Surfactants Monthly Review – October 2019

Surfactants Review- October 2019

October was notable for a few things. First for our 3rd Indian surfactants conference in Mumbai. Second for the denoument of a major (non-surfactant related) scandal I’ve been following (WeWork) and third for the completion of a major project I’ve been working on, which it looks like I won’t be able to talk about until next month’s blog, because the actual press release isn’t out yet. So – this just to remind you that we don’t publish behind the scenes news or gossip here. Everything here is already public domain. Of course, the opinions, I like to think, are original, but even there, we stand on the shoulders.. right?

Nonetheless we have a few interesting snippets of news for the month. Here we go.

First some economics:

All businesses involved in international trade should be aware of the wider impact of the current trade war on economic activity. The Wall Street Journal noted in an opinion piece titled “Adam Smith’s Revenge” a few days ago “The great counterfactual of the Trump Presidency is how much faster the economy would be growing without the damage of his trade protectionism. Wednesday’s report of lackluster 1.9% growth in the third quarter shows again that you can’t escape Adam Smith’s revenge for indulging in bad economic policy for political goals.”

[caption id="attachment_1534" align="aligncenter" width="1024"]He Told You So[/caption]

Having said that, leave it to the comments section to point out that we should not just be focused on some near term discomfort .. “Re-ordering our unfair and disadvantaged historical trade arrangements with China using tariffs is in our long term interests. Those wringing  their hands over short term inconveniences during this transitional period are short sighted. We must require China to deal with America and the rest of the world as a mature economic trading partner. The special treatment during it's climb out of 3rd world status resulted in trade policies that no longer apply. Better to have economic warfare with China now than the much less pleasant kind later…” Fair point.

So... what is it good for?

Whilst sympathetic to issues of national security and intellectual property protection, as noted above, the rhetoric and activity around the “trade war” leave me a little uneasy. Joe Chang has produced an excellent status report on the US-China tussle in chemicals. The direct impact on surfactants is not large. Round 3 tariffs on the US side impacted surfactants but volumes are not significant as the graph below shows.

[caption id="attachment_1533" align="aligncenter" width="893"]The Impacts of  a Trade War[/caption]

In news obliquely related to Oxiteno: Ultracargo of Brazil announced a new CEO. Decio de Sampaio Amaral will become executive officer and CEO at Ultracargo on 1 January 2020, the Brazil liquids storage company announced. With more than 28 years of experience in logistics, supply and project management, de Sampaio Amaral most recently served as CEO of Camargo Correa Infraestrutura. Ultracargo is a subsidiary of the Brazilian conglomerate Ultrapar, which also owns surfactants producer Oxiteno.

In the world of detergent alcohols, ICIS editor, Lucas Hall has taken over from the legendary Judith Taylor who has retired after 21 years on the alcohol beat with ICIS and predecessors.

At the beginning of the month, Lucas, in a superb article, commented that fatty alcohol contracts were assessed mostly flat to down. Although domestic demand is healthy, contracts faced downward pressure amid ample supply to meet domestic demand as well as lower feedstock costs in southeast Asia.

Fourth quarter C12-C15 mid-cut contracts settled anywhere from a rollover to down 3 cents/lb ($66/tonne) to 61.50-70.50 cents/lb on a delivered (DEL) basis. Despite healthy demand, lower fourth quarter contracts largely decreased because of high feedstock inventory levels and lower feedstock prices in the natural alcohols sector. However, some contracts decreased because of ready supply of both natural and synthetic alcohols in the US market.

Following several quarters of short supply, mid-cut synthetic (i.e. petrochemical) alcohol production improved during the third quarter. This gave ready supply into the US domestic market as well as offering material into Europe to sustain requirements following the closure of alcohol production at the Stanlow refinery in the United Kingdom. Entering the fourth-quarter contract negotiations on the mid-cuts, buyers commented about being approached by synthetic producers for the first time in a number of quarters, putting downward pressure on contract prices despite healthy demand. These actions on fourth-quarter volumes could prompt sharper competitive activity to develop between synthetic and natural alcohols players, pressuring prices further. Some sources have speculated that more synthetic alcohol is in the market because less volume is going to Europe. Other sources said synthetic producer expansions are becoming active, bringing more alcohol into the market.

