Fatty Alcohols What's Next??

Fatty Alcohols What’s Next??

Norman Ellard IP Specialties 3rd ICIS Pan American Conference Miami, October 2018 The Certainties about Oleochemicals

• They are used in products with “high Reach” – detergents, personal care (shampoos, soaps). • They are sensitive to the economy. Consumers can trade down or use less. • Consumers globally are very price sensitive. Oleochemicals need to be priced at levels to make surfactants affordable. IMF GDP Real Growth % Annual Increase

2009 2018

The overall global economy looks much healthier than in 2009 just after the crash! 2018 – Uncertainty and Concern

• Unpredictable policies by the USA • Hard to keep up with Tariff issues. • Potential Trade Wars • Economy too strong? Inflation? • Interest rates rising in the USA. (Strong US $) • Stock Market topped? • Commodities mixed – Crude Oil strengthening, Fats and Oils weakening, 20182017/2018 – FATTY ALCOHOL – Fatty SITUATIONAlcohol

• • For quite some time we have been concerned about the excess capacity in the fatty alcohol business and there have continued to be some additions to the capacity • As always, a much smaller market versus fatty acids. Focused on a few larger customers - the big soapers. • Capacity utilization varies – 85-90+% in a well run competitive plant to <50% in an uncompetitive plant down to zero in some plants. • We seem to have found a way to run plants at low capacity utilization, but this cannot be very profitable. • Detergent markets increasing by about 5% globally - personal care markets are higher. New alcohol capacity 2012-2015

Synthetic Oleochemical Oleochemical new/expanded 2012-2015

> 1,000,000 tons 30% on top of existing capacity Estimated Capacity Over Market Potential • Current Calculated Capacity – almost 4.5MM NT • 60% of this capacity in Asia • 22% of the global capacity is synthetic alcohol. • Estimated market size 3.3 MM MT Fatty Alcohol Capacity 3%

• Assuming synthetic capacity is 100% sold (good 4% estimate since it is difficult to get), then the global 15% capacity utilization of natural alcohol is about 18% 66%. • Actually this varies by region, depending on captive uses. • Over 1000 MT added since 2013 and more 60% coming. • Only closure in the USA. North America Asia Europe S America Africa Production of Fatty Alcohols

• Two Main Routes: – Natural from lauric oils (high C12-14) such as coconut oil. – Synthetic from olefins or ethylene. • Natural Routes – Via Fatty acids - used to be the old route, but now has come back to prominence with new processes. – Via methyl esters – the traditional route practiced by P&G and Henkel (or others using their technology.) Where to find those C-11 – C-15 chains?

• Petrochemical • OLEOCHEMICAL – Ziegler Process • SPLIT AN ANIMAL OR VEGETABLE • build up from ethylene OIL • C2 + C2 + C2 + C2…… • Even chain lengths – OXO and S.H.O.P. Process • Hydroformylation an olefin • Olefin + C1 • Odd and even chain lengths

• EVEN CHAIN LENGTHS ONLY • 100% LINEAR Why all the Capacity?

• Natural fatty alcohols originally came from tallow. • Lauric oils were a later development. • Synthetic came along in the 1960’s as a clear cost leader. • In the 1980’s with the huge growth of palm oil in Malaysia and Indonesia, PKO was a ”new” lauric oil and expected to price as a co product. Why all the Capacity?

• Many companies excited by the availability of palm oil built fatty acid units. (Bigger market and easier technology) • Natural alcohol became the cost leader. • Huge fatty acid capacity encouraged new fatty alcohol capacity as the technology developed. • PKO was priced like a primary product – lifted 1214 alcohol, prices to over $2000 – uneconomic!! • As oil and gas prices dropped, synthetic became the cost leader again. Two Events to Impact 2019

Old Oleochemical Plants never die – they just come back with a lower capital base.

Unfortunate Fire at Stanlow impacts Alcohol capacity for 2019 To Survive and Thrive in Oleochemicals March 2017

CPO and PKO (and maybe CNO) has to come down to reasonable levels to help the industry stay competitive versus alternatives and also allow growth of the Market. 2,000 2018: 1,800 Record highs Lauric oil 1,600 prices in 1,400 decline 1,200 Forecast 2018 supply (vs. 2017):1,000 PKO: +10% CNO: +15% 800 Not a surprise • Palm / PKO yields have 600

recovered from El Nino

Jul-14 Jul-15 Jul-16 Jul-17 Jul-18

Oct-14 Oct-15 Oct-16 Oct-17

Apr-14 Apr-15 Apr-16 Apr-17 Apr-18

Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 CNO CIF R'dam PKO dvd Malaysia 2,000 Record gap between The 1,800 CNO and PKO Surprise! 1,600 The gap Disappearing disappears coconut oil 1,400 Premium 1,200 or: the perils of forecasting 1,000 commodities

• CNO crop has recovered 800 from devastating typhoons of recent years. 600

• Increased edible demand

Jul-14 Jul-15 Jul-16 Jul-17 Jul-18

Oct-14 Oct-15 Oct-16 Oct-17

Apr-14 Apr-15 Apr-16 Apr-17 Apr-18

Jan-15 Jan-16 Jan-17 Jan-18 may be fickle… Jan-14 CNO CIF R'dam PKO dvd Malaysia 8 Benefits of Coconut Water You Didn’t Know About • Aids in Weight-loss Efforts.’ • Picture-Perfect Skin. • The Ultimate Hangover Remedy. • Facilitates Digestion. • Boosts Hydration. • Reduces Blood Pressure. • Rich in Nutrients. • Compatible with Human Blood. Source: LIFEHACK.ORG

Coconut has gone nuts!

Economics of natural fatty alcohol (the key issue is co products!!) Light Cuts 8-10 1214 1618 Palm Kernel Oil 6% 63% 41% Coconut Oil 15% 63% 22%

• About 2 kgs. of oil to make 1 kg 1214 alcohol (including glycerine effect.) • PKO has much less 810 and much more 1618. • Ethylene has a similar relationship on synthetic alcohols What does it take to make 100 tons of C-12/C-14 alcohol? 170 tons PKO • Can go via fatty acid or methyl ester, but the principle is the same. (or CNO) Fatty-acid- • Proportions of co-product vary according to making oil (CNO vs. PKO) 45 tons Fractionation C-16/18

Hydrogenation 17 tons 11 tons Glycerine C-8/10 100 tons C- 12/14 • Cost varies as 1.7 x oil cost!

IP Specialties What does this mean for oleochemicals?

170 tons • PKO Proportions of co-product vary (or CNO) according to oil (CNO vs. PKO) Fatty-acid- making 45 tons Fractionation C-16/18

Hydrogenation 17 tons 11 tons Glycerine C-8/10 100 tons C- 12/14

IP Specialties Fatty Alcohol 1214 Coproducts 1618 alcohol

• The wide range in between the price of PKO and CNO drove the producer to use PKO. • This created an excess of 1618 – methyl ester, alcohol and acid. • The Ester found it’s way into some biodiesel, although there is still some excess – and there are still new uses to be found. • The fatty acid market is much more diverse and larger than fatty alcohol and has absorbed much of the excess 1618, especially as vegetable oleic has grown. • 1618 alcohol has, for the most part, kept in balance and been very stable in price. Fatty Alcohol 1214 Coproducts 810 light cut products • The swing away from coconut and closure of an oleochemical unit in the Philippines caused a dramatic drop in the availability of light cut products. • Light cut acids went very tight and high priced. • Main uses in MCT’s and synthetic lubricants. • The industry has become dependent on these high prices to enable some profit in the industry. • Today light cut fatty acids are a more available, but light cut alcohol is very difficult to find. Raw Materials –Ethylene / Petrochemicals

• The synthetic alcohol raw material is ethylene or olefins. • Has been low priced and well supplied. • Threat of higher oil prices ? • Ethane in the USA is under pressure. • Prices are increasing on petrochemicals – and synthetic alcohols. Crude Oil prices West Texas intermediate

$73.25 / Barrel

Crude Oil strengthening and appears to be heading for volatility! Could be bullish for Palm Oil. Natural gas prices USA

$3.40/ MMBtu

Natural Gas in the US is still well priced. Ethylene as a feedstock is still very competitive BUT…. • US ethylene length to continue through 2018 • 05 July 2018 17:00 Source: CIS News Ethane getting tighter! Propylene getting tighter! Ethylene derivatives are going Up! EO prices increasing. Synthetic alcohol prices going up! The Demand Side- End Markets

• Continued gains in Personal Care – Cosmetics. 5-10% per year, especially in NEW emerging markets,. • Detergents – continued growth in liquids (China is happening much faster than expected) will drive alcohol uses. Mature markets are very slow growth. • Unit dosing Pods– a chilling effect on many surfactants. Now 15% of the market in the USA and having a clear effect on surfactant demand. • The continuing malaise in Europe and Japan markets. • New markets – Oil and gas – but what type of surfactants will they use? • Could there be a big change in surfactants? Enzymes?

