CURRENT AND FUTURE ISSUES AND

CHALLENGES FOR THE OLEOCHEMICAL

INDUSTRY

• Presentation to PIPOC Oleochemicals Conference 2011

• by Alan Brunskill, Senior Oleochemical Consultant, LMC International

• KL Conference Centre, 15th November 2011,

• Kuala Lumpur, Malaysia

Agenda

Capacity

Capacity ownership

Market Growth

Major Issues –

•Biofuels,

•Taxes/Duties etc, Economy,

•Sustainability

What’s next?

Global Fatty Acid Capacity by Region 2010/11 capacity - ca 9.0 million tons

SE Asia 40

China 22

India 7

ROA 3

Europe 13

N America 11

ROW 4

Global Fatty Alcohol Capacity by Region Total 2010/11 – ca 3.7 million tons

SE Asia 31

China 20

India 4

ROA 2

Europe 23

N America 15

ROW 5

Historic and forecast fatty acid consumption

volumes, by region (2000-2020)

0

1

2

3

4

5

6

7

8

9

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Million T

onnes

North America Europe South East Asia Rest of Asia South America Rest of the World

Historic and forecast fatty acid production volumes,

by region (2005-2020)

0

1

2

3

4

5

6

7

8

9

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Million T

onnes

North America Europe South East Asia Rest of Asia South America Rest of the World

Historic and forecast fatty alcohol consumption

volumes, by region (2000-2020)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Million T

onnes

North America Europe South East Asia Rest of Asia South America Rest of the World

Historic and forecast fatty alcohol production

volumes, by region (2005-2020)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Million T

onnes

North America Europe South East Asia Rest of Asia South America Rest of the World

Capacity Ownership

% Capacity owned by raw material

producers

Fatty acids – 60

Fatty alcohols - 25 (50)

Problems affecting Oleochemicals

The economy

Biofuels - Oil Price effect

Biofuels - Disappearing feedstock

Biofuels - Glycerine

Export/Import taxes/Anti-dumping tax

Sustainability

The Economy

Bankers – one way risks only: they get

the bonuses, tax payers/investors pay the

penalty

Politicians – no business experience. Yet

we elect them to run our countries

Economists – only have hindsight

Auditors/Ratings Agencies – never spot

the big problems

Is it any wonder we are in a mess?

Biodiesel effects

Oils and fats prices

Glycerine price/availablility

Raw material availability

Biodiesel Growth 2000-2020

•By 2020 conventional biodiesel will have

grown to 40 -50 Mt

•Glycerine generation will grown to ca 6 Mt

glycerine, (2011 ca 3 million)

•Other types of biodiesel will consume

additional fats and oils, e.g. Neste process

•Total oils and fats consumption for fuel will

be above 50 Mt

Biodiesel production volumes (1995-2010)

0

2

4

6

8

10

12

14

16

18

20

22

24

26

1995 1998 2001 2004 2007 2010

Million T

onnes

North America Europe South East Asia ChinaIndia Other Asia South America Rest of the World

Until 2006, year-on-year changes in CPO prices used to be fairly easily explained in terms of MPOB stock changes.

-600

-450

-300

-150

0

150

300

450

600

750

Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06

Year-

on

-Year

Pri

ce C

han

ge, M

$/t

on

ne

-500

-375

-250

-125

0

125

250

375

500

625

Year-o

n-Y

ear S

tock

Ch

an

ge, '0

00 m

t

Price Change Stock Change

The relationship has broken down since mid-2007

-2,000

-1,600

-1,200

-800

-400

0

400

800

1,200

1,600

2,000

Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11

Year-

on

-Year

Pri

ce C

han

ge, M

$/t

on

ne

-1,000

-800

-600

-400

-200

0

200

400

600

800

1,000

Year-o

n-Y

ear S

tock

Ch

an

ge, '0

00 to

nn

es

Price Change Stock Change

Brent nominal crude prices plotted against ethylene,

US$ per tonne

0

250

500

750

1,000

1,250

1,500

1,750

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

US$

per to

nne

-5

10

25

40

55

70

85

100

Ethylene Brent crude

Biodiesel use in Germany and the US, reacts quickly to swings in the biodiesel premium over diesel. This links biodiesel to diesel prices.

