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Business Plan

Basic Oleochemicals: Asia

Business Plan Basic Oleochemicals: Asia Creating value is our business
Business Plan Basic Oleochemicals: Asia Creating value is our business

Creating value is our business

Oleochemicals: An Asian Perspective

What are oleochemicals?

What is the market?

Who are the players?

What does the future hold?

• What is the market? • Who are the players? • What does the future hold?

Creating value is our business

What are Oleochemicals?

Oleochemical are chemicals derived from plant oils and animal fats

Major use in surfactants, cosmetics, rubber, plastics & food industries

Used practically in every industry directly or as an intermediary

Similar to petrochemicals

BASICS

Broadly classified into Basics and Derivatives based on the number of steps involved in the

production

Production The first step is splitting the

Triglycerides in oil/fat to give:

Crude glycerine (sweet water)

A mixture of fatty acids

in oil/fat to give:  Crude glycerine (sweet water)  A mixture of fatty acids Creating

Creating value is our business

How are they manufactured?

Raw materials

Use of tallow as a feedstock reduced significantly after the outbreak of mad cow disease in Europe in the 1990s

As the industry shifts to Asia with abundance of palm oil, tallow is becoming obsolete

 CNO generally trades a premium to CPKO (historical average US$27.5/MT) C16-C18 chain lengths C8-C14
 CNO generally trades a premium
to CPKO (historical average
US$27.5/MT)
C16-C18 chain lengths
C8-C14 chain lengths
 Yields prone to weather vagaries
 Production reducing due to a
Tallow
Coconut oil
wilt disease for which no cure
Palm oil/Palm stearin
Palm kernel oil
has been found
No new plantations
Soybean, Canola, Babassu etc
 No new plantations Soybean, Canola, Babassu etc  Between them, PO and PKO cover the

Between them, PO and PKO cover the entire carbon chain lengths

Abundance of by- product Palm Stearin

chain lengths  Abundance of by- product Palm Stearin  Very low volumes and not used
 Very low volumes and not used because of cost, quality and availability considerations QUICK
 Very low volumes and
not used because of cost,
quality and availability
considerations
QUICK FACTS
• About 68% of all oleochemicals produced in 2010 were palm-based
• 20% of CPO produced is used as oleochemical feedstock
40% of the palm-based oleochemicals are made from palm oil/palm
stearin and the remaining 60% are made from palm kernel oil

Typical investment of US$ 25-40 million for a 200-500 TPD fatty acid splitter with production cost of around US$ 110 per MT output

Returns: ROI 6%-7%; IRR 7%; Margins 4%-5%

Low-tech, low-margin & capital intensive industry

; IRR 7% ; Margins 4%-5% • Low-tech, low-margin & capital intensive industry Creating value is

Creating value is our business

What are they used for?

What are they used for? • The major use of oleochemicals lies in various consumer goods
What are they used for? • The major use of oleochemicals lies in various consumer goods

The major use of oleochemicals lies in various consumer goods

manufacture

Oleochemicals may be classified into 5 major use categories

Surfactants: This is the biggest with 70% of oleochemicals used to manufacture surfactants. These surfactants are used in household and industrial cleaning, laundry detergents, shampoos and liquid soaps, oil

recovery, food processing and

textiles industry

Lubricants: Wide industrial use , in rubber as release agents, in textiles for lubricating fibers, food uses and greases

Cosmetics: Used in lotions, foundation, lipstick, toothpaste and perfumes

Ployols: Gylcerol is a simple polyol. This and other oleochems are used in the polymer industry as (1) polymer material, (2) polymer additives and (3) building blocks

Agrochemicals: Most important use in this segment in as an emulsifying agent in pesticides

Creating value is our business

What is the Market Evolution

• A traditionally western industry with tallow as predominant feedstock • Consumer goods companies like
• A traditionally western industry with tallow as predominant feedstock
• Consumer goods companies like Unilever, P&G and Henkel used to manufacture oleochemicals for in-
house consumption
HISTORY
• AcidChem (now IOI Oleochemicals) first started producing oleochemicals by splitting palm oil in the
• AcidChem (now IOI Oleochemicals) first started producing oleochemicals by splitting palm oil in the
1980s
• This being a low-tech industry, Malaysian companies were able to effectively compete with Japanese
tallow-based manufacturers like Kao Corp due to
 Abundant availability of palm
 Cash-rich plantation companies looking for new opportunities
 Low cost of production
 Efficiency
 Good infrastructure
• Huge profit margins led to increased number of players and commoditization of the products, which
squeezed margins in this sector
• Current industry margins are at 4%-5% and average capacity utilization of 80%-85%
However, best cost producers are running their plants at full capacity
• No capacity increase in Malaysia in the last 4 years
MARGIN SQUEEZE
RISE OF MALAYSIA
• No capacity increase in Malaysia in the last 4 years MARGIN SQUEEZE RISE OF MALAYSIA