27 2018/19- Dreams come True! (If you are a natural producer) • Overall markets are very optimistic versus the previous year in the face of better priced raw materials and higher demand. • PKO in the face of increased supply has come down to better than expected levels for oleochemicals • Coconut has come down to “re-join” the lauric oil markets. • It appears the bubble to healthy coconut derivatives has burst. • More CNO is now being used in oleochemicals – freeing in up light cuts. . • Overall, oleochemical have been well priced. 2018 / 2019 – Tough Times (If you are a synthetic supplier) • Problems with supplies early in 2018 – due to Hurricane Harvey. • Synthetic capacity – not rapidly expanding and totally sold out. • Catastrophic closure of European capacity – expected to last for some time. • New capacity may finally come – but it will be modest. • Synthetic prices increasing. • Synthetic costs increasing? Fatty Alcohols – the Future

• Fatty alcohols much tighter for natural. This is in a scenario where last year it was predicted there was enough capacity for 10 year growth. • Reasons for the tightness: – Continued economic growth – A limit to synthetic supply. Lower supply in 2019. – A more stable PKO/CNO price profile with a downward trend allows more competitive pricing. Influences on Oleochemicals in 2018/19 The Economy

• The world is slowing backing out of “quantitative easing”. • Interest rates will now likely rise. Capital will become more expensive. • Healthy demand and labour shortages could drive costs higher. • Commodities dropping or? • Could this be the time that inflation starts to accelerate? • On the other hand, trade wars could take us into a hard recession. • Will the USD remain strong? Influences on Oleochemicals in 2018/19 Logistics

• The cost of logistics has always been a significant (and growing) portion of oleochemical costs. • Much of the business has been moving over oceans. Capacity has been long – especially in the container market. Consolidation is leading to tighter controls. • The real current issue is local trucking logistics in some markets such as the USA. There is a huge shortage of drivers in the USA and this is causing all kinds of issues. • China trucking is a $750 billion business with 30 million truckers. Such a fragmented business is bound to have it’s own problems. Logistics within China has always been seen as a major issue. There are efforts to simplify and this could be a major opportunity. • The internet has put consumer business under huge cost pressure as well as the need for “on time” deliveries. • This is going to push against oleochemical returns. Influences on Oleochemicals in 2019 The Environment • As an industry, we have been used to environmental issues. • Palm Oil has been a subject of much discussion. Many of our raw materials are subject to climactic issues El Nino and La Nina. This is a routine discussion. o Some are predicting a new El Nino – could impact Palm Oil Prices. • Higher oil prices will make biodiesel more competitive. • More Hurricanes/ Typhoons to disrupt the industry?

We are into the unknown on this issue !! Influences on Oleochemicals in 2018 The Environment and Sustainability • Sustainability is becoming a requirement, not just a need and more consumer noticeable. • More customers across the world are asking for RSPO. • Will this become the norm? • Will the consumer pay a premium? • Cities (Cape Town) are running out of water. BBC identified 11 other cities that are in jeopardy. From Beijing to London….. • How will this impact the use of surfactants? the future of Natural fatty alcohols

• Better priced raw materials to be competitive. • Better economies, assuming no trade war. BUT trade wars could bring global recession. • No significant new capacity – but maybe no more rationalization. • For the most part, plant costs on natural are very competitive. Synthetic capacity will continue to be full. The barrier to capacity increase on synthetic remains high. • Opportunities in Fatty Alcohol: – Plant Utilization – Better utilization? New opportunities? – Co – products – light cuts, heavy cuts an glycerine. – Logistics • 9-year old oleochemical trading company • Cincinnati, Hamburg, Singapore, Guangzhou • Fatty acids, alcohols, glycerine. Methyl Esters Cincinnati USA, Hamburg Germany, Singapore, Guangzhou China Helping customers solve problems and create opportunities in Chemicals Norman Ellard [email protected]