledge that these paragons of virtuous capitalism are spending increasing amounts of their time on the dark web purchasing dodgy drug cocktails with even dodgier virtual currency.
Now for the news:
The month of October started with Procter & Gamble management celebrating beating back the barbarians at the Cincinnati gate in a victory over a proxy challenge from activist investor Trian. [Note to readers an “activist investor” is someone who has invested in a company and thinks that the company could actually do better in terms of providing a return on that investment – and then does something about it, because, you know, they are an owner of the company.] The company said that at its annual meeting in Cincinnati, shareholders voted to elect all of P&G’s 11 directors to the board. Not elected, according to P&G was Trian CEO Nelson Peltz who has criticised the company's performance and urged its shareholders to elect him to the board. Unfortunately, for P&G management, they uncorked the champagne and bit too soon and as of the writing of this blog, final vote tallies put Trian ahead and it looks like Peltz will get his board seat after all. P&G may still press ahead with contesting the vote result but my guess is that Peltz will soon be seen in the hallowed halls at P&G plaza and that first board meeting should be worthy of a Netflix mini-series. Does P&G have an agency problem? The next few weeks may make that clear.
In the ethylene oxide market, US contract prices for August went up by 2.8% on the back of a 6.8% increase in the August contract settlement for feedstock ethylene. Meanwhile, US EO contract prices for September went up by 5.4% on the back of a 12.8% increase in the September contract settlement for feedstock ethylene. August EO contract prices were assessed on Friday at 54.0-63.5 cents/lb ($1,190-1,400/tonne) FOB (free on board), an increase of 1.6 cents/lb from July. September EO contract prices were assessed at 57.2-66.7 cents/lb FOB (free on board), an increase of 3.2 cents/lb from August. This follows a two-month settlement for feedstock US ethylene, where August ethylene negotiations began in early September in the immediate aftermath of hurricane Harvey, but were delayed due to disruptions and uncertainty in the market. US August ethylene contracts were assessed at a 2 cent/lb increase, while US September ethylene contracts were assessed at a 4 cent/lb increase.
US EO contract prices for October however, went down by 0.7% on the back of a 1.4% decrease in the October contract settlement for feedstock ethylene. October EO contract prices were assessed on Friday at 56.8-66.3 cents/lb FOB (free on board), a decrease of 0.4 cents/lb from September. US October ethylene contracts were assessed at a 0.5 cent/lb decrease.
Regular readers know that I spend at least a week each year in Singapore and I love it. It’s not just the ability to blow an entire year’s earnings shopping in the city with a Rolex store on every street corner. Singapore is a success story in many areas including surfactants. And so, it was with great interest that I read a story in ICIS Chemical Business that Singapore has launched a new road map for its chemicals and energy sector which aims to create S$12.7bn in manufacturing value-addition and 1,400 new jobs by 2025. The energy and chemicals Industry Transformation Map (ITM) will be adopted through a two-pronged strategy. The first approach is to transform Singapore’s existing base of chemicals manufacturing through the adoption of innovative technologies and secondly, to diversify into new growth markets and develop new innovation capabilities to capture growth opportunities. This includes a plan for at least 20 plants, including refineries and crackers, to adopt “advanced manufacturing technologies” by 2020. The facilities involved under the ITM were not disclosed. Singapore has three refineries with a refining capacity of more than 1.3m bbl/day and four crackers with an ethylene output of 4m tonne/year. “Singapore will diversify and upgrade its olefin derivative portfolio towards high value added petrochemical products, and specialty chemicals,” the EDB said. “Focus end-markets include lubricant additives, oilfield and water chemicals, consumer care, agricultural chemicals and animal health and nutrition, as well as functional chemicals such as surfactants and function polymers,” the EDB added. Other areas to be explored include biotechnology and synthetic biology, it said. Now before regular readers jump all over me, yes, I realize that elsewhere is these pages I rail against clumsy government intervention in perfectly good functioning markets and celebrate those rare winds of sweet free-market change that are sometimes loosed on monoliths such as Mexico’s Pemex. Singapore is different is all I can say and that difference may only survive as long as the legacy of Lee Kuan Yew survives his passing. Would I like to live there? Vs New Jersey – that’s a tough one. Talk to me when the Winter really kicks in.
