Surfactants Monthly – November 2020

Surfactants Monthly

November 2020

We had an election. I checked outside every morning this past month. The sun rises (eventually) and when I step onto the cold bathroom tile and extend my left hand to flick the light switch, the lights light, every, single, time. Turn on the shower and, wow, beautiful hot/warm/turbulent-flow water at just-the-right pressure gushes forth, releasing also a rather pleasant steam cloud – just like the past thousands of mornings. I step into the plate glass enclosure (is this getting too graphic for you? Don’t worry, we cherish our G-rating at the blog) and confront 5 different body washes and soaps at eye-level. I ignore all of them and grab my Irish Spring off its own shelf. Aaah the fragrant aroma of the old country… top o’ the morning to you, world. I stretch a vocal chord or two and summon one of the household gods. Alexa, play the best guitarist. Bucky Pizzarelli fills the translucent temple with a glissando. Alexa – not funny. Dave, Michael, Alex and Eddie enter stage left and ..tcchmff, tttlnk, tttlnk, waoawohhhhng.. Eruption erm, well, erupts into consciousness. Pulse quickens. Four-decade old memories float up, of a younger, leaner, more testosterone-drenched time. Girl, you really got me now..another voice joins, (harmonizes?) Shut up, I’m still sleeping. Ablutions complete in respectful silence, I towel off, don M&S WFH-wear and pad along the 20 yard carpeted commute to the office where I change people’s lives, then change them back again with a couple-a-clicks on the MacBook. Changing lives is hard work. I need coffee, but it’s all the way downstairs. I need a coffee machine up here. Couple-a-clicks and I get one on its way for delivery before 10.00AM tomorrow. Still have to schlep downstairs today, though. Life goes on.

From the bond desk: [I’ve always wanted to start a column, like that. Today, courtesy of of the newshounds at ICIS, I get to do it.] At the beginning of the month, S&P Global Ratings downgraded Vantage Specialty Chemicals to CCC+ from B- because the company's has large amounts of debt in relation to its earnings, the credit rating agency said. The outlook is negative [S&P added, as If to rub it in..]. Vantage, as we all know is a large (top 2 in size in N. America) fatty acid manufacture with a sizeable specialties business grafted on. It’s owned by HIG.  S&P said the coronavirus has lowered demand from the company's industrial customers. S&P also noted softness in Vantage's high-end personal-care segment.

S&P estimates that Vantage's debt will remain at 9x EBITDA. [which I have to  say, is considered pretty high these says. I mean not Gordon-Gekko high but high enough in a post-2009, mid-COVID era]. According to S&P, If the economic downturn persists, then that should squeeze Vantage's liquidity and pressure its cash flow, S&P said. In October 2022, a revolver has a maturity date [man, don't you hate those]. For now, Vantage's free cash flow remains positive and the company has ample liquidity, S&P said. As far as the revolver, S&P expects Vantage will address it before it becomes current [I’m going to resist juvenile references to Captain Obvious here. We’re better than that at the blog]. [Seriously though, I trust they can weather the storm and do what they can to lean on the consumer, non-specialty busines that has provided such a boost to Stepan and others this year. The blog likes these guys and wants them to succeed.]

News from Brazil: I feel we have to address an issue again here. I know there are some readers who assume that any news item involving Brazil is seized upon by the author of this blog as an excuse to spend hours on Google-Images finding just the right photo of Gisele with which to illustrate the piece. I have to dispel that scurrilous accusation right now and remind you that that we need no such excuse. Thank you. And in any case, research has shown that blog-posts with images of supermodels generate approximately 10¹³⁰ X more clicks than those featuring tankers of ethylene oxide. So there’s a valid commercial and journalistic reason for our selfless dedication to aesthetic excellence. You’re welcome.

ICIS reports Oxiteno reported a spike in third-quarter operating income because sales rose faster than costs.  The table shows the company's Q3 performance. Figures are listed in millions of reais.