Fourth quarter C16-18 contracts largely settled at a rollover, with some contracts slightly down. Although domestic demand is healthy, contracts faced downward pressure from lower feedstock costs in Asia and ample supply. C16-18 blended alcohol demand is slightly lower amid higher inventory levels, prompting some contracts to settle slightly lower in the fourth quarter.

The following graph shows price trends for the C12-15 mid-cuts alongside the C12-14 natural alcohol spot prices in southeast Asia. The graph also shows price trends for the US C16-18 market alongside spot prices in southeast Asia.

[caption id="attachment_1531" align="aligncenter" width="668"]Price Trends in Alcohols[/caption]

Meanwhile in Europe, ICIS’ Melissa Hurley reports that ethylene oxide (EO) market sources envisage the relaxed supply and demand conditions to continue. Despite short-term challenges surrounding demand, the current supply in Europe is expected to outstrip demand by 2028 according ICIS data projections. There have been several announcements to expand capacity in Europe from suppliers.

[caption id="attachment_1532" align="aligncenter" width="719"]How EO Demands Stacks Up[/caption]

Here’s a company, I’m pretty sure we have never mentioned in the blog. That is the Maroon Group .ICIS reports that since being acquired by private equity (PE) group CI Capital in 2014, Maroon has become extremely acquisitive, buying nine distributors which have helped grow sales from around $100m to pro-forma $500m for 2019. The group’s merger and acquisitions (M&A) strategy saw it focus first on core areas and geographies before moving further into specialties and new territories.In 2014 Maroon Group was focused on coatings, adhesives and sealants (CASE) plus plastics. Its heavy focus on industrial end markets meant it was heavily reliant on automotive, housing and commercial construction. It was a regional US business with the vast majority of revenue coming from the mid-western US. President and chief operating office, Mike McKenna, said: “With the PE partner in place we made the decision to not only focus on organic growth in CASE and plastics, but to add strategic acquisitions. For our first 37 years we never made an acquisition, then we achieved nine in the space of five years. It’s been a massive evolution for us.” Interestingly enough, I met Mike a few weeks ago at an ICIS Advisory meeting. He’s focused on growth; the customer base has grown from 700 to 4,700, and on surfactants. You should read the whole article. This is a company to watch as it expands into Canada, with the acquisition of Cambian and has its eyes on overseas opportunities.

In one of their periodic and interesting pieces on M&A, ICIS had some great commentary from Frederico Menellas of Rothschild, who says, in part “….Great strategy beats great markets…” [In some cases, yes, but then again, I’d rather be lucky than good]. He goes on to cite former surfactant producer, Huntsman as an example: …once a highly diversified commodity and intermediate chemical company, Huntsman is slimming down with the planned $2.1bn sale of its intermediates and surfactants business to Thailand-based Indorama Ventures to focus on polyurethanes (PU), including further downstream to PU systems houses… “It’s not just about cutting costs but improving pricing and delivery, managing inventories and producing more efficiently,” said Frederico. “If you can build or acquire a system that enables dynamic pricing, you can scale this - graft it onto existing structures - to be able to price on the basis of value to the customer rather than cost,” [Now I’m with you]

[caption id="attachment_1535" align="aligncenter" width="735"]Huntsman Focuses[/caption]

I don’t normally write about what happened at my conference because, you know “you gotta be there”. However, ace ICIS reporter Yuanlin Koh, penned a superb analysis of the the Indian LAB market based on what she heard in Mumbai, do I thought I would go ahead and excerpt a few pieces, as it’s already out there.

Yuanlin says that India’s linear alkylbenzene (LAB) players are bullish about market prospects despite a slowing economy. Consumption for is expected to remain strong in developing economies like India, where annual demand growth is projected at 5%, according to market players at the recently concluded ICIS surfactants industry conference in Mumbai. A growing middle class population in both urban and rural areas remained the strongest support for downstream use in the industry, they said. Swacch Bharat Abhiyan or The Clean India Movement also played a major role in boosting surfactants' consumption.

For the first seven months of 2019, India's LAB imports stood at 152,832 tonnes, representing a 21% increase from the same period last year, according to ICIS demand and supply database. Monthly LAB imports so far in 2019 have mostly posted growths on a year-on-year basis.

[caption id="attachment_1536" align="aligncenter" width="752"]Not enough domestic capacity[/caption]

Higher imports was partly due to shortage of domestic supply as most domestic plants were undergoing turnarounds during the period, with some prolonging/delaying their shutdowns either because of feedstock issues or facility troubles.

