Can I just have a minute for a quick commercial before we start? Our Asian and European Surfactant Conference will be online and coming up soon, October 26th and 27th. Details and registration here. We’ll talk oleo, EO, logistics, computational design (yeah I know right?), carbon capture and much more. We have a huge keynote from Sasol and a bunch of other special guests. I co-produce and chair as usual and so, yes, I’m biased. But you should still register. Thanks for your attention.
Lots of news this month, so let’s get stuck in. First up Hurricane Ida. Your blogger was fortunate enough to only experience a minor inconvenience from the storm having to spend an extra day in San Diego before getting home. Others lost their homes, businesses, and lives – along the gulf coast and in the Northeast. The chemical industry, as usual, reminded us how the concentrated their risk profile is in North America. ICIS maintains a truly excellent topic page on Ida here. We learn that about 2.64% of the US chemical supply was taken offline by the hurricane, including 3 Million MT of ethylene capacity.
In further analysis by Janet Miranda, ICIS noted that: Producers, as of 8/30 shut in nearly 95% of current oil production and nearly 94% of gas production in the US Gulf due to Hurricane Ida. The following shows the number of platforms and rigs evacuated, including the total of oil and natural gas that has been shut in.
| Total | % | |
| Platforms evacuated | 288 | 51.43 |
| Rigs evacuated | 11 | 100 |
| Oil shut in (bbl/day) | 1,721,809 | 94.60 |
| Gas shut in (bcf/day) | 2.087 | 93.57 |
A partial list of plant shutdowns includes:
Rubicon shut down its Geismar, Louisiana site due to the storm. The plant makes methylene diphenyl diisocyanate (MDI), polyether polyols, aniline, nitrobenzene. Rubicon is a joint venture made up of Huntsman and LANXESS.
Cornerstone declared force majeure on products from its Waggaman, Louisiana site. Its acrylonitrile (ACN) and melamine plants had begun a shut down ahead of the storm.
Shintech shut down its Addis and Plaquemine plants in Louisiana. The company said it did a controlled shutdown of operations because of the storm. No restart date was given. The plants make ethylene, chlorine, caustic soda, ethylene dichloride (EDC), vinyl chloride monomer (VCM) and polyvinyl chloride (PVC).
Westlake shut down its Geismar and Plaquemine plants due to Ida, the company said. The plants along the US Gulf Coast maintain hurricane and tornado plans. The plants make caustic soda, EDC, PVC, VCM. Westlake did not provide an expected restart date.
Pinnacle Polymers declared force majeure on all products following the impacts of Hurricane Ida on Louisiana, according to a customer letter. The company is currently unable to predict when normal production will resume. The plant makes polypropylene (PP).
Dow shut down its operations in Louisiana at its St Charles site in Taft and its Plaquemine site. Both sites have crackers and plants that make polyethylene (PE). The St Charles site also makes acetic acid, acrylic acid, ethylene oxide (EO), glycol ethers and surfactants, among other chemicals.
The Plaquemine site also produces benzene, toluene, EO, glycol ethers, propylene glycol (PG) and propylene oxide (PO), among other chemicals.
At Baton Rouge, Exxon is shutting down units in its refinery to stabilise operations. No damage was sustained during Hurricane Ida, the company said in a statement.
On Sunday, ExxonMobil said it was adjusting its rates and shutting down some units at its complex. The ExxonMobil site has a refinery and a chemical complex that makes ethylene, propylene, butadiene (BD), PE, polypropylene (PP), phthalic anhydride (PA), plasticizers, benzene, toluene, isopropanol (IPA), base oils and various other chemicals.
BASF idled its Geismar plants. It makes butanediol (BDO), EO, methylene diphenyl diisocycanate (MDI), toluene diisocyanate (TDI) and polyether polyols.
Phillips 66 shut down its Alliance refinery in Belle Chasse, Louisiana. In addition to fuel, the refinery makes benzene, mixed xylenes (MX) toluene and propylene.
