Commodities Pricing and Surfactant Markets
Last week, spent largely in the office, gave me an opportunity to reflect on the current commodity markets and their effect on surfactants. The crude oil and other commodities bubble of 2008 had a well documented effect on the surfactant value chain. As feedstock prices rose in the first half of 2008, pricing of surfactants also rose, largely keeping pace. As feedstocks began to fall away precipitously toward the end of 2008, North American producers at least, managed to hold pricing up and expand gross margins.
Source: US Energy Information Administration
Today, oil hovers around $84/bbl, but other commodities are causing greater concerns as a few recent headlines emphasize. Last week’s Economist magazine talked about corn prices “as high as an elephant’s eye” (a literary(?) allusion to the musical Oklahoma). As a result, as reported in the Wall Street Journal on Friday, McDonalds plans to raise prices after a long running price war with rivals. This followed an article on Thursday which outlined the commodities pressure forcing largely food related companies to increase prices.
So what does this mean for surfactants? Well, we see some similar signs of feedstock inflation affecting surfactants as well, although not as uniform as during the great bull-run of 2008.
For example, as of today (October 25, 2010), CPKO (crude palm kernel oil) traded at $1,440 / MT FOB Indonesia, a level last seen in July of 2008 at the peak of the last vegetable oil price run. This steady march upward of CPKO since the sub-$600 trough of January 2009 has had the predictable effect of fatty alcohol pricing as the graph below shows.
Source: ICIS
Now, there is much debate around the drivers behind this price surge in fatty alcohols and recent plant outages have certainly been a contributory factor. In addition, there is some reasonable skepticism regarding exactly how much alcohol is being sold today at $2,250/MT FOB SE Asia. Nonetheless, I think it is accurate to say that fatty alcohol pricing today is above the heady levels of the Summer of ’08 and a major factor behind this is the surging price of palm kernel oil.
However not all feedstocks are re-testing the bubble levels of 2008. By all accounts, LAB (linear alkylbenzene) pricing has been moving sideways at best. Also, on the petrochemical side of the ledger, ethylene has not even approached the heights of 2008 as the chart below demonstrates.
Source: ICIS
In response to this divergence of feedstock markets, surfactant producers and users are making the most of their ability to substitute petrochemical derived feeds for oleo. Most commentators believe that LAB substitution has gone about as far as it can go this cycle. The substitution of petrochemical alcohols for oleo alcohols may have some legs left in this coming quarter, but we’ll see. As the old commodity trader saying goes “The best cure for high prices is high prices”. If demand for fatty alcohols and the underlying oils moderates in response to historically high pricing, that pricing should come down.
In the meantime, surfactant producers are reacting prudently and moving pricing up to maintain margins as Stepan announced for October 1 and Pilot Chemical announced for October 15.
The interesting question is, where do these price increases end up (i.e. who eats them – me and you the consumer or Wal-Mart the retailer or P&G the formulator)? Earlier this summer it was reported widely that P&G planned to raise prices, mainly in response to packaging increases. How successful they will be in the current price run-up remains to be seen. However, my reading of the situation says, it really depends where you live. In North America, a modicum of power has shifted to a decreased number of surfactant producers in recent years and we see that reflected in the published results of a number of players. Wal-Mart is not budging and so the increases will likely be paid by the consumer and some of the less powerful formulators. In Europe, the surfactant market remains as fragmented and competitive as ever with predictable results. One expects that attempts to raise prices by surfactant manufacturers in this market to be continuingly less successful than in North America. In Asia, as noted in an earlier blog posting on China, overbuilding and underutilization are the order of the day in surfactants with a consolidation sure to take place in the near future.
Your comments on these musings are most welcome as are requests for specific topics to be covered in future blog postings.
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