Rm	Q3 2020	Q3 2019	%
Sales	1,425.0	1,120.6	27.2
Cost of sales	1,152.3	910.4	26.6
Gross profit	272.7	210.2	29.7
Operating income	54.1	28.5	89.8

Source: Oxiteno ($1 = R5.66)

Oxiteno attributed the rise in revenue to an increase in the home and personal-care segment in the Brazilian market. The rise marks a continuation of the trend that began in the second quarter. [Good for them. There’s some of that market mojo that Vantage has to try to tap into] Revenue also benefited from the recovery in the automotive fluids and coatings segments. Sales also rose from its new US plant in Pasadena, Texas. [That’s gotta be welcome news for those guys]

The following table shows Oxiteno's sales volumes, listed in thousands of tonnes. One table lists volumes in terms of product type, the other in terms of geography. [In Oxiteno-speak, commodities is basically MEG and specialties is everything else, more or less]

1,000 tonnes	Q3 2020	Q3 2019	%
Commodities	37	42	-11.9
Specialties	166	153	8.5
1,000 tonnes	Q3 2020	Q3 2019	%
Brazilian	143	147	-2.7
International	60	49	22.4

Although sales prices fell, these were offset by a weaker real.

More News from Brazil: [Hey, we just comment on the news, here. We don't create it.]. The great Al Greenwood of ICIS penned an absolutely outstanding analytical piece on Oxiteno. I’ll give you some snippets here. For the whole thing, though, you should probably get a jump on your New Year’s resolutions and subscribe.

Al reports that Joao Parolin, CEO of Oxiten has noted, in an interview with ICIS, that the coronavirus has caused a permanent shift in buying habits in Brazil, which will cause demand for cleaners and other products to remain elevated after the pandemic subsides. Demand for the product lines used in cleaners rose as a result of the pandemic, said Joao Parolin, CEO. He made his comments in an interview with ICIS.  The coronavirus has changed other buying habits in Brazil as well.

Like many parts of the world, consumers are working from home, and they are taking on improvement projects to make their houses more accommodative for work, Parolin said. This trend has manifested itself in many of Oxiteno's products that are used in construction and paint.

Another sector that has performed well is agriculture. Even though Brazil's GDP fell by 11.4% year on year in the second quarter, agriculture actually rose by 1.2%, according to the state statistical agency (IBGE). It was the only main sector to rise year on year.

Overall, Brazil's economy staged a strong recovery in the third quarter, which Parolin attributed to customers replenishing inventories and the county's generous assistance programs.  The highlight was a package that gave Brazil's neediest reais (R)600/month. Parolin said Brazil's response to the pandemic was among the largest among emerging economies.

A trend that could slow growth is Brazil's rising unemployment rate. It reached 14.4% in the fourth week of September, according to IBGE. That's up from 10.5% from the first week of May.  Some economists expect the rate could reach 16-17% at the beginning of 2021, Parolin said.

In operations news for Oxiteno, a new plant started up in the Capuava petrochemical complex that will capture and purify the carbon dioxide (CO2) produced by Oxiteno's ethylene oxide (EO) plant.  The plant, built by Air Liquide, will be able to process 20,000 tonnes/year of CO2. The gas will be used in various medical and industrial applications. The plant is ideally located since it is near several industrial customers, Parolin said. The plant builds on the long relationship between the two companies.

Production should reach 120,000 tonnes/year of mixed products in 2022-2023 at Oxiteno's new surfactants plant in Pasadena. That is up from 50,000 tonnes of mixed products in 2020. In Mexico, Oxiteno has had to find ways to work around the shortage in ethylene. Mexican state energy producer Pemex uses ethylene to make ethylene oxide (EO), which Oxiteno uses to make surfactants.  All of Mexico's ethylene plants rely on ethane as a feedstock, and ethane supplies have fallen with the country's oil production. The shortage of ethane has lowered ethylene production, which has trickled down to Oxiteno's operations in Mexico.  "Ethylene oxide has been challenging," Parolin said. "Year to date is still below what we intended to receive."

From the Fatty Alcohol Desk: Lucas Hall – alcohol guru at ICIS reported mid-month: Bullish feedstock costs across the oil palm complex are weighing on early discussions for Q1 and 2021 US fatty alcohols volumes.  Palm kernel oil (PKO) costs continue to rise amid tighter production at the end of the harvest season and continued strong export demand in key markets like China and India. Recent estimates suggested that Malaysia's palm oil production in October may drop by another 10% from September. Higher prices for other vegetable oils like coconut oil amid an active and later than usual typhoon season are adding to the pressure.

Bullish feedstock costs are increasing supply chain concerns across the wider market amid squeezed margins in southeast Asia and the pandemic globally. Q4 supply is sufficient to meet demand. Some buyers are looking to negotiate Q1 and 2021 volumes early in order to secure supply amid the wider uncertainty in the market.  Q4 alcohols contracts were assessed in early October.