Shell shut down its plants in Geismar and Norco. Geismar makes linear alpha olefins (LAO), ethylene glycol (EG), EO and glycol ethers. Norco makes ethylene, propylene and BD.
So – that’s quite an impact, right? Within hours, the great Lucas Hall of ICIS neatly summarized what’s happened as a result, in the US fatty alcohols market here.
US Q4 fatty alcohol contract negotiations are in their early stages amid a rebound in feedstock costs across the oil palm complex from early June against the backdrop of bullish freight costs, particularly for container shipments. Feedstock costs have re
bounded from early June on the back of supply chain disruptions in southeast Asia as the pandemic continues to ravage the region. Mid-cut alcohols are mostly shipped in bulk, while heavy chain alcohols are often shipped in containers. Domestic freight markets are also constrained, with truck markets particularly tight. In the mid-cut alcohols market, a mixed demand outlook is somewhat offsetting the above cost pressures. Single cut C16 and C18 alcohols remain tight, depending on the supplier, and demand remains strong.
The most significant impact Hurricane Ida will have on US alcohols markets is on transportation in the near term. Shell confirmed its US Geismar, Louisiana, site was operating at reduced rates on 8/30. Shell did not say when it expects to resume normal operations. Shell had begun shutting down its facilities in Geismar ahead of Hurricane Ida.
A company source said logistics for shipments at Geismar remain suspended, pending surveys of the river and land infrastructure for any damage or blockages. Sasol confirmed its US Lake Charles, Louisiana, Chemical Complex is open and operating normally following Hurricane Ida, according to a customer letter on 30 August. However, delivery delays of at least two to three days are expected for traffic that flows around areas impacted by the storm. Downstream, BASF confirmed it had idled its US Geismar, Louisiana, site ahead of the storm. The market is awaiting updates on site operations. Dow confirmed its US Taft, Louisiana, surfactants site remains shut amid a lack of functioning infrastructure in St Charles Parish following the storm. Dow is partnering with stakeholders in the region to understand both immediate- and longer-term needs to help address the challenges.
Multiple importers also have storage capacity in New Orleans, Louisiana. Storage capacity was not heard damaged in the storm but transport delays are expected in the near term.
Discussions for mid-cut alcohols are mixed amid the above cost and supply and demand fundamentals. Some downstream manufacturers, including major surfactants producers, have carryover volumes amid pandemic-related supply chain disruptions and a lower Q4 demand forecast. C16-18 alcohols face upward pressure from tight supply of single chain C16 and C18 alcohols, depending on the supplier, and strong demand, including into antioxidant and other industrial end-markets. Demand for alcohols from domestic producers is relatively steady as market participants look toward the domestic market to ensure security of supply amid months of import supply chain disruptions during the pandemic. Demand in Mexico is also strong as ethylene oxide (EO) availability from the local producer continues to improve [oh – we are familiar with the “waiting for Pemex” game aren’t we?]. Multiple producers are switching contracts from DEL (delivered) terms to an FOB (free on board) plus freight basis amid volatile and bullish freight markets.
Q3 contract ranges
| Product | Price (cents/lb) | INCO | Location |
| C12-C15 | 107-120 | DEL | USG |
| C16 | 124-131 | DEL | USG |
| C18 | upper 90s-129 | DEL | USG |
| C16-18 | 106-122 | DEL | USG |
Mass balance
Premiums were held steady at 7-12 cents/lb. Prices for Q4 have been heard above the the posted ranges. US sanctions against Malaysian palm oil giants Sime Darby Plantation Berhad and FGV Holdings Berhad last year have significantly tightened Roundtable on Sustainable Palm Oil (RSPO) mass balance (MB) markets over the last several months. Rising premiums are making MB material competitive with coconut-based material, in turn increasing demand for coconut-based fatty alcohols. Coconut-based alcohols do not fall under the same environmental scrutiny as palm-based material. [Don’t know why that is honestly. There is a roundtable on sustainable coconuts and coconut oil https://www.sustainablecoconutcharter.com/ ] This makes them a viable alternative to MB material when pricing becomes competitive in sectors where sustainability labelling is common, like personal care and cosmetics. US Customs and Border Patrol (CBP) recently held up and subsequently turned away a vessel from one southeast Asian supplier amid growing scrutiny against Malaysian-origin product with the Sime Darby and FGV bans. While the latest supply chain disruption did not directly impact US fatty alcohols markets, the most-recent action suggests expanding scrutiny against Malaysian-origin material. CBP has not announced any further withhold release orders (WROs) other than Sime Darby and FGV at this time.