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What is the Market Current State

CAPACITIES
CAPACITIES
• Inefficient European producers like Henkel and Unilever sold their operations; P&G has moved operations
• Inefficient European producers like Henkel and Unilever sold their operations; P&G has moved
operations into SE Asia
• Indonesia, being the biggest palm producer, is trying to emulate Malaysia and is giving export tax
exemptions to promote downstream activities
 Huge population to feed – high demand for edible palm oil
 Plagued by infrastructure bottlenecks
 Low margins discourage cash-rich plantation companies from investing in downstream
 Further downstream to final products profitable but very competitive; large marketing investment
• Most of the recent trends in SE Asia dictated by government policy
 Windfall profits tax (WPT) in Malaysia
 Export tax exemptions in Indonesia
• New trend is towards efficient Malaysian producers locating production capacities close to major
consumers (Europe, USA & China) to optimize on transportation
RECENT TRENDS
to major consumers (Europe, USA & China) to optimize on transportation RECENT TRENDS Creating value is

Creating value is our business

What is the Market Demand

• Total world wide consumption of oleochemicals in 2010 was 10 million MT (US$ 15
• Total world wide consumption of oleochemicals in 2010
was 10 million MT (US$ 15 million)
• Oleochemical consumption is driven by increase in per
capita disposable income
• The biggest consumers are the USA and Europe,
followed by China
• India lags behind in oleochemical production as well as
consumption
• China accounted for roughly 1.8 million MT of oleochem
consumption in 2010
 Huge and growing population
 Booming construction sector
 Infrastructure development
 Demand met by local production and imports
Source: LMC, ICIS
Per Capita Consumption (US$)
Source: Euromonitor, 2006
Source: ICON Group
CONSUMPTION
Per Capita Consumption (US$) Source: Euromonitor, 2006 Source: ICON Group CONSUMPTION Creating value is our business

Creating value is our business

Who are the Players?

• Emery Oleochemicals – JV between plantation company Sime Darby and Thai chemical company PTT
• Emery Oleochemicals
– JV between plantation company Sime Darby and Thai chemical company PTT
– Presence in Malaysia, Japan, China, Germany and USA
• IOI Oleochemicals
Previously AcidChem; now owned by plantation company IOI
• KL Kepong Oleochemicals
Part of the major plantations company KL Kepong
– Presence in Malaysia, China & Europe
• Wilmar Palm & Laurics
– Acquired Natural Oleochemicals
– Presence in Malaysia, Indonesia, China, Europe and Vietnam
– JVs in India, Russia & Ukraine
• Indonesia: Musim Mas, Sinar Mas, Bakrie Sumatera
• P&G Chemical in Malaysia; planning expansion into Indonesia – captive market exists
• Niche players like Matrix
MAJOR PLAYERS
into Indonesia – captive market exists • Niche players like Matrix MAJOR PLAYERS Creating value is

Creating value is our business

Who are the Players Strategy

• Standalone oleochemical players being taken over by plantations companies – Consolidated customer base: B2B
• Standalone oleochemical players being taken over by plantations companies
– Consolidated customer base: B2B business in which customers (Unilever, P&G, Henkel, Reckitt
Benckiser, etc) have high pricing power – small players cannot make enough margin to survive
– Low margins: Without the backing of plantations, it would not be possible to operate as a
standalone player
– Volume play
– Taxation: WPT in Malaysia and export tax in Indonesia
– Diversification: Oleochemicals correspond to 20% of total palm demand; major plantation
companies have a diversified product portfolio of CPO/CPKO, RBD PO/PKO and Oleochemicals
• 2011: Wilmar’s JV with Elevance Renewable Sciences (Indonesia)
• 2010: Natural Oleochemicals acquired by Wilmar
• 2010: Uniquema Germany (formerly Unilever’s oleochem division, then Croda) acquired by KLK
• 2009: Capacity closures in Europe and North America
• 2007: Pan Century acquired by IOI International
• 2007: Uniquema Malaysia acquired by KL Kepong
• 2007: Twin Rivers Technologies (USA) acquired by Felda
• 2007: Emery JV between Sime and PTT; Emery was previously Cognis’ oleochem business
• Emery planning JVