The Role of Tall Oil in Finnish Bio-Economy Policy and Changing Value Network MASTER’S THESIS University of Helsinki Department of Forest Sciences Tania Afrin September 2018 HELSINGIN YLIOPISTO HELSINGFORS UNIVERSITET UNIVERSITY OF HELSINKI Tiedekunta/Osasto Fakultet/Sektion Faculty Laitos Institution Department Faculty of Agriculture and Forestry Department of Forest Sciences Tekijä Författare Author Tania Afrin Työn nimi Arbetets titel Title The Role of Tall Oil in Finnish Bio-Economy Oppiaine Läroämne Subject Forest Economics and Marketing Työn laji Arbetets art Level Aika Datum Month and year Sivumäärä Sidoantal Number of MSc in Agriculture and Forestry September, 2018 pages 66 Tiivistelmä Referat Abstract For 80 years, Pine Chemical Industries have used Crude Tall Oil (CTO) for a wide range of products. To fulfil the climate goal, the European Union (EU) has changed its policy by subsidizing renewable sources, which in turn has promoted CTO as a resource for biofuels. Also, Finland has followed the EU by setting the target for 2020. This research aims to analyze the role of CTO in Finnish bio-economy by focusing on the market dynamics and value network between biofuel and pine chemical industry after the new EU regulation. In addition, it forecast the optimal future end use market. The empirical study is based on qualitative data from five interviewees representing a forest company, two biochemical companies, a research institute and a consulting firm. This study showed that the double carbon benefit supported the increase in demand of CTO. The import also increased to produce biodiesel. In addition, biofuel companies have more purchasing power. Also, decrease in export and price fluctuation has been observed. Strategically, this has directed the biochemical companies to decrease their fixed costs. UPM, Forchem and Kraton are the key players using more than two times CTO where one fourth is used for biodiesel. If available enough, both sectors will have an impact on Finnish bio economy. The double counting has helped Finland to reach EU renewable energy quota for traffic fuel distribution. However, this study also showed that it is not beneficial to invest heavily based on subsidies. Both Biofuel and Biochemical Companies should consider CTO as a competitive product even without the subsidy. It is resource-efficient to use the functionality of the molecule and long value chain to produce diversified product. There should also be room for R&D and innovation. It is for example possible to produce biodiesel from other sources including waste and animal fat. If there is scarcity, then it would be wiser to produce biochemicals rather than biodiesel for maximum economic benefit. New holistic regulations are needed from Finnish authorities. The policy should consider equal access to the raw material, the higher value of the product, free market mechanism without any distortion, stable and balance operating environment for all its bio-based industries. Consumer awareness and motivation should be increased. Cross-industry collaboration, networking and integrating is also essential. Overall, co-operation rather than competition is needed from both biochemical and biodiesel sides. Avainsanat Nyckelord Keywords Tall oil, Bio-Economy, Value network, Market dynamics, Policy. Säilytyspaikka Förvaringsställe Where deposited University of Helsinki Muita tietoja Övriga uppgifter Further information Investment decision of pulp and paper industry. List of Figures Figure 1: CTO fraction percentage Figure 2: Four major components of wood Figure 3: Pulp process-At a glance Figure 4: Output of 2 tons of wood chips in forest industry in kraft pulping process Figure 5: Fractions of CTO in different process and its application Figure 6: Theoretical framework of the study Figure 7: Main part of Finnish Forest Cluster based on Lammi 2000 and Alen 2000 Figure 8: Forest cluster-movement towards bioeconomy Figure 9: The dimensions of the business ecosystem Figure 10: The effect of changing value network on business ecosystem Figure 11: Visual representation of the structure of the 2012 Bioeconomy Strategy and Action Plan Figure 12: Step towards sustainable business ecosystem Figure 13: Steps on sustainable business ecosystem towards Finnish Bioeconomy Figure 14: Pulp mill scenario at a glance Figure 15: Production of tall oil in the world Figure 16: Present World demand and supply of tall oil Figure 17: Tall oil Demand and Supply in Scandinavia Figure 18: Finland Export and Import situation, 2014-2018 Figure 19: Share of CTO use in Finland Figure 20: Crude tall oil price in Europe Figure 21: Market dynamics of tall oil Figure 22: Value chain network of tall oil Figure 23: Major CTO supplier and Value theory Figure 24: Impact of Climate policy on tall oil market 3 List of Tables Table 1: Difference in CTO derivatives Table 2: Comparison between cluster, value network and business ecosystem. Table 3: The implementation of interview protocol Table 4: Maximum potential based on investment plan Table 5: Use of CTO by three major players in Finland Table 6: Existing and planned tall oil base biodiesel in Finland and Sweden Table 7: Participant profile Table 8: Summary of participant responses according to questionnaire 4 ACKNOWLEDGEMENT I would like to give my heartiest gratitude to my supervisor, Professor Anne Toppinen, Department of Forest Science, University of Helsinki. Her vast knowledge, guidance and supervision supported me from start to end. She inspired me to this very interesting research topic, which is present time oriented in Finland. Her essential advices have helped me to complete this work. I also wish to deliver my special thanks to Jukka Lyyra, Area Manager, Paper Machine, Stora Enso Varkaus, who spend quite many hours to teach me about paper production process and how the tall oil produces as a by-product. He showed me the plant and also gave me a little bottle of tall oil for better understanding. Thanks to all the interviewee from VTT, Stora Enso, UPM, Forchem, Kraton and Häggblom & Partners for their valuable time, cooperation and support. No words to say thanks to Ullmaija Karhu, my teacher from Savonia AMK, who has always guide me to go forwards with my thesis. Deepest appreciation to my mother and husband for supporting me all the way. Thanks to all my friends, brothers and sisters for inspiring and encouraging me with my studies. Thank you all for being with me. Tania Afrin September, 2018 Helsinki, Finland 5 ABBREVIATIONS CO2 Carbon di-oxide CSS Crude sulphate soap CTO Crude tall oil DTO Distilled tall oil DJSI Dow Jones European and World Sustainability Indices EAV Economic added value EC European Commission EU European Union EU ETS European Union emission trading system HFO Heavy fuel oil HSL Helsinki Region Transport ISCC-EU International Sustainability and Carbon Certification LVL Laminated veneer lumber RED Renewable Energy Directive RES Renewable energy source RSB Roundtable of Sustainable Biomaterials SCA Svenska Cellulosa TOFA Tall oil fatty acid TOP Tall Oil Pitch TOR Tall oil Rosin USA United States of America 6 Table of Contents List of Figures.................................................................................................................................................... 3 List of Tables ..................................................................................................................................................... 4 ACKNOWLEDGEMENT ................................................................................................................................. 5 ABBREVIATIONS ........................................................................................................................................... 6 1 INTRODUCTION .......................................................................................................................................... 9 1.1 Background of the study .......................................................................................................................... 9 1.2 Aim, scope and Research Questions ...................................................................................................... 10 1.3 Outline of the Research ......................................................................................................................... 11 2 BACKGROUND OF CRUDE TALL OIL .................................................................................................. 13 2.1 Source of CTO ....................................................................................................................................... 14 2.2 Production process of CTO ................................................................................................................... 15 2.3 CTO applications and comparisons of the two main product ................................................................ 16 3 THEORETICAL BACKGROUND ............................................................................................................. 18 3.1 Value theory .......................................................................................................................................... 18 3.1.1 Porter’s Cluster theory and Forest cluster of Finland ..................................................................... 18 3.1.2 Value Network ................................................................................................................................ 22 3.1.3 Business