In further analysis of the impact of the hurricane, Helen Yan looks to the Asian fatty alcohols markets in an outstanding ICIS analysis. Asia’s fatty alcohols market players are looking at shipping out cargoes to the US and EU, wary of any potential decline in regional demand as China’s economy slows down. Disruptions in synthetic fatty alcohols supply in the US in the wake of Hurricane Ida could lead to a pick-up in demand for natural fatty alcohols from southeast Asia, market sources said. Southeast Asia is a major oleochemicals production hub.
"We expect to ship out bulk cargoes to the US in the near term due to the impact of Hurricane Ida on supply in the US," a regional producer said. “Today the two strongest markets for alcohols are China due to its limited local supply and the US because of the unfortunate impact of Hurricane Ida,” another regional producer said.
A majority of US Gulf oil and natural gas remains shut in after Hurricane Ida made landfall on 29 August. Nearly 94% of current oil production and 94% of gas production in the US Gulf remains shut in, according to the latest update by the US Bureau of Safety and Environmental Enforcement (BSEE). From Europe, demand for bulk shipments from southeast Asia has also picked up as economies re-open following speedy vaccination rollouts. “We are getting enquiries for bulk shipments from Europe. However, logistics is an issue for both container and bulk shipments,” another supplier said.
Market players have been grappling with soaring freight costs, congested ports, delayed shipments and demurrage in both regional and deep-sea trades. Demandfrom China, on the other hand, may slow down in view of downbeat August manufacturing data in the world’s second-largest economy. Caixin’s China manufacturing purchasing managers’ index (PMI) fell to contraction territory at 49.2 in August, snapping four months of expansion. “China’s PMI has gone into contraction and sentiment will be bad and this will certainly impact southeast Asia,” a regional oleochemicals producer said. China’s official manufacturing PMI declined to an 18-month low of 50.1 in August, down for the fifth month and barely above the expansion threshold. The slowdown in the Chinese economy, however, may have limited impact on fatty alcohols prices as Chinese demand exceeds local supply. "China needs to import as it does not have sufficient fatty alcohols locally to meet its demand. It needs to import about 20,000-30,000 tonnes a month," another supplier said. “Chinese buying interest usually slows when prices are weak or falling, so let us wait and see,” a trader said.
On 25 August, C1214 blend spot prices were flat week on week at $1,840/tonne FOB (free on board) southeast (SE) Asia, down by about 18% since May, ICIS data showed.
If the crazy increases in freight we just noted, haven’t convinced you that an inflation tidal wave is coming - in news that reminded us how inflation is still very much simmering beneath the economic surface, Stepan announced price increases at the end of the month on all list and off-list surfactants products, effective 1 September, or as contracts allow, according a company pricing announcement. Stepan is seeking an increase on both packaging and handling as well as transportation.
| Price Increase ($/lb) | ||
| All Surfactants - Packaging and Handling | All Packaged Surfactant Products (Drums, Totes, Pails, Bags, Supersacks) | 0.04 |
| All Surfactants - Transportation | All Stepan Surfactant Deliveries (Bulk, Split Bulk, FTL, LTL, and Rail) | 0.025* |
*Note: Price increase is independent of and in addition to any packaging increase above
The increases are expected to gain at least some traction amid bullish shipping markets stemming from continued shipping equipment shortages and internal/external shipping logistics constraints, as the economy continues to recover from the pandemic-related downturn. According to the company, demand for surfactants into consumer end-markets remains above 2019 levels, but has largely stabilised from panic buying-driven demand at the beginning of the pandemic. Demand in other end-markets like institutional cleaning and industrial end-markets is rebounding from the pandemic-related downturn. The resurgence of the Delta variant driven version of the pandemic is not expected to slow demand into industrial end-segments in the near-to-medium term given the snug-to-tight supply environment.