Volatile but overall bullish feedstock costs - in addition to tighter production amid ongoing outages globally - underpinned the negotiations, despite slowing demand during the Q4 destocking season.  Bullish feedstock costs continue to put upward pressure on the wider market, with players largely unwilling to negotiate Q1 or any 2021 contracts until at least December until a clearer feedstock outlook emerges.

Early discussions have largely been discussed at a 5-15 cent/lb increase from Q4 for both mid-cut and long-chain alcohols, based on feedstock price fundamentals.

Mid-cut alcohols production is largely sufficient to meet demand.

C16 supply from southeast Asia is relatively tight compared with C18, prompting a higher blend of C16 over C18.

Sasol has restarted and is ramping up operating rates at its US Lake Charles, Louisiana, chemical complex (LCCC) as of late last month.  The company remains on force majeure for several chemicals at the LCCC, including alcohol and surfactant products.  The restart is likely to ease production concerns over short-chain and C18 alcohols in the US.

In More Sasol News: We’ve been following the Sasol story for obvious reasons and we also like to find the moral in the story when we can. In prior blogs we’ve noted the keen interest by Sasol shareholders in securing more liquidity (i.e. cash ) for the company. And we’ve noted that the Lyondell deal addresses only part of that cash requirement. Read on from an ICIS insight piece by ICIS’ Tom Hall: Shareholders in South Africa energy and chemicals group Sasol expressed their views remarkably strongly at this year’s annual general meeting (AGM) on 20 November.

The company is beset by problems, the low oil price and the Lake Charles Chemical Project (LCCP) cost overrun just two of them. Creating a company that is fit for the future has been the challenge for some time now.  How do you realign a coal to oil and chemicals company into one that can function adequately in a lower carbon economic environment?  Investors got a better idea of what ‘Future Sasol’, the term adopted by management to describe the company’s future proofing strategy, looks like at an investor event on 2 December (see below – Sasol 2.0).

A significant proportion of shareholders voted against non-executive reward motions at the AGM, clearly venting their frustration with non-exec remuneration. The company did not have to consider an attempt to force a link between its climate goals and executive pay and rewards.  Sasol is in a particularly difficult position in the current lower oil price environment and, while it battles against the impact of the Covid-19 pandemic on its businesses and operations, it has to invest to further reduce its significant carbon dioxide (CO2) and greenhouse gas emissions.

Sasol has had to manage spectacular cost overruns at the US complex – a 1.5m tonne/year steam cracker and downstream polyethylene (PE, 890,000 tonnes/year), ethylene oxide (EO, 350,000 tonnes/year) and ethylene glycol (EG, 250,000 tonnes/year) and more specialised chemicals project.  It hit a period of maximum gearing [that’s leverage for US readers] in the most recent financial year, which ended on 30 June, as the Louisiana chemicals project neared completion.  In its fiscal year second half, Brent crude hit a 21-year low while the pandemic put even greater strain on its balance sheet.
Sasol is looking at carbon offsets, CO2 sequestration and other measures to help further reduce its greenhouse gas emissions. But the company is a coal to liquids producer and, as such, is restricted in what it can do. It is talking to Air Liquide about the French company acquiring the massive oxygen plant at Secunda in South Africa, where Sasol coal gasification plants are mammoth greenhouse gas emitters.  According to company data, in total, Sasol emitted 56.5m tonnes of CO2 equivalent greenhouse gases in 2019.

The sale to INEOS of its stake in the Gemini PE partnership, announced earlier this week, further reduces Sasol’s footprint in the US and seems to mark the end of the company’s global expansion ambitions for the time being.  Aside from selling down its stake in the joint venture, the bigger deal for the company this year has been the agreement to sell half of the base chemicals assets at the Lake Charles complex to LyondellBasell.  Sasol CEO Fleetwood Grobler said at the time of the announcement of that deal, in October, that the US olefins and polymers specialist could take full ownership of the assets in future.

If LyondellBasell were to take full ownership of the large-scale commodity chemicals assets, that would leave Sasol with the more specialised Guerbet and Ziegler alcohols, surfactants, and ethoxylates production at the site. [i.e.surfactants continues to consolidate its grip on core business status at Sasol. Great to hear.]

