Surfactants Monthly – February 2020

Surfactants Monthly – February 2020

I write this month’s blog safely self-isolated in the study of a suburban New Jersey house. A trip to Home Depot this morning was cancelled out of an abundance of corona-caution and so the needed repairs in the downstairs bathroom will have to be postponed until it’s safe to visit busy hardware stores again – perhaps some time next year, hopefully. Oh well, more time to write the blog.

Saw a great movie on Netflix, Friday. The invention of lying, with Ricky Gervais. It’s from 2009 and panned by most critics, so well worth a look. It’s set in an alternative present in which humans have evolved unable ever to tell a lie, except our protagonist, Gervais, who wreaks some havoc along the way to finally getting the girl, (Jennifer Garner) and learning a good lesson.

Yeah it's corny and soppy but that sometimes makes a truly great movie for me. A classic scene is this one, where we get to see a Coke commercial in this alternative, brutally honest, world.

Regular readers and attendees at my conferences will know why I find this commercial absolutely delightful – and why I seem to have watched it upwards of 30 times already on Youtube this weekend. Well I won’t retread old ground, except to say that it’s been the mighty and self-righteous Pepsi that’s been on the receiving end of my happy sarcasm for the past several years. Here’s the thing: Let’s imagine we’re in that alternative present and we had to run a commercial for our industry, or indeed the chemical industry as a whole. Would the unvarnished truth be as embarrassing and awkward as that Coke commercial? No of course not. It would be pretty much what we talk about at our events and training courses. The truth about our industry is truly mind-blowing. It’s amazing what these products do and the role they play in making lives better and, as I like to say; making civilization, well, civilized. A brutally honest world would suit us just fine compared to many other human economic endeavors. “It’s basically just brown sugar water” “ we put the polar bear on the can to attract kids”.

I’d love to have just one day in that world wouldn’t you? Well you can in a sense. In fact you can have three days if you like: May 13^th, 14^th and 15^th. We’ll be telling the whole truth about our surfactants industry from the palm plantation to the supermarket shelf – and beyond to the consumer’s heart and soul – the GenZ consumer, that is. We’ll tell everything like it is, no BS. Of course, no babies will be called ugly as we’re not complete sociopaths. We’ll just enjoy the ability to say what we think and do what we say and engage in beautiful intellectual engagement and free speech with informed and conscientious people who don't feel awkward about telling the truth. I’ve never been to a soft drinks conference but I have to believe that it’s got to be a much less forthright environment than one of our events.

Starting the news this month: The great Lucas Hall, ICIS detergent alcohol expert and successor to the legendary Judith Taylor writes that US fatty alcohols prices continued to face upward pressure at the start of the month, despite the downward correction in the oil palm complex stemming from decreased demand for edible oils in China amid the ongoing outbreak of coronavirus in the country.

As prices for feedstock palm kernel oil (PKO) have come down much more significantly than crude palm oil (CPO) or palm stearin, however, mid-cut sellers have begun to lower their offers for February and March volumes as buyers shift to buying more spot material over contracted volumes.

Spot prices for mid-cut alcohols were heard notionally lower, in the 70 cent/lb DEL (delivered) range, as sellers lower their offers to attract bidders amid the downward correction in feedstock costs in southeast Asia. The C16-18 alcohols market has held more firmly, as the market is not as subject to swings in PKO pricing. Spot prices for C16-18 alcohols were also heard in the upper 70 cent/lb DEL range, underpinned by strong demand in the US on restocking efforts despite the downtrend in feedstock costs. Q2 contract negotiations remain limited, nonetheless, as market players continue to eye developments in Asia alongside the anticipated startup of Sasol's Ziegler alcohols expansion in early Q2. If palm prices remain on a downtrend alongside the startup of Sasol's alcohols expansion, Q2 pricing could become more competitive as sellers vie for market share among buyers with formulations that can utilize either natural-based or synthetic alcohols.

Later in the month, as corona-economics started to apply; Hall writes that the uncertain effect that the coronavirus (Covid-19) will have on the oil palm complex is delaying early discussions regarding US Q2 fatty alcohols contracts.

Buyers have largely moved to the sidelines, shifting to more spot buying over negotiating Q2 contract volumes, amid expectations that prices for feedstock palm oils may fall further as muted demand for edible oils in China puts downward pressure on the market.

The pressure is being most significantly felt in the natural mid-cut C12-C14 detergent range of fatty alcohols commonly consumed in the US over the C16-C18 chain alcohols, as feedstock palm kernel oil (PKO) costs have fallen more significantly than palm oil since the start of the year. Spot volumes for mid-cut alcohols have been heard done in the mid-to-upper 70 cent/lb ($1,543/tonne) range DEL (delivered) US Gulf. Some sellers are unwilling to lower their offers, as the price of material currently making its way into the market is reflective of feedstock prices 4-6 weeks ago, when costs were much higher. Feedstock costs rose the last three months of 2019 on the back of increased consumption into the biodiesel sector ahead of increased blending mandates rolled out in Indonesia and Malaysia at the start of 2020.