Back at the beginning of August, another in-depth piece by Lucas Hall of ICIS illustrated how Southeast Asia has a somewhat different relationship to COVID than that of the US or even Europe. Lucas notes that the US H2 fatty alcohols market faces the major possibility of further supply chain disruptions as the pandemic continues to worsen in southeast Asia. Stringent lockdown orders in place in the region's top natural alcohols producing countries - Malaysia and Indonesia - are already raising supply chain concerns in the US, especially for container volumes. Mid-cut alcohols are largely shipped in bulk, while heavy chain alcohols are in large part shipped in containers. Lead times for packaged material are approximately three to four months. Lead times for bulk shipments are approximately one month. The restrictions are already weighing on oleochemical and feedstock palm oil production in the region, especially in Malaysia, where palm oil inventories are historically tight. Malaysia has reduced operating rates to around 60% because of labour constraints, according to sources in Asia.
Malaysian oleochemical producers Emery Oleochemicals and Southern Acids Industries have both declared force majeure, according to customer letters obtained by ICIS.
MALAYSIA PALM SUPPLYThe charts below show Malaysian palm oil production, export and stocks data. Check out these charts:
Market sources largely consider Malaysia's palm stock levels to be balanced around 2m tonnes. July production is largely expected to decrease from June and will likely remain constrained so long as these restrictions remain in place. If these restrictions remain in place through Q3 - which coincides with the typical peak palm harvest season - stock levels are highly unlikely to recover to the 2m threshold this year.
FEEDSTOCK COSTS
Lower palm oil production is likely to maintain upward pressure on feedstock costs across the oil palm complex, in turn putting upward pressure on downstream oleochemical markets like natural fatty alcohols. Prices across the oil palm complex have already rebounded to around their May-June levels, putting upward pressure on spot fatty alcohols in southeast Asia.
FREIGHTS
Container freights are upwards of $20,000/container [ 5 X what it was a year ago!] into various ports throughout North America amid worsening shipping logistics globally, adding to the pressure. Internal freight costs within the US also continue to rise - particularly in trucking, where drivers are tight. Lead times for trucks in the US is several weeks.
PRICES Rebounding feedstock costs and bullish freight costs against the backdrop of further supply chain disruptions are prompting market players to begin Q4 domestic negotiations early. Prices across the oil palm complex entered a downward correction in mid-May, initially suggesting downward pressure on Q4 contracts. US natural alcohol prices typically track the feedstock cost delta from about the previous month and a half, given standard shipping times, plus freight costs.
However, feedstocks are not being processed through oleochemicals plants as quickly as usual because of the countervailing logistics constraints globally that have only worsened in recent weeks. As such, bullish feedstock and freight costs against the backdrop of tighter supply in southeast Asia is likely to exert upward pressure on the US market as it approaches Q4.
Freely-negotiated spot prices remain above 100 cents/lb for mid-cut and high-chain alcohols.
Q3 contract ranges
| Product | Price (cents/lb) | INCO | Location |
| C12-C15 | 107-120 | DEL | USG |
| C16 | 124-131 | DEL | USG |
| C18 | upper 90-129 | DEL | USG |
| C16-18 | 106-122 | DEL | USG |
Single cut C16 and C18 remain particularly tight.
Mass balance premiums also face upward pressure from tightening availability amid ongoing US sanction against companies in southeast Asia - namely Malaysia - and worsening supply chain constraints as the pandemic continues to worsen throughout the region. Premiums for Q4 have been heard as high as 13 cents/lb. Higher premiums are pushing palm-based product close to parity with coconut-based product, which may prompt some users to substitute palm-based for coconut-based product in the near-to-medium term given its wider availability.