LAB import prices this year have been hovering below $1,200/tonne CFR (cost & freight) India, according to ICIS data, partly weighed down by weakness in the Indian rupee against the US dollar. India’s LAB import volume has been rising despite the general decline in the country’s overall value of chemical imports amid domestic economic weakness.

[caption id="attachment_1537" align="aligncenter" width="668"]Worth importing[/caption]

The south Asian economy is projected to grow at a slower rate of 6.1% in the fiscal year ending March 2020 compared with an earlier forecast of 7.0%, according to global financial stability watchdog, the International Monetary Fund (IMF). Economic growth will be supported by lagged effects of monetary policy easing, a reduction in corporate income tax rates, recent measures to address corporate and environmental regulatory uncertainty and government programmers to support rural consumption, the IMF stated. In September, the country’s exports and imports fell the steepest in three years. Total imports for the month declined 13.9% year on year to $36.9bn, with those for chemicals recording a 16.2% fall.

I don’t usually consider propylene glycol to be a surfactant but it often ends up in many of the same formulas as surfactants and so I ready the following report by ICIS with great interest. Evonik and Dow are working together to develop an industrial-scale method of synthesising propylene glycol (PG) from propylene and hydrogen peroxide. The partnership will begin with a pilot plant being constructed at Evonik’s site in Hanau, Germany, by the end of 2020, with large-scale technical implementation to be rolled out in the following years.

Compared to the traditional process where propylene oxide (PO) is converted to PG using water, the new method of synthesis provides a high yield of PG for comparatively low energy consumption. As this process combines all reaction steps in a single reactor, then the need for investing in additional PO capacity would be eliminated as existing PG plants could be retrofitted for a competitive price. The production cost could also come down as only hydrogen peroxide and propylene would be needed as feedstocks. Around 1.9m tonnes of propylene glycol were used worldwide in 2018, which is used in the production of polyester resins and as a de-icing agent, as well as in food additives, and acts as a co-solvent in many home and personal care products.

In more project news from Sasol, the company delayed the planned start-up dates for its low density polyethylene (LDPE), ethoxylates, Ziegler and Guerbert alcohols plants at its Lake Charles, Louisiana complex, according to a company release on production and sales metrics.] The company anticipates reaching beneficial operations at its 420,000 tonne/year LDPE plant by the end of the fourth quarter of 2019. The ethoxylates plant at the Lake Charles Chemicals Project (LCCP) is anticipated to start-up in the first quarter of 2020 while the Ziegler and Guerbet alcohols plants are scheduled to start up in the second quarter of 2020, according to the company. As of the end of September 2019, construction progress at the site was 96% complete and overall project completion was at 99%, the company stated. Sasol is currently operating the 470,000 tonne/year linear low density polyethylene (LLDPE) plant at the site while the 1.5m tonne/year cracker is running at around 50% of capacity as the company works to improve the quality of ethylene production at the site.

Now in related news, the Wall Street Journal reported that in view of the major capex over-runs and delays in the Louisiana project, Sasol’s two co-CEO’s Bongani Nqwababa and Stephen Cornell are leaving the companyimmediately. Fleetwood Grobler (who many readers know), Sasol’s EVP Chemicals has been promoted to President. Brad Griffith (also well known to blog readers) has then been promoted to Fleetwoods vacated post as EVP Chemicals. Congrats to both. Steady hands on the tiller in turbulent times. Good for Sasol.

[caption id="attachment_1538" align="aligncenter" width="756"]New Sasol Management[/caption]

In palm sustainability news, if you are interested in some facts regarding the use of fire to clear plantation land in Indonesia, Wilmar has published an excellent briefing. You can download it here. One key point: Indonesian law actually allows the use of burning to clear land – not by large palm companies, but by smallholders (under 2 hectares) who are often not running palm operations. Read the whole document to get the full story. For more palm perspectives, don’t miss PIPOC in a couple of weeks where the two co-founders of P2 Science will speak along with a return speaking engagement for the CEO (that’s me).

[caption id="attachment_1539" align="aligncenter" width="594"]Not always what they seem[/caption]

In specialties : BASF has bolstered its production capacity for Alkyl Polyglucosides (APG), in Jinshan, China by an additional 10,000 metric tons, as part of the production improvement project announced in 2018. With this expansion, the company’s production capacity of APG in Jinshan, China is up from 20,000 to 30,000 metric tons. Moreover, BASF has already acquired the required approvals and prepared the basic infrastructure to swiftly scale up the capacity by an additional 10,000 metric tons, in the near future, thereby doubling the production capacity. This will enable the company to better support the market and its customer’s demand growth.