However, feedstock costs have fallen since the start of the year amid an ongoing diplomatic spat between Malaysia and India that has led to decreased consumption of edible oils in India against the backdrop of decreased demand from China during the coronavirus outbreak. Sellers are further unwilling to lower their offers, as feedstock oil inventories are at multi-year lows, suggesting longer-term upward pressure on feedstock costs despite the current downturn in the market. Moreover, feedstock costs are expected to see significant upward pressure once the Chinese market reopens.

In the meantime, pricing discussions are expected to remain competitive, as market participants hedge their bets on where feedstock prices will move in the coming weeks before Q2 contracts need to be settled.

In the crude oil market – corona-concerns weigh on pricing due to decreased travel and a slowdown in heavy industry in China in particular. Al Greenwood, in a superb analysis lays out how this could affect the US economy, particularly if oil settles well below $50/bbl. He also calls out surfactant demand in drilling and recovery as being potentially affected detrimentally. The whole article is well worth reading here. I still find it hard to get used to the idea that lower oil prices are anything but an unalloyed good for the US economy, but Al points out that US oil production is about 3 times what it was 10 years ago and so is a much larger part of the economy than it was back then.

Hmm… I still think that lower abundant and cheaper energy has to be good for the economy as a whole. Let's see, I guess, how things play out.

US EO (ethylene oxide) prices continued their downward trend, following ethylene, of course, since late last year. January EO contracts were assessed at 49.6-59.1 cents/lb ($1,093-1,303/tonne) FOB (free on board) US Gulf, a decrease of 1 cent/lb from December. January ethylene contracts settled lower by 1.25 cents/lb, on lengthening supply and lacklustre demand.

Disappointing news from Brazil mid-month as surfactants producer Oxiteno reported a net loss of reais (R) 20.4m reais ($4.67m), compared with a net income of R235.3m because of lower sales and fewer one-time benefits.

During Q4 2018, Oxiteno reported a benefit of R208.9m in other operating income, which it attributed to tax credits. Fourth-quarter gross profit, which factors out the one-time benefit, also fell year on year because sales fell faster than costs.

 

The following table summarizes the company's financial performance. Figures are in millions of reais.

 

	Q4 19	Q4 18	%
Sales	1,012	1,200	-15.7
Cost of sales	827.2	973.7	-15.0
Gross profit	184.5	226.2	-18.4
Operating income	-20.4	235.3	-108.7

Cost of sales fell because of cheaper prices for ethylene and palm kernel oil. Costs also fell because of lower sales volumes. These were partially offset by a weaker real. Oxiteno attributed the drop in revenue to lower international prices and to lower volumes.

Oxiteno also noted that it faced a more difficult time in starting up in Pasadena, Texas, in the US. The company keeps working to ramp up its US alkoxylation plant at Pasadena, Texas, which has yet to reach break even, Frederico Curado, CEO of Oxiteno’s parent Ultrapar, said in an update on a couple of weeks ago.

The 170,000 tonne/year alkoxylation plant, which started up in September 2018, produces surfactants and specialty alkoxylates. Curado, speaking during the Ultrapar/Oxiteno Q4 earnings call, said that the Texas plant has not yet reached break-even point - but is expected to do so in late 2020 or early 2021.

“Execution, execution, execution” is Ultrapars’ focus in running the plant, he added.

Regarding possible acquisitions, Curado, in reiterating previous comments, said that Ultrapar remains interested in the refining or related assets Brazil’s state oil major Petrobras is seeking to sell. While Utrapar cannot comment on Petrobras' divestment process, there would be synergies between the Petrobras assets and Ultrapar’s businesses, he said. The break-up of the Petrobras monopoly would improve the way that company's respective regional plants in Brazil are operated, he said. “There is an intrinsic opportunity for higher efficiency and utilisation of the  [Petrobras] assets,” he added. He also said that Ultrapar is eyeing opportunities from a reduction in the prices Petrobras charges for bulk liquefied petroleum gas (LPG). The price reduction makes LPG more competitive in regard to other energy sources, he said. In the mid-term, Ultrapar could also see upside from importing lower-cost LPG, he said.