DOMESTIC PRODUCTION US production is improving but is not expected to have a major impact on the greater supply balance in the domestic market. Sasol confirmed it is lifting the force majeure for US produced linear alcohols and linear alcohol-based surfactants early in the month, according to a customer letter. Sasol will maintain a sales control on some alcohol homologs until inventory levels are fully restored. Sasol declared force majeure following major hurricane-related disruptions at its US Lake Charles, Louisiana, site in late August 2020. Sasol remained on force majeure amid continued supply chain constraints globally, including pandemic-related shipping constraints externally/internally and extreme weather-related disruptions in Texas and the US Gulf in February. Sasol was largely fulfilling its contract commitments in recent months, so the announcement is unlikely to have a major impact to the domestic supply situation in the near term.
DOMESTIC DEMAND Demand for fatty alcohols is likely to remain stronger than pre-pandemic levels this year but unlikely to increase to levels seen during the initial onset of the pandemic in Q2 2020.
Waning consumer demand for cleaning, disinfection and personal wash products as pandemic-related restrictions ease and more people get vaccinated is largely contributing to that decline.
Rebounding demand for institutional cleaning and other end markets like agriculture and oil and gas is expected to offset some of these declines.
Meanwhile over in Europe, ICIS’s Melissa Hurley writes that European ethylene oxide (EO) supply is expected to remain relaxed following a spate of turnarounds, with solid demand set to continue. High production costs from months of higher upstream ethylene prices is also a continued concern. Supply has improved after planned turnarounds finished in the second and beginning of the third quarter. Demand is still considered healthy despite the summer holidays drawing away some market players in parts of Europe. Previously demand has mostly been robust, especially from the surfactants market, and demand for EO is still considered healthy moving into August.
Production costs have been relentlessly increasing this year. Prices in August increased again due to the monthly ethylene contract jumping by double digits. The European EO market has experienced seven months of mounting contract prices. There were previous logistical concerns, following flooding in southern Germany and Belgium. Part of the Rhine was subsequently closed but has since been reopened. Derivatives such as glycols experienced slight delays in delivery times in the truck market but mostly it was considered manageable.
Similarly for EO in the US, prices are trending up, as reported by Lucas Hall. US July ethylene oxide (EO) contracts settled at a sharp increase from June, tracking a record month-on-month increase in July ethylene contracts. Ethylene contracts increased 11 cents/lb ($243/tonne) - the largest month-on-month increase in the 24 years ICIS has been covering the market - tracking higher spot prices stemming from widespread disruptions in the market. Approximately 13% of US ethylene capacity was disrupted in July, according to Chemical Data (CDI), now part of ICIS. Downstream demand remains strong as supply catches up to pent-up demand following supply chain disruptions in Texas and the US Gulf in February ahead of increased economic activity from around the end of March with easing pandemic-related restrictions across most of the US. Shortages and disruptions of other raw materials in the supply chain are keeping downstream producers from increasing operating rates further, including in glycols and surfactants markets. US July EO contracts increased 8.8 cents/lb ($194/tonne) to 65.2-74.7 cents/lb FOB (free on board).
News from the front end of the value chain. ICIS reported that German adhesives and detergents major Henkel has raised its guidance for full-year 2021 organic sales growth, but it lowered guidance for the adjusted earnings before interest and tax (EBIT) margin due to rising raw material and other costs.
| New guidance | Previous guidance, from May | |
| Organic sales | 6-8% | 4-6% |
| Adjusted EBIT margin | 13.5-14.5% | 14.0-15.0% |
Organic sales exclude the impact of currency effects and acquisitions or divestments.
The increased sales guidance comes after “strong” H1 sales of €9.9bn, with organic sales up 11.3%, and despite expected slower growth rates in industrial demand in H2. Meanwhile, raw material and other costs are expected to continue to rise through the end of 2021. “The exceptionally sharp rise in raw material prices and strained supply chains will weigh heavily on the economy in the further course of the year,” the company said.