One of this blog’s favourite surfactant companies, Stepan posted a slight rise in net income to $21.9m in the third quarter of 2017 as increased demand in the surfactants business was outweighed by higher costs in its polymers division, the US-based manufacturer told ICIS News. Stepan’s Q3 net income was up 2% year on year, while diluted income per share climbed from $0.92 in Q3 2016 to $0.94 in the third quarter of 2017. Operating income in the surfactants division grew to $22.5m, up from $20.7m a year previously, driven by increased demand in the functional products and household, industrial, and institutional end markets. Higher distribution sales as well as lower manufacturing costs due to plant closures in Brazil and Canada also contributed to the improved performance in surfactants. Elsewhere, in the polymers division, operating income was down 22% year on year to $21.1m as a result of higher material costs and a drop in North American sales volumes. The specialty product division recorded an operating income of $1.0m versus $2.3m a year previously due to “order timing differences within our pharmaceutical and flavour business”, Stepan said. “Although the third quarter reported net income increased versus prior year, adjusted net income was down due to increased competitive pressure within our North American Polymer business,” said Stepan CEO F Quinn Stepan Jr. “Surfactant income increased due to an improved product mix and lower manufacturing costs." “Global Polyol volumes were down slightly reflecting share loss at one customer despite a growing market for insulation materials. Both Surfactant and Polymers continue to benefit from our diversification strategy.”
Another blog favourite, Croda announced sales up by 6.1% year on year to £334.6m in the third quarter of the year driven by strong performances in personal care and in performance technologies. ICIS noted that Constant currency sales in personal care were up 7.5% year on year in the quarter, while, in the performance technologies division, revenues rose 7.0%. Third-quarter profit margin recorded a slight year-on-year increase “reflecting improved product mix and pricing, with a successful focus on growing value ahead of volume”, the company said. Croda added that it expects its North American bio-EO / EOD plant to be commissioned towards the end of the year. “We continue to deliver on our priorities for 2017 - driving profitability through premier, faster growth market niches; improving performance in less-differentiated markets; and making progress towards our target increases in return on sales in life sciences and performance technologies,” said Croda CEO Steve Foots. “The combination of good top line growth and margin in Q3 gives us confidence in delivering our expectations for the full year,” he added.
We don’t write much about Sime Darby here usually, but we like to keep an eye on the palm giants as more of them (following KLK and WIlmar) move into surfactants. ICIS reported in November that Malaysia's Sime Darby will spin off its palm plantation and property units. Based on its proposed distribution, its shareholders will be entitled to one share in Sime Darby Plantation and one share in Sime Darby Property for each Sime Darby shares held. Sime Darby owns palm plantations and produces oleochemicals. The outlook for the palm oil industry is favourable with higher demand from both the food and non-food sectors, boosted by growing global population, food requirements and a wide application of palm oil, Sime Darby said. Sime Darby Plantation is the world’s largest oil palm plantation company by oil palm planted area and the world’s largest producer of certified sustainable palm oil, it said. Sime Darby announced early this year its restructuring plan, which will entail the spin-off of the two businesses, while the parent firm will keep its trading and logistics businesses and remain listed on Bursa Malaysia. “The restructuring plan will ensure that each of the three entities will have the relevant financial resources and talent to execute their growth strategies,” it said in a previous statement.
More quarterly earnings news: Oxiteno's Q3 2017 net operating income fell 43% year on year amid higher net sales but increased expenses, the Brazilian surfactants producer told ICIS. Net sales in Q3 2017 rose to Brazilian reais (R) 1.030bn ($316m), up by 7.7% from the prior-year period and a record for the company, Oxiteno said. But variable costs of goods sold increased by 13% to R696.8m, while selling operating expenses rose by 19% to R83.7. While the year-on-year net operating income decreased, Oxiteno did show marked improvement from the previous quarter, in which the producer posted a net loss of R3.8m. The company sold 211,000 tonnes of chemicals in Q3 2017, up by 5.5% from the prior-year period. Its sales in and outside of Brazil both increased on a per-tonne basis. The producer invested R107m in the quarter, largely on its ethoxylation plant project in Texas, which is set for start-up in 2018. This is a big and important project for Oxiteno and for the US surfactant market. The blog wishes them continued success in the US. They have a solid team in place there in Houston.