Finally, In their third quarter earnings report, one of the blog’s favourite surfactant manufacturers, Stepan ,attributed a decline in global surfactants operating income mostly to the company's exit from its sulfonation business in Germany in 2018; lower agricultural demand amid wet weather in the US farm belt this year; and weaker demand in the US commodity consumer end-markets.

Year to Date for Stepan: Reported net income was $81.1 million, or $3.48 per diluted share, versus $87.2 million, or $3.74 per diluted share, in the prior year. Adjusted net income was $93.7 million, or $4.02 per diluted share, versus $92.2 million, or $3.95 per diluted share, in the prior year. Total Company sales volume declined 3% compared to the first nine months of 2018. Sales volume growth within the Polymer and Specialty Product segments was offset by a 4% decline in Surfactant sales volume, or a 2% decline excluding the exit from the sulfonation business in Germany.

Now I normally let these earnings announcements stand on their own but this has quite a lot that ‘s worth unpacking so: First – getting out of sulfonation in Germany was an outstanding long term move by Stepan; proving that yes, in fact it is possible to close a sulfonation plant in Europe without the world actually ending. Good for them. Why torture yourself selling the lowest margin surfactants in the lowest growth, lowest profit markets in the world for surfactants. Second – the thing about the weather. I’m always a little skeptical when companies blame the weather for financial setbacks but this is legit. Flooding in the Midwest delayed and reduced the application of fertilizers (and with them their surfactant adjuvants) and this hit the results of DuPont, Corteva and others (according to the WSJ ) so, OK. Third the “weaker demand in the US commodity consumer end-markets”. This to me means laundry or at the very broadest, HPC (Household and Personal Care). This got me thinking. Is there a slowdown happening in these so-called consumer staples, perhaps where folks trade-down to private label products containing less surfactants. Or maybe just some make-vs-buy shenanigans going on with the soapers? Hard to tell honestly. My concern would be – is there a thrifty canary in the laundry coalmine? I recall this phenomenon in 2008 – 9 and the effect was not pretty although Stepan themselves weathered that storm pretty well.

[caption id="attachment_1540" align="aligncenter" width="576"]Return of the Thrifty Canary?[/caption]

Higher inventory-related costs associated with the company's internal Asian-US supply chain - estimated around $2m - as well as the lingering impact of an equipment failure at its Ecatepec, Mexico, surfactants plant also weighed on the third quarter, said the company. The Ecatepec facility has returned to full operations.

Slowing market conditions (there’s that canary again) caused weaker performance in North and Latin America, despite the pass-through of lower raw material costs. Stepan expects higher volumes in the fourth quarter compared with the third quarter amid a seasonal uptick in agricultural sector. The company does not anticipate significant growth in the commodity space from the fourth quarter into 2020. Looking forward, the company plans to work down its reliance on commodity volumes and instead grow in the more functional markets in the surfactants space. [Good news and I think in line with the company strategy over the last 10 years. ]

Finally the article notes that Stepan has room to de-emphasise its commodity business, with current operating rates probably around 75-80% capacity utilisation, according to the company. [So, I don’t fully understand what this means.] Going back into the company announcements, it looks like this came up on the conference call with analysts in response to questions and it was characterized as “we still have some excess capacity” in sulfonation] I take this to mean that the company could take on business if it wanted to – that is if the economics were good. But right now – the economics are not that good, especially compared to the higher margin functional products.  In my experience, at 75 – 80 % capacity utilization in commodity products, you’re really not doing that great. I can’t quite figure that one out. Perhaps someone else can – if so please get in touch.

Nonetheless it has to be noted that 9 month net income is 2% ahead of the 2018 record and they expect solid growth for the full year, despite the aforementioned challenges.

OK so now that we are talking about Stepan, I have to share some additional thoughts with you. Googling around, I came across an interesting analysis of Stepan from May of this year on the Seeking Alpha site, entitled “Buy This Overlooked, Boring Company For The Long-Haul”. The article goes on to characterize Stepan as a “relatively “boring”, stable company that provides consistent, growing results”. Now, if you have not already realized, “boring” in this context is a compliment and one that I think is absolutely spot-on. The article ends by noting that “While we do not expect the company to double or triple any time soon, we do expect Stepan Co. to be a successful investment for long-term buy-and-hold investors….” In my view, there are many fields of endeavour where boring can be really good. Well, by way of illustration, let’s consider a couple of companies that are not boring.