First-half 2021, ended 30 June:
| H1 2021 | H1 2020 | |
| Sales | €9.9bn | €9.5bn |
| Adjusted EBIT margin | 13.1% | 11.5% |
In H1, Henkel managed to offset the effects of higher raw material costs through strong volume growth, as well as price increases, cost management, and efficiency improvements, it said. The company uses a range of petroleum-based raw materials, including surfactants.
More supply chain disruption, this time from BASF in Germany. BASF declared FM on PO-containing surfactants and some specialities on 19 August as the result of an unforeseeable incident, according to a letter to customers seen by ICIS. Market sources said the FM affects PO from the site. "Due to a fire in one of our precursor plants in Ludwigshafen on 7 August, such plant cannot operate until further notice," said BASF in the letter to customers. "As a result of such unforeseeable incident which occurred beyond our control, we suffer from a shortage of PO...with immediate effect, BASF SE – also on behalf of our affected affiliates – hereby has to declare FM on PO-containing surfactants and selected specialities until further notice." BASF also advised it was not under FM for PO or PO-based glycols.
LAB remains the workhorse of the surfactants industry and it’s worth keeping tabs on the market – as ICIS does in this recent bulletin: The market for linear alkylbenzene (LAB) was stable in southeast Asia based on deals and buying indications in the market.
Most producers chose to maintain their offers from last week amid shortages of material in the market. Demand remained steady despite lockdowns being imposed in some countries as LAB is considered an essential product. In India, the market slowed in August, which is typical for the monsoon season. Local producers had to offer discounts of Indian rupees (Rs) 5/kg or more to incentivize buyers to lift material. Despite this, buyers did not order much material and are waiting for new September offers to be announced next week. The market was also muted as the festival of Janmashtami is celebrated this week. Demand for LAB was also affected by downstream products like linear alkyl benzene sulphonic acid (LABSA), prices of which were softer in the local market. Local prices fell from Indian rupees (Rs)102/kg to Rs 99/kg. Some sellers were also keen to move their high-priced LAB material before next month.
The market for LAS was stable, with little discussion taking place. Buyers from southeast Asia felt that $1,650/tonne CFR SE Asia was a workable price. There were some offers at this level, but few deals took place.
Did you see this? Emery is splitting into 2 companies. As reported in the really very good, Indian Chemical News : Sime Darby Plantation Bhd (SDP) and PTTGC International Private Limited (GC Inter) have signed an agreement to divest their collective 100 per cent equity interest in the Asia Pacific business of Emery Oleochemicals (M) and Emery Specialty Chemicals to Edenor Technology for RM38 million. Emery Oleochemicals, one of the world’s leading natural-based chemical producers, is a 50:50 joint venture between PTT Global Chemical and SDP.
“The divestment is conditional upon the restructuring of Emery Group into separate standalone groups in respect of its Asia Pacific business, and the North America and Europe business,” the plantation company said in a stock exchange filing with Bursa Malaysia. “Post restructuring, Emery Group’s Asia Pacific business will remain under Emery Oleochemicals (EOM) and Emery Specialty Chemicals, while its North America and Europe businesses, both held under Emery Oleochemicals UK Limited, will be transferred out from EOM, to be held directly by SDP and GC Inter on a 50:50 basis.”
Edenor Technology is a 50:50 joint venture company jointly incorporated by Mega First Corporation Bhd (MFCB) and 9M Technologies Sdn Bhd for the purpose of undertaking the proposed acquisition. MFCB is a Malaysian public listed company under the utility sector with key segments in renewable energy, resources, packaging, investment holding, and others while 9M Technologies is a Malaysian private limited company with business in investment, mergers and acquisitions, and technical advisory services.
If someone could add more color or background on this transaction, I’d love to hear it. You can do that for publication or not. Up to you.
