The Market Outlook for Fatty Acids

The market outlook for fatty acids

ICIS Pan American Oleochemical Conference, October 2018 Dr Caroline Midgley, LMC International

• Brent crude oil prices rose to almost $80/bbl in 2018. • This raised the competitiveness of lauric oils relative to ethylene. • Supply/demand for fatty acids rose strongly in 2017. • Despite new capacity start-ups (BSP/Sinarmas/Rugao), utilisation rates rose. • Trade in fatty acids rose strongly in 2017. • Growth in demand for fatty acids is being driven by growth in the markets for fatty amines, ester quats, fatty esters and metal stearates. • Fatty acid producers’ cost of production fell this year (H1 2018) thanks to declining raw material prices. • Profitability improved for tallow but remained weak for stearin based fatty acid production.

Prices of major oleochemical raw materials, (US$/tonne)

2,000

1,800

1,600

1,400

1,200

1,000

800

Tallow Ethylene)& 600

400

200 US$/tonne (basis CIF NW Europe except Europe NW CIF (basis US$/tonne Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Coconut Oil Palm Oil Palm Kernel Oil Palm Stearin US Bleached Fancy Tallow Brent Crude Oil

Coconut oil price premium over PKO

350

300

250

200

150

100

50 Premia over PKO, US$/tonne PKO, over Premia 0

-50

-100 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Jan/Oct CNO premium

Value of CNO vs PKO in implied by C8-C10 fatty acid content

600

500

400

300

200 C8 C8 andC10 (US$/tonne)

100

0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Jan/Oct Difference CNO PKO

Fatty acid prices

4,200

3,700

3,200

2,700

2,200

1,700 FOB FOB Asia SE (US$/tonne) 1,200

700

200 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18

TP Stearic Acid C8-10 Fatty Acid Cut C12 Fatty Acid C14 Fatty Acid

• In 2017, the El Niño recovery was disappointing. New areas of oil palm came into maturity whilst older palm trees and a weak La Niña suppressed yields. • In the US, the competition between tallow in the biodiesel industry and oleochemicals is easing but the two will continue to compete in the EU. • Stearin may become more attractive for oleochemicals as the EU looks to phase out high ILUC fuels in biodiesel in the latest RED II proposal. • In 2018, CNO had a good harvest and prices fell. Some fatty acid producers switched back to CNO as it was cheap relative to PKO. • However, PKO still constitutes the bulk of lauric oil supplies and will continue to do so.

World palm oil production to 2030

100

40 Million tonnes Million 30

0 2009 2012 2015 2018 2021 2024 2027 2030 Indonesia Malaysia Rest of World

Demand for lauric oils

10 100%

9 90%

8 80%

7 70%

6 60%

5 50% 4 ? ? 40% 3 30%

Consumption Consumption (milliontonnes) 2 20%

1 10%

0 0% 2010 2017 2018 2020 2025 2030 Demand for oleochemicals Demand for food use % of lauric demand for oleochemicals

Global fatty acid capacity

6 Million tonnes Million 4

0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 North America Europe South East Asia Rest of Asia South America Rest of World

Fatty acid plants in Asia, 2017 (Capacity > 100,000 tonnes)

China, Jiangsu: China, Tianjin: - Deyuan Goake - Wilmar - Nantong Kangqiao Chemical - Wilmar

China, Shandong: ! - Shuangpengchem China, Rudong: - Rugao Shuangma Chemical (Double Horse) China, Zhangjiagang: ! - Dongma Palm Industries India, Mundra: China, Rugao Port: - KLK ! ! - Adani Wilmar ! ! - Teck Guan ! ! China, Zhejiang: ! China, Shanghai: - Nice Group - Wilmar

China, Juaxing Port: ! ! India, Valia: - Zhejiang Jiahua - Godrej Industries ! Malaysia, Prai: - IOI Acidchem China, Guangdong: ! - Wilmar Malaysia, Rawang: Indonesia, Medan: - Palm-Oleo - Ecogreen - Musim Mas Malaysia, Klang: Malaysia, Pasir Gudang: India, Taloja: - Permata Hijau Palm Oleo - Palm-Oleo - Evyap - VVF - Socimas - Iffco - IOI Pan-Century ! ! - Natural Oleochemicals (Wilmar) Indonesia, Sei Mangkei ! ! !! ! - Pacific Oleochemicals - Unilever ! !

Indonesia, Kisaran: - Nubika Jaya

! Indonesia, Gresik: Indonesia, Pelintung: ! - Wilmar Indonesia, Dumai: - Wilmar - AAA (Asian Agri) - KLK Indonesia, Jakarta: - Sinarmas Cepsa - Dua Kuda - PT Dinuo Indonesia

Fatty acid plants in the Rest of the World, 2017 (Capacity >100,000 tonnes)

Netherlands, Gouda: Germany, Emmerich: - Croda - KLK Emmerich

U.S., Chicago: ! U.S., Ohio: ! ! - Vantage - Emery ! - Akzonobel Belgium, Ertvelde:

! ! - Oleon ! ! Germany, Düsseldorf: ! U.S., Massachusetts: - KLK Emmerich - Twin Rivers Technologies