Disappointing, although not at all unexpected news from South Africa as Sasol earnings for the closing six months of 2019 fell 72% to South African rand (R) 4.5bn ($297.1m) on the back of weaker oil pricing, softer chemicals margins, and losses from the delays and outages incurred at its Lake Charles, Louisiana, petrochemicals complex. The company booked a total of R4.8bn in losses related to the Lake Charles (LCCP) project, made up of a 1.1bn hit on earnings before interest, taxes, depreciation and amortisation (EBITDA), R1.7bn in depreciation charges and R2bn in finance charges as the company brought units at the site online.

Rand-denominated crude oil pricing fell 9% year on year during the period, while overall gross margins dropped 2% due to the softer macroeconomic environment. The company projects that chemicals prices will continue softer through the next 12-24 months, with a structural rebound not expected until the medium-to-long term. The Lake Charles complex has been beset by delays, outages and poor weather that has seen its budget balloon from $9bn to $12.6bn-12.9bn and led to the ouster of the company’s former co-CEOs.

Sasol achieved beneficial operation at the site’s ethoxylates unit at the end of January, while a fire that knocked out the low-density polyethylene (LDPE) plant at the site that had been in the process of ramping up has not had an impact on work at the Ziegler and Guerbet alcohols units under development.

“As the LCCP units progress through the sequential beneficial operation schedule, our revenues do not yet match the costs expensed,” the company said in a statement.

The company projects that Lake Charles earnings will better match costs from the second half of 2020 onwards, and will ultimately produce a positive EBITDA contribution for the period.

Good news from India, though. I love India because people seem so positive and upbeat about things – at least in the business world that I see. Galaxy Surfactants reported a 14.6% year on year (YOY) increase in net profit for the fiscal third quarter, which ended on 31 December, to 479.9 million Indian rupees ($6.7 million). Higher profit was achieved because of a one-time deferred tax payment, it says. Revenue was down 7.5% YOY to Rs6.2 billion due to lower prices of fatty alcohol, a major raw material for the company’s performance surfactants. Galaxy states that the average price of fatty alcohol declined by 16.3% YOY to $1,138 per metric ton. It reports a 25.2% YOY rise in profit to Rs1.67 billion for the fiscal nine months ended 31 December, on sales of Rs19.4 billion, down 6.8% YOY. The company’s production volume increased to 214,711 metric tons, a rise of 8.7% YOY. Performance surfactants volume grew by 3.6% YOY to 135,337 metric tons, while specialty care product volumes increased 19% YOY to 79,374 metric tons.

Occasionally I will browse the internet to see what the culture is saying about surfactants – usually not much directly. Generally I’ll end up studying a Kardashian story or five then call it a day. Today, however, I happened upon an article in a UK newspaper. I used to read the Guardian as a 18 year-old student because I thought if made me look cool. Well, just like desert boots, bleached denim and long hair, it really didn’t (I can conclude in retrospect). The paper hasn’t changed much and a recent article has highlighted (doubtless much the trial lawyers’ delight) a new villain in the Bayer / Monsanto Roundup story. The villain is surfactants! I hesitantly link to the article here. They note that although the US National Toxicology Program (NTP) finds pure glyphosate not to cause genetic damage, the formulated product with other ingredients does. Those other ingredients include surfactants as well as other herbicides. The link to surfactants of course is the red-tofu for the Guardian reader and her trial lawyer benefactors. And the paper points out that the EU banned tallow-amine ethoxylates in 2016. The Guardian positions itself as a serious news organ but a quick look at other articles in the same paper by the same author yields one entitled “Neurotoxins on your kid's broccoli: that's life under Trump”. Enough said. The culture has spoken. Ignore it at your peril.

So what to make of this and the industry struggle with dioxane legislation in New York; all while Coke and Pepsi rule the culture. I stumbled across this quote from stoic philosopher Marcus Aurelius – no not by reading the Guardian or other high-brow publication but by listening to more lo-fi hip-hip. First the quote, then the video. I think you’ll agree, it’s brilliantly appropriate.

“When you wake up in the morning, tell yourself: the people I deal with today will be meddling, ungrateful, arrogant, dishonest, jealous and surly. They are like this because they can't tell good from evil. But I have seen the beauty of good, and the ugliness of evil, and have recognized that the wrongdoer has a nature related to my own - not of the same blood and birth, but the same mind, and possessing a share of the divine. And so none of them can hurt me. No one can implicate me in ugliness.”

Brilliant right? But is throwing away the books the right approach. Stoicism is a valid approach but maybe it’s good just to fight sometimes?

“I’m learning and reading and studying more now than I ever have in my whole life” – Yep there’s a reason we used this music for our 10 year video for the conference series.

Regardless of your approach to what comes your way, this much is true, there must be sacrifice.

Circling back to where we started the blog. Free speech, intellectual honesty, true engagement. These are good tools at our disposal to deal with professional and personal difficulties and challenges. We’ll do our best to thread these through everything we do at our three days in May.

Remember this one? 1966