Finally the word became official as ICIS reported that Indorama is to acquire Brazil’s Oxiteno for $1.3bn. Subject to regulatory approvals, the transaction is expected to close in the first quarter of 2022. Indorama agreed to defer one payment of $150m to 2024, within the purchasing price of $1.3bn. As many readers know, Oxiteno has 11 industrial units in Brazil, Mexico, the US, and Uruguay; two global R&D centres, three R&D facilities, and eight commercial offices in Argentina, Belgium, China, and Colombia. In Brazil, its domestic market where it was founded in 1973, Oxiteno has plants in Suzano and Tremembe (Sao Paulo state), Triunfo (Rio Grande do Sul state), the Petrochemical Hub of Maua (also Sao Paulo state) and the Industrial Hub of Camacari (Bahia state).
Joe Chang, editor of ICIS writes an excellent analysis of the Oxiteno deal. I won’t repeat it all here. You can read it yourselves - it’s worth the subscription honestly. Rather, let’s go first to Indorama Ventures: In their press release, they note that : Oxiteno’s innovation-led HVA [I think this means “High Value Added” but I’m just guessing as it’s not defined anywhere in the press release] offering is a significant complement to IVL’s [That’s Indorama Ventures Limited] growth platform (Figure 1 - below), and a key driver of IVL’s EBITDA projection over the next two years, which is 15% above the company’s forecast in January 2021. Together with IVL’s world-class assets, which were acquired from U.S.-based Huntsman in 2020 (Spindletop transaction), the acquisition of Oxiteno will lead IVL’s newest IOD [That’s Integrated Oxides and Derivatives] business segment as a major high-margin growth driver alongside its traditional PET [Polyethylene Terephthalate] commodities business, creating a stronger and more resilient hybrid platform.
The press release goes on to say that the linkages between IOD, Oxiteno’s high-performing surfactants, and the Combined PET businesses through their crude oil, shale and oleo feedstocks gives IVL integration benefits across the value chain, which is key to the company’s sustainable business model as the world’s largest producer of PET resin and a large geographic footprint in non-ionic surfactants in the Americas (Figure 2 - below).
Oxiteno’s green chemistry innovation credentials also strengthen IVL’s ambitious sustainability objectives as a leader in PET circularity and bio-ingredients. Brazil is home to the largest inventory of ethanol, used to produce bio-ethylene to enhance EOD and PET sustainability. Today, IVL is the largest producer of resin used in recycled PET bottles and aims to recycle a minimum of 750,000 metric tons of PET globally by 2025, investing up to US$1.5 billion to achieve this goal.
In an informative slide presentation, Indorama (IVL) lays out the rationale for the acquisition. The first thing you’ll notice is, that on slide 3, IVL sets off a sort of a “battle of the multiples” by quoting a series of EV / EBITDA multiples that it paid for Oxiteno. Here I quote “Enterprise value of $1.3B: (i) LATAM Downstream (EODs) assets at 7.0x EV/EBITDA1, (ii) LATAM Intermediates (EG) 5.4x EV/EBITDA1, (iii) USA Downstream (EODs) assets at 6.2x EV/EBITDA2 [and the footnotes are: Note: (1) on average 2018-20 adjusted EBITDA; (2) USA asset considered as capital work in progress, EV/EBITDA multiple based on 2023F EBITDA ] – OK then, those numbers are quite low and seem somewhat selective in their presentation. So let’s see what Ultrapar (Oxiteno’s parent) has to say. On their call with investors, they note, somewhat obliquely so as not to contradict the IVL release, that the deal is done at 10 – 10.8 X EBITDA based on the somewhat fuzzy concept of EBITDA over a 3 – 5 year cycle. However, I think this actually does make sense as Oxiteno’s business is notoriously cyclical due, in part, to the effect of exchange rates and the volatility of the market for glycols, especially MEG. If you look at trailing 12 month results through Q2, 2021, the deal was worth 8.1 X EBITDA and if you look at 2020 – it’s 10.8. Phew! Erm…so – given all that, my sense is that the 10 – 10.8 range is not that unreasonable an estimate to use – so go ahead and do so, if you want to haver a single number (ok – range) It’s more representative, in my opinion, than the 7.0 / 5.4 / 6.2 trio that IVL presents.