The superbly talented, up and coming journalist, Yuanlin Koh wrote a great piece on surfactants in ICIS news and she actually stitched this together from one and a half days of conference material and a day’s worth of my course on surfactants. I would like to reprint it all here. But really you should subscribe to the ICIS dashboard and come to our conferences to get this stuff. Here are a few snippets though – starting with some excerpts from our unique and valuable survey: “Surfactants producers in Asia and elsewhere in the world may be in tough times on account of lackluster world economic growth, global overcapacity and an increasing regulatory environment, especially in China. These challenges for surfactants producers dominated the discussions at the 7th ICIS Asian Surfactants Conference held in Singapore on 9-10 November 2017. In a 2017 surfactants survey done by ICIS, 49% of market participants said that the biggest challenge the industry will face in the next 12 months was sluggish world economic growth. Demand in mature economies is likely to be restricted, given the lower gross domestic product (GDP) as compared to emerging economies. Surfactants consumption per capita has also been declining in economies such as North America, Western Europe and Japan, and this trend is likely to continue. Overcapacity in the markets came in second at 42%, and an increasing regulatory environment and new competitors entering the markets both came in at 39%. ….
…… With substantially less competition than Europe and Asia, North America could be a market to tap into. Asia is an emerging economy, but its capacity is long and growing. As a result, demand is hard-pressed to keep up with the plentiful supply. An increasing regulatory environment is also a big threat to the surfactants market. In China, the government is stepping up on environmental checks on Chinese plants, which would have to shut down if they do not pass the inspection. In many parts of the world, import taxes and anti-dumping duties (ADD) are introduced to protect local markets. For instance, Latin America is a fairly protected market. …..
……However, the Asian market is highly fragmented with huge overcapacities in China, which has more than 500 surfactants manufacturers. Likewise, in India, the market is also dotted with several players of varying sizes. Therefore, in order to differentiate themselves, surfactants producers in the market have turned to new applications and technology, and customer-led innovation to appeal to their customers. For instance, the recent technology using the shale gas route to produce ethoxylates may increase competition in the global surfactants market. In the process, there is a potential to improve operating margins if any new technologies succeed.”
In a good comprehensive survey of M&A, ICIS has the following relevant to surfactants: AkzoNobel is seeking to separate or sell its specialty chemicals business in a dual track process to focus on its core coatings franchise. The specialty chemicals business, which in 2016 generated sales of €4.8bn and €953m in EBITDA, includes surfactants, polymer additives, salt and chlorine products, and pulp and performance chemicals. AkzoNobel estimates the value of the business at €8bn-€12bn. But such a large asset with a diverse slate of product categories is less digestible for a strategic buyer, and so would most likely to go to a consortium of private equity firms, who could then sell the businesses piecemeal at a certain point, according to a number of sources in the financial community. “There is still so much money in private equity that is looking for deals but there is a lot of competition, including from family office funds. It is very competitive among private equity, and then they are dealing with a lot of strategic buyers, noted Chris Cerimele with Balmoral Advisors. Chris, by the way, will be one of a slate of high profile speakers at our next surfactants conference in May in New York.
Further downstream: Spot fatty alcohol ethoxylates (FAE) prices in Asia may hold stable to firm in the near term on the back of tight supply and a potential increase in demand. In the week ended 15 November, FAE-7, 9 prices were assessed steady at $1,700-1,800/tonne CIF (cost insurance and freight) SE (southeast) Asia and CIF China, according to ICIS data. Transactions for November drummed cargoes were last heard concluded at around $1,800/tonne CIF China, while buying indications were at around $1,700/tonne CIF China. Spot FAE supply was somewhat limited amid regional plant turnarounds and high costs of feedstocks ethylene oxide (EO) and C12-14 fatty alcohol, sources said. Upstream EO prices remained at a seven-month high of Chinese yuan (CNY) 10,200 EXWH (ex-warehouse) on 15 November, according to data compiled by ICIS. Co-feedstock C12-14 fatty alcohol prices in Asia were assessed stable week on week at $2,250-2,350/tonne FOB (free on board) SE Asia on 15 November, ICIS data showed. Pricing uncertainty for C12-14 alcohols and its feedstock palm kernel oil (PKO) was also cited as a concern among sellers. Regional PKO prices in south Malaysia edged up week on week to around $1,345/tonne DEL (delivered) on 14 November, according to data collected by ICIS. As a result, producers were heard to be being selective and offering limited cargoes, especially for those with low inventory levels or those planning turnarounds. On the buying side, demand was generally stable, as consumers were purchasing on a need-to basis in small volumes. Some buyers, however, were preferring to take some time to consider the import offers. Demand may pick up in the coming weeks since buyers in the home care and industrial cleaning sector are likely to stock up on FAE ahead of the year-end holidays. With multiple supply-demand variables to consider, most industry participants said they would adopt a cautious approach on the FAE market.