Spain, Barcelona: ! - Cailà & Parés U.S., Tennesee: - PMC Biogenix

Saudi Arabia, Jubail: - SABIC

! Brazil, Camaçari: - Oxiteno

Capacity shares of leading fatty acid manufacturers (>250,000 tonnes)

Wilmar KLK 16% 10% Musim Mas 5%

IOI Oleochemicals 5%

VVF 4%

Asian Agri 3% Permata Hijau Other Group 48% 3% Dua Kuda 2% Emery Oleon Oleochemicals 2% 2%

Fatty acid market split by key group, average (2015-2017)

Fractionated palmitic and stearic acid 9%

Fractionated fatty acids 15%

Commercial Industrial fatty oleic acid acids 4% 52%

Commercial ste a ric a cid 20%

Note: Published trade data covers excludes transactions between companies and not within countries/regions. For example, it excludes fatty acid trade within US and Europe for which there is large domestic production. The diagram is therefore a distortion of the full market. © 2018 LMC International. All rights reserved. The market outlook for fatty acids 17 In 2018, demand will increase by 3% to 10 million mt

Fatty acid consumption by region, 2006-2018

Milliontonnes 3

0 2006 2008 2010 2012 2014 2016 2018 North America Europe South East Asia China Rest of Asia South America Rest of the World

Fatty acid production by region, 2006-2018

4 Milliiontonnes 3

0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 North America Europe South East Asia China Rest of Asia South America Rest of the World

Global fatty acid capacity, production & utilisation, 2008-2020

18 90%

16 80%

14 70% Capacity utilisation 12 60%

10 50%

8 40% '000 tonnes

6 30%

4 20%

2 10%

0 0% 2008 2010 2012 2014 2016 2018 2020 2022

Capacity Output Utilisation

Evolution of industrial and stearic acid trade

3.0

2.5

2.0

1.5 Milliontonnes

1.0

0.5

0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Industrial fatty acids Commercial stearic acid

World trade in fatty acids

0.8

0.7

0.6

0.5

0.4

0.3 Million tonnes Million

0.2

0.1

0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Commercial oleic acid Fractionated fatty acids Fractionated palmitic and stearic acid

World fatty acid market by derivative

Fatty acids used Fatty acid as such ethoxylates 24% 3% Others 3%

Fatty alcohols Metallic soaps 13% 16%

Fatty esters 16%

Nitrogen Soap noodles derivatives 12% 12%

Growth rates in application sectors using fatty acid derivatives

Animal feed Global GDP Rubber compounding growth to 2030 Emulsion polymerization Agrochemicals Synthetic lubricants Plastic films - slip agents Construction release agents Asphalt additives Plastics - processing aids Detergents Processing aids Cleaning products Personal care Coatings Water treatment Surfactants Additive/ingredient Oilfield chemicals Other pharmaceutical Nutrition & health foods Medical nutrition 0.0% 2.0% 4.0% 6.0% 8.0% Projected market growth rate (CAGR, 5-7 Years)

Category Subcategory Fatty acids as such Fatty alcohols Fatty esters Fatty amines Fatty acid ethoxylates Soap Noodles Metal Stearates Others Animal feed Animal feed X X Food Additive/ingredient X X Food Health foods X X H&PC Detergents X X X H&PC Cleaning products X X H&PC Personal care X X X X X X X H&PC Surfactants X X X X Industrial Agrochemicals X X X Industrial Anti-Caking X Industrial Coatings X X X Industrial Construction release agen XX X Industrial Asphalt additives X Industrial Water treatment X Industrial Oilfield chemicals X X Industrial Plastics - processing aids XX Industrial Plastic films - slip agents X Industrial Paper & Textiles XXX Lubricants Synthetic lubricants X X X Pharmaceutical Nutrition X X X Pharmaceutical Other X X X X Rubber production Rubber compounding X X Rubber production Emulsion polymerization X

Raw material and processing costs for stearic acid and fatty alcohol production in Malaysia

3,000

2,500

2,000

1,500

US$/tonne 1,000

500

-500 Stearic Acid C12-14 Fatty Alcohols Raw material (Stearin/PKO) Processing costs Glycerine Co-product

Fatty acid processing costs Malaysia

Water 5% Maintenance 10%

Depreciation 32% Labour 14%

Energy 15% Chemicals 24%

Note: For a new medium scale fatty acid plant (100,000 mtpa), that is well utilised. © 2018 LMC International. All rights reserved. The market outlook for fatty acids 28 In 2017 stearic acid producers incurred a loss

Gross margins (full cost) on stearic acid production, 2014-2018 (H1)

120

100

US$/tonne stearic acid -20

-40

-60

-80 2014 2015 2016 2017 2018 H1 SE Asia Stearin US Tallow

• In 2018 to date, short and medium chain fatty acid prices have weakened as a result of the CNO recovery which has increased lauric oil supplies. • Palm oil prices are expected to fall further as we enter into peak production in Q4, as will PKO prices. • Near term lauric supplies are ample but beyond 2020, slowing CPO growth and growing oleochemical output could put pressure on prices. Developments in synthetic fatty alcohols will be key. • New fatty acid capacities came onstream in 2017. However a rebound in demand allowed utilisation rates to recover somewhat. • Fatty acid profitability improved in 2017 and 2018 after a terrible year in 2016 but remains weak for palm. • With few new projects in the pipeline, utilisation rates should continue to improve.

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