So overall my gut says that it’s a good price for IVL to pay. This was clearly not a bid-driven winners curse type scenario. 10 – 15 years ago, the picture could have been different (certainly before the financial crisis) when Brazil was the leading member of the BRICs (remember them?) and Oxiteno was a star in the Ultrapar portfolio. Today, however, any purchaser of Oxiteno has to reckon with the Brazilian economy and political picture, exchange rate risk and the weight of glycols in the product portfolio. In this regard, IVL was, in retrospect a very strong acquirer and they didn't overpay. Good for them. Some additional slides from their presentation are quite instructive – so let’s take a look.
First – This is not their first rodeo. Most readers are familiar with their acquisition of the Huntsman surfactants business, but did you know they’ve acquired more than 50 businesses over the last 20 years.
Second [and I think this is a key point] IVL emphasizes that Indorama’s internal need for MEG is a competitive advantage when considering the combined product mix and this can allow a focus on higher value products in downstream EOD (ethylene oxide derivatives)
Third – the combination is big with a large market share in nonionics
Oh.. and did we mention we bought it at a good multiple?
Finally – some ambitious targets with $100M of synergies plus a rapid turnaround of Oxiteno USA from an EBITDA loss of $13M in 2021 to a profit of $43M in 2022 (including $30M of US based synergies).
So it’s a good story overall as Oxiteno now has a home where it is truly welcomed as a core member. The MEG problem is solved.
..And one must assume that exchange rate exposure can be better hedged within the new parent. Where, however, does that leave the blog in our single-minded pursuit of national stereotypes to illustrate our stories? It’s time to move on, mature a bit and get with the times. Supermodels and football at the end of the day are cheap hackneyed journalism that we just don't need here. Time to kick things up a notch as we welcome a new champion to the surfactants arena.
I think this has been a pretty long blog already right? So I’m not sure how much more I want to write. I know some readers (hey Mike!) look forward to the music section so I’ll just drop some videos below of songs I’ve been thinking about recently.
October 1976, The Damned released their first single on Stiff Records. It made a great impression on me..
… – not least because of the opening “Is she really going out with him” – an homage to Joe Jackson? No of course not – that song didn't come out ‘til ’78 and in any case, it was the Shangri-Las who immortalized that innocent question in 1964 in this song..
So were the Damned playing a homage to the Shangri-Las or was it a sarcastic, commentary on the long lost innocence of the early 60’s – or just you know, sarcastic, mocking. Hmm well, let’s see. You gotta love the rest of the lyrics. “I got a feeling inside of me. It’s kinda strange like the stormy sea. I don't know why, I don't know why. I guess these things have gotta be” You know what? It’s a love song. Pure and simple. With a meaty riff, ridiculous drums and packed into 2 and a half minutes. So – yeah it’s a homage to the Shangri-Las. By the way go back and listen to those impossibly wholesome lasses from 1964. Isn’t it a great song?
Back to the Damned. A few years later in 1979, speaking of love songs, they released Love Song as a single off the Machine Gun Etiquette album. Check it out. A couple of things to note – first the opening had a definite crossover appeal to your average heavy rock fan while still maintaining pop sensibility and street cred. Not bad. And how about that bass eh?
Do you think these lads ever listened to a spot of Motorhead? ...
By the way, the Damned weren’t all Sturm und Drang Check this out from the same Machine Gun Album – Smash it Up Parts 1 and 2. Banned from most pub jukeboxes within a couple of weeks..
So why have I been thinking about the Damned? Don't know really but that 1976 single was something unique at the time and ushered in (to the UK anyway) a sort of boisterous upbeat sound. And that idea of a new rose. It sticks with you right? It could be a new car, new town, new book, new product, new market, new chapter, new vocation. It’s still exciting, isn’t it? This may sound a bit cheesy, but post-labor day is new product launch time and I'll be doing a few of those for sure . And also - that visit to San Diego I mentioned upfront. A couple of really fasincating new ideas germinated there. Could be ... Got no time to mess around, got a brand new rose in town..
Ok that’s it for this month.