180

220

260

300

340

380

420

460

500

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Mo

nth

ly B

iod

iese

l D

em

an

d, '

000 t

on

nes

-100

-50

0

50

100

150

200

250

300

Pre

miu

m, U

S$ p

er to

nn

e

US + German Demand Average US & German Biodiesel Premium

Edible oil prices vs crude oil 2006 - 2011

0

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250

Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

EU

Pri

ces,

US$ p

er

ton

ne

Brent Crude Palm Oil Soy Oil Rapeseed Oil PKO Coconut Oil

Other oils vs crude oil

0

200

400

600

800

1,000

1,200

1,400

Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

US$ p

er

ton

ne

Brent Crude Olein Tallow Stearin PFAD

Biodiesel Effect on Oils and Fats Availability •US position – tallow rated better than vegetable oils on greenhouse

gas emissions.

•European position – tallow gets a double tax benefit for biofuels in

some countries

•Neste type technology – can use any oil as feedstock (TO, PFAD, PS,

Tallow, Soya, Rape)

Net effect -

In addition to the vast quantities of fats and oils taken from traditional

uses , the price advantage of the cheaper feedstocks favoured by

oleochemicals will be prejudiced and some may just disappear

In the EU biodiesel market, used cooking oil methyl ester is now by far the most expensive, with tallow ME just ahead of rapeseed ME.

800

1,000

1,200

1,400

1,600

1,800

Sep-09 Mar-10 Sep-10 Mar-11 Sep-11

US$/t

on

ne

FAME 0 RME (B100) PME (B99-100) Tallow ME UCOME

Glycerine Price - Biodiesel effect •Long term low prices due to massive

volumes from biodiesel

•New uses only stop this being an

absolute disaster

•Too high prices turn off new uses

•Rapid price cycling as non-traditional

uses come on and off due to price

fluctuation

Historic glycerine production volumes, by sector,

1980-2010

0

1

2

3

4

5

6

7

8

9

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Million T

onnes

North America Europe South East Asia Rest of Asia South America Rest of the World

The biodiesel production growth has kept crude glycerine prices in check, when other commodity prices have been strong.

0

200

400

600

800

1,000

1,200

1,400

1996 1998 2000 2002 2004 2006 2008 2010

EU

Cru

de G

lyce

rin

e, $

per

ton

ne

EU Crude Glycerine EU CPO

Refined glycerine has settled at a premium of over $400 above crude glycerine prices, and have now fallen well below CPO prices.

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

1996 1998 2000 2002 2004 2006 2008 2010

EU

Cru

de G

lyce

rin

e, $

per

ton

ne

EU Crude Glycerine EU CPO EU Refined Kosher Glycerine

Indonesian Export taxes

•Keeps a cost advantage for domestic

industry

•Disadvantages the rest of the world

•Will there be retaliation? (Import

duties, anti-dumping taxes, quotas)

•Unnecessary capacity may be built in

Indonesia causing spare capacity

elsewhere (on a global basis)

The new Indonesian export tax system has reduced the export taxes on RBD palm stearin by approximately half

0%

5%

10%

15%

20%

25%

<700 750-

800

850-

900

950-

1000

1050-

1100

1150-

1200

>1250

Exp

ort

tax r

ate

, %

New tax structure Previous export tax structure

At the same time, the Indonesian government has introduced relatively high export taxes on PFAD, after a long period with no such taxes

0%

5%

10%

15%

20%

25%

<700 750-

800

850-

900

950-

1000

1050-

1100

1150-

1200

>1250

Exp

ort

tax r

ate

, %

New tax structure Previous export tax structure

Anti – Dumping Duties on Alcohols

•Formal complaint by two European producers

•EU puts variable anti-dumping tariffs on

Malaysian, Indonesian and Indian producers

•A number of the affected producers claim not

to have shipped alcohol to the EU in the

period in question

•One complainant has now withdrawn

Users are upset, producers are upset

Sustainability Issues •Land use, Raw materials, Pipeline, Storage, Traceability, etc.

•But does the ultimate consumer really want it? NO, the ultimate consumer wants no more deforestation and safe raw materials, doesn’t care about the rest and certainly doesn’t want to pay for it •For oleochemicals the danger is being hijacked by the edible/biofuel industry problems

What’s next?

•Geographic expansion? - Indonesia,

China, India, South America

•Contraction? – US, Europe

•Downstream activities? - surfactants,

consumer products.

•Green chemistry - new ways of

making chemicals from natural

sources.

An explosion of new names, along with some

familiar players…

Thank you for your kind attention

Acknowledgements: LMC International, Oleoline/HBI, Industry Players; Biofuels Digest;

BIO; Biorefining Week; Benson Ford Research Center; & ICIS