By: Aarudhra Dharshini -- Senior Research Analyst, Oleochemicals
16 July, 2019
The global oleochemical market is facing more than 10 years of overcapacity. In odds with this, capacity expansions are witnessed every year in both the fatty acids and alcohol markets.
Adding to the fire are other challenges prevailing in the current industry scenario, as follows:
All this could lead a category manager to ask two major questions: (1) which natural oleochemical supplier(s) can survive these challenges? and (2) what are the key competencies to look for while screening supplier profiles?
This article evaluates the current market situation and highlights the key traits that could make a supplier the best fit in the industry.
Key Highlights |
– Gabriele Bacchini, Sales Manager, Processi Innovativi s.r.l
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The industry is facing 10 years of overcapacity and supply, representing about 2 MMT/year of excess capacity of fatty acids, while fatty alcohols is likely to be experiencing about 1 MMT/year of overcapacity.
Reality behind Overcapacity
Source: ICIS, POC Malaysia, OFI, and Beroe Analysis
The fatty acid market is facing a period of consolidation, and, hence, capacity expansion is expected to be limited until 2020. However, fatty alcohol sector expansion is likely to increase further in the synthetic alcohol segment. Despite the existing overcapacity situation, individual companies are planning expansion, capitalizing their competitive advantage(s) to confront market challenges
Major players, such as IOI, KLK, and Musim Mas, are integrated into plantations because
Comparison between Suppliers: Based on Integration, Profit, and Financial Stability |
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Factors |
Financial Ratios |
Suppliers Integrated until Plantation (e.g., IOI, KLK) |
Non-integrated Suppliers (e.g., Jocil) |
Profitability Factors |
Revenue Share |
> 45% revenue comes from plantations and the least from oleochemical business |
Nearly, equal revenue comes from oleochemicals and downstream |
Operating Profit Margin | ≥ 15% (favorable for the buyer) | 7% | |
Credit Periods |
Days—Sales Outstanding |
30 days |
45 days (favorable for the buyer) |
Efficiency Factors |
Asset Turnover Ratio |
0.75 (favorable for the buyer) |
1.62 |
Receivables Turnover Ratio |
12 (favorable for the buyer) |
8 |
|
Inventory Turnover Ratio |
5 |
8 (favorable for the buyer) |
Source: Financial statements, Bloomberg, Expert interaction, and Beroe Analysis
Buyers’ negotiation power is higher with major suppliers integrated from plantation to oleochemicals compared with non-integrated suppliers due to consistent supply assurance, competitive pricing, and lower risk.
Of the global oleochemical produce, 85% are vegetable oil-based because
Tallow supply is growing only at 1% per annum. Increasing diversion of tallow to biodiesel, palm stearin growing at 3% per annum, and with SE Asia recording cost leadership, it is very likely that future growth will be based on SE Asian palm stearin, not tallow.
Logistics cost has always accounted for a significant (and growing) portion of oleochemical costs. Much of the business has been moving over oceans. Buyers are looking for more ‘exactly-on-time’ deliveries to control inventories. However, countries such as the U.S., Europe, Japan, and even China are facing logistics cost pressure, pushing against oleochemical returns. Thus,
Comparison between Suppliers: Based on Integration, Profit, and Financial Stability | ||
Regions |
Countries |
Major Ports (Number of Suppliers with ≥ 0.1 MMT capacity) |
SE Asia | Indonesia | Medan (4), Dumai (3), Jakarta (2), Sei Mangkei (1), Kisaran (1), and Gresik (1) |
Malaysia | Pasir Gudang (5), Prai (1), Rawang (1), and Klang (1) | |
Asia | China | Jiangsu (3), Zhangjiang (2), Tiajin (1), Shandong (1), Zhejiang (1), Rudong (1), Rugao (1), Shanghai (1), Juanxing (1), and Guangdong (1) |
India | Mundra (1), Valia (1), and Taloja (1) | |
U.S. |
Plants in Mid-west states: Chicago (1), Ohio (1), Massachusetts (1), and Tennessee (1) |
|
EU |
Gouda-Netherlands (1), Emmerich-Germany (1), Dusseldorf-Germany (1), Barcelona-Spain (1), and Ertvelde-Belgium (1) |
|
Middle East | Saudi Arabia | Jubail (1) |
South America | Brazil | Camacari (1) |
Source: Company statements, Expert interaction, and Beroe Analysis
The U.S. and the EU have better capacity utilization rates compared to Asian countries. However, logistics (both truck and ocean freight), inflate the overall cost. For example, BASF’s fatty alcohol plant in the U.S. was a long way inland. Poor logistics probably could be one of the major reasons for its plant closure (in August 2017), as natural fatty alcohol plants operate by importing raw materials mostly from SE Asia.
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