Aside from some scattered alkylbenzene and phenol assets, the Lake Charles specialties would be the last vestiges of Sasol’s grand North American ambitions, leaving the bulk of its remaining chemicals presence outside South Africa in Marl, Germany.  [ouch !? Tom!] Although prompted by the “perfect storm”, in Grobler’s words, of a crashing oil price and surging global pandemic during the year the company hit peak leverage multiples to bring the delayed Lake Charles complex over the finishing line, the retrenchment is in keeping with strategy.

Chastened by the extent that delays and technical issues bloated the budget for Lake Charles, the co-CEOs that ran the company before Grobler said that the debacle had caused them to refocus on more manageable investments of $500m-1.0bn.  The US divestments are likely to help Sasol complete the structuring of its debt facilities by the end of the calendar year but come at one of the lowest moments for the market in living memory.

The purchase of the brand new Lake Charles assets stake cost LyondellBasell $2bn, giving it – in conjunction with a 50/50 polyolefins joint venture in China with Liaoning Bora Enterprise – the equivalent of “full capacity of a new and operational world-scale cracker complex with little exposure to risks from project execution”, CEO Bob Patel said at the time.  The price tag was at least $1bn below the replacement cost for a 50% stake in the assets, Patel added, while it cost INEOS $404m to acquire the 50% outstanding stake in the 470,000 tonne/year high density polyethylene (HDPE) project. The deals are not inherently negative but could be net present value destructive, according to an investment banking source, agreed as they were at the bottom of the cycle.

[In perhaps one of the greatest paragraph headers that I have seen in an industry publication, Tom notes that …] There is a Plan but Woes Mount. Tom continues..
Sasol’s management has done well to draw up and execute a plan to deal with such unprecedented disruption, but company leverage remains above the level required to maintain its current junk rating, according to Moody’s vice president Rehan Akbar. [That is shareholders want more money]

Moody’s downgraded the company to Ba1, below investment grade, in March 2020 and subsequently slashed the rating further to Ba2 with a negative outlook.  “We have to recognise that it's a very challenging time, they probably deserve some credit for making a plan and executing on it. At the same time I think there is more work to do because the leverage is still relatively high for where we think a Ba2 rating is and that's why the outlook is negative,” Akbar said, speaking after the Lake Charles stake sale but before the Gemini sale.  “When you look at ethylene derivatives there are still a lot of supply/demand imbalance concerns, oil prices are still fragile, and I don't think anyone is expecting a very strong uptick in oil prices next year either,” he said.  “The outlook over the next 12-18 months is uncertain, the macro picture is also uncertain, so that is why we have rested on negative outlook because there is still material debt on the balance sheet and it does weigh on the rating,” Akbar added.

Some great news from Stepan:  ICIS reported that Stepan has appointed Scott Behrens as president and chief operating officer (COO), effective 1 January 2021. Behrens, who has been vice president and general manager, surfactants, since 2014, has been with Stepan for more than 25 years, holding a series of leadership positions. Stepan, to date, has not listed a COO as part of its leadership team. I’ve known Scott for some decades. Congrats and kudos to him and Stepan for this great move. Relentlessly focused execution. That’s what Stepan, and Behrens, do.

Sasol 2.0 News: Some good stuff potentially coming out of adversity. In a strategy update December 2^nd, reported by ICIS, Sasol unveiled a series of 2025 targets to help improve profitability and cut costs as it aims to recover from the impact of a low oil price environment and problems with its Lake Charles chemicals projects in the US.

It also today finalised the sale of a 50% stake in the Lake Charles cracker and polyethylene (PE) plants through the formation of a joint venture (JV) with LyondellBasell. It also revealed amendments to its debt covenants.

The new Sasol 2.0 2025 targets include:

• 5-10% rise in gross margin
• Lower net debt ratio from 4X  to around 1.5 X EBITDA
• 30% reduction in capital expenditure
• 1% cut in working capital to 14%
• 15-20% cut to cash fixed costs
• Will enable breakeven at $30-35/bbl oil compared with $35-45/bbl now
• Polymer price basket assumption of $800/tonne

CEO Fleetwood Grobler told ICIS:  “The Lake Charles JV is a clear indication that we will in the future put less emphasis on polymers and base chemicals where we don’t own technology. We have a much stronger right to succeed in specialty areas where we have proprietary technology and customer intimacy compared to a commodity which is sold by everyone.”  Grobler highlighted Sasol’s leadership in advanced materials where he said the company is one of the top 2-3 in specialty alumina products such as a 99.9% pure grade for scratch resistance and LED lighting.