First one in our very own (chemical ) industry , since Bayer announced the acquisition of Monsanto in May 2016, the company has been roiled by the mounting lawsuits and judgments around Roundup. That sort of not-boring excitement, I am sure they could live without.

Second the poster – child for not-boring companies today is of course, Wework , who, mere months ago, was looking at a record breaking IPO at a valuation well North of $47 Billion only to be eventually bailed out by it’s lead investor, Softbank, a couple of weeks ago at a valuation of less than $8 Billion. There’s an excellent article in the Wall Street Journal with a couple of superb scenes that illustrate what happened. Scene 1 happens at “one of” Adam Neumann’s (WeWork founder) homes in the Hamptons where he had summoned the heads of the NASDAQ and the NYSE to audition for the right to handle the Wework IPO. NASDAQ’s Adena Friedman won out by offering to create a new index, the We 50, of companies committed to sustainability. Scene 2 – just weeks later has Neumann fired and the company valuation a fraction of what it was.  The lead investor, Softbank has now invested into the company twice the amount Wework is now worth. What’s interesting is that over those few weeks, when the company fell off a cliff, the business model had not changed. What had changed is that the company filed an IPO prospectus and the world got to take a look under the hood of Wework. Nothing good under there in terms of ability to make money, to say nothing about accompanying stories of dope-smoking, morning tequila-shot-sodden company meetings, astrology and self-dealing on a massive scale. Nonetheless, Neumann leaves his job with about $1Billiion while 90% of employee options are under-water and thousands are laid off. Not boring.

[caption id="attachment_1542" align="aligncenter" width="1024"]Exciting Times at Wework[/caption]

It’s great to read around the subject of Wework as there continue to be some staunch apologists for Neumann. In a book-promoting interview with Fortune’s Termsheet, Ben Horowitz, founder of well-known VC firm Andreesen Horowitz lapses into the Anglo Saxon vernacular while explaining carefully “If a guy who’s born a slave can take a bunch of slaves and turn them into one of the greatest fighting forces in the world [referring to the Haitian Revolution’s slave revolt], you absolutely can change the fucking culture at your company. That’s a mistake that people often make—that you can’t.” Ooooh Ben said a bad word. I guess he really believes in what he says. He goes on “It’s easy to shit all over everything Adam [Neumann, WeWork’s co-founder and former CEO] did now—the swing and the miss with the IPO, [the takeover by] SoftBank, all of that. But what he accomplished wasn’t trivial; it was very real. WeWork started with a giant vision: “We will change the way that work happens, and make it much more human.” He built a culture around that, and lived it himself.” Wow – another naughty word. Clearly Ben is committed to this view. Another interpretation is that Neumann was fortunate enough to be the world’s biggest snake-oil salesman, who met the world’s richest sucker (Masayoshi Son of Wework backer, Softbank). The result was anything but boring. No expletives needed to make that clear.

[caption id="attachment_1544" align="aligncenter" width="630"]Please listen to me![/caption]

So circling back to Stepan. Maybe that is one good indicator of a genuinely good company. I really do not recall any analyst reports, articles or interviews about Stepan where the F-bomb was dropped. No-one ever said that Stepan is a  f***ing great surfactant company that makes a s*** load of money in some really f****ing challenging markets. No I really don’t recall seeing that sort of thing anywhere about Stepan. Kinda boring really – in a really good way.

Finally finally – some good stuff on the telly these days. We’ve been watching Spirited on Amazon; about the ghost of a 70’s punk rocker haunting a present day Sydney apartment building. It’s a love story and it really pulls the hearstrings. I was first attracted to it by the music running over the opening credits; the 1976 single by the Saints – I’m Stranded , which I remember buying at Saville records that Summer in South Shields. Both sides of the single are great. Australia had the Saints while the UK had the Sex Pistols and Queens, NY had the Ramones. I honestly think the Ramones inspired the other two. Other abrasive and disruptive things have come out of Queens, I think. Anyway that’s another blog. Enjoy the following trip back to those times…

The A side:

The B side:

The Sex Pistols (check out Steve Jones's riffs)

And.. hey ho, let's go..

That's it - see you at PIPOC and in Singapore..