More on the theme of government intervention: ICIS reported that a reduction in the Indian goods and service tax (GST) applicable on detergents lent a stronger outlook to linear alkyl benzene (LAB) demand in the near-term. Effective from 15 November, the Indian government slashed GST rates on mass consumption items including detergents from the highest 28% slab to 18%. Following this move, market players expect stronger demand for detergents in the weeks ahead, propping demand for LAB. Improved acceptance of the new workflows around the recently-implemented GST tax structure in place since 1 July this year also upheld expectations of stronger detergent demand, supporting LAB offtake. LAB demand in the country has remained weak since June, with the absence of a seasonal uptick even after the end of the monsoon season, market sources said. Furthermore, a lack of clarity in the new accounting systems and workflows following the implementation of GST also capped LAB imports, sources said. End of November, offers for Asian and Middle Eastern material at $1,250/tonne CFR India and higher failed to find response from importers, hampering trade for late November and early December-lifting shipments. Acceptable buying levels for imports were firmly capped at $1,200/tonne CFR India
And finally from Pakistan: Tufail Chemical Industries Ltd is planning to raise capacity of its linear alkylbenzene sulfonic acid (LABSA) to 100,000 tonnes/year by the middle of next year from the current 60,000 tonnes/year, an executive said on late November. Tufail said current production was mostly sold in the domestic market whereas after the expansion the company will look for exports to Africa, Bangladesh, the United Arab Emirates and Turkey. Tufail said petrochemical needs for Pakistan were set to grow as the country developed, especially the use of polymers, which was quite low even compared to neighbouring countries. “Pakistan is a market of 220 million people and current per capita consumption of polymers is very low at 3kg whereas in Europe it is 30kg per person” Tufail said. “Consumption is expected to grow by 40% to 50% in the next two to three years,” he said, citing massive foreign investment pouring in the country under China Pakistan Economic Corridor (CPEC) – an initiative under China’s One Belt and One Road project.
I just want to come back to this "supermen and women on Linkedin" theme for a minute. What got me thinking about this is a NEPIC meeing I attended in June of this year.For some reason, they had a video playing before the event started - with a song by the Chainsmokers (and Coldplay) - see below. The singer, our protagonist, says that he has read all about superheroes, but really does not have any of these incredible marvel comic gifts of flight, speed, agility, strength etc. His girlfriend however, says she really is not looking for anything like that; just the simple stuff will do, someone to turn to and kiss. So, of course, that got me thinking because I am always looking for meaning in music. What does this video have to do with NEPIC - the Northeast Process Industries Cluster - a chemicals trade association? Rather than ask the organisers, I conjured up my own reason behind the video. Clearly the message here is that success is not necessarily the result of breathtakingly spectacular superhuman actions carried out in front of an adoring audience. Is it not also the result of hundreds and thousands of simple and consistently delivered ,"right" actions? Perhaps success is not exclusively the province of the high-profile superman who, to the adulation of his fans, flies around the world in a minute, but also of the man who catches the number 10 bus Every. Single. Morning... and delivers his best for customers, clients and colleages, with little fanfare. I hope you'll forgive me for over-interpreting a pop song (and for putting a Coldplay video on this blog in among the Rush and Iron Maiden). Your number 10 bus might be United flight 1530 to Cleveland on a wet January morning. You don't arrive at your customer in a flash of light and a trumpet blast, but more likely a National rental car. But you're there, ready to listen and solve problems and add value for him and that's what he needs...something just like this. Think about it.
That’s it until the end of the year review. Keep an eye on our May 2018 New York Conference. Registration is not yet open but the program of speakers is almost full and I can tell you that it is absolutely outstanding. Plus we have, very soon, an important announcement to make about our value chain survey. Check this link periodically for all of conferences and courses. All the best and I expect to see many of you at the ACI in Orlando in January.