Sasol’s Zieglar and Guerbet technology produces C6-C36 alcohols with plants in Germany and the US, enabling the company to offer a wide range of surfactants, he said.  He said for these areas of advanced materials and essential care chemicals its broad portfolio puts Sasol in the top three globally. [And he’s right. Sasol is a global surfactants powerhouse, with a strong diverse portfolio of intermediates, particularly in alcohols]

The CEO hopes to grow chemicals inorganically once the finances improve: “After this organic growth period our next realistic target is to ask how we can get some adjacencies to broaden our offering by doing acquisitions within our capital allocation framework."  [This is an excellent strategy and will be critical to do right because there’s  a bunch of other companies out there with a lot more ready cash looking for similar sorts of acquisitions. Building on synergies with Sasol will be key]

Sasol’s use of the Fischer–Tropsch process also means it can harness the opportunities green hydrogen will present, said Grobler.  The CEO said that while Sasol has a competitive position in coal, they want to gradually increase the amount of gas it uses to help cut carbon intensity. This gas will also be used for chemical production. “South Africa is a developing country and lacks the pipeline infrastructure you have in the US and Europe. It will take time to develop that. If we want to get more access to gas, we will have to focus on improving access,” he added.

During the strategy presentation, Grobler ruled out separating or selling Sasol’s chemicals businesses. He said: “Splitting the oil and chemicals business is not a consideration as we believe there is more value in the two businesses together.” [Let’s see if the market buys that. It works for Shell and Exxon so… maybe]  He also said that there would be future opportunities to debottleneck and increase capacity of the Lake Charles cracker and PE plants by 5-10% with very low capital expenditure. The Lake Charles performance chemicals assets can also be debottlenecked.

And finally, at the beginning of December:

More Fatty Alcohols News: ICIS’ Lucas Hall again reports - Q1 fatty alcohols discussions continue to face pressure from overall bullish feedstock costs across the oil palm complex and record high freight costs against the backdrop of stable to strong demand in the core personal care and hygiene markets.

Costs across the oil palm complex remain relatively firm but showed signs of softening if not lacking direction. Freight costs remain at record highs amid strong container demand in the US.  Demand for mid-cut alcohols remains stable in the core personal care market. Demand for C16-18 alcohols and particularly C16 alcohol remains strong. C16 supply in southeast Asia is tight, adding to the pressure.  Mass balance material remains tight from the summer, maintaining upward pressure on premiums.

Sasol remains on force majeure for linear alcohols and ethoxylates at its US Lake Charles, Louisiana, Chemical Complex (LCCC)  into December following a hurricane-related outage earlier in the year. The plant restarted in late October.  Discussions for Q1 material have been discussed at a 5-30 cent/lb increase from Q4 for both mid-cut and long-chain alcohols, tracking higher feedstock and freight costs.  Discussions for mid-cut alcohols have been heard in mid-70 to 100 cents/lb range and higher.

Discussions for long chain alcohols have been heard in the low-80 to low-90 cent/lb range.  Discussions for mass balance premiums have been heard around 5 cents/lb.

The sharp increase in offers has prompted some buyers to adopt a wait-and-see approach until a clearer feedstock outlook emerges.

From the EO Desk: US November ethylene oxide (EO) contracts settled at a decrease, following same-month feedstock ethylene contracts.  ICIS assessed US November EO lower by 1 cent/lb ($22/tonne), at 52.2-61.7 cents/lb FOB.  This was the second consecutive monthly decrease.

 

OK so that’s it for the month. Life goes on and honestly, for many, if not most of the readers of this blog, things are just fine. I’m guessing about half of you loved the election result and half of you just shook your head in despair. For all of you – life goes on. Have I said that enough yet? Because, here’s the thing: For some folks, life is not going on. For some it has not quite ended but been put into some sort of dream-like stasis that we might only know from our reading of Orwell or Huxley or Rand or Chekov or any one of a number of perceptive essayists. Certain empire state business owners have been pushed into a place where they have nothing to lose and so they’d rather be taken away in handcuffs for serving drinks than face financial ruin. In the California Republic, exceptions have been made by party leaders for public gatherings for the purpose of peaceful protest. Interestingly, this very night, in Santa Monica, spontaneous protests about all sorts of worthy causes are scheduled to take place at independent eateries across this beachfront town. Does this not seem a bit, well, Orwellian to you? Well, at least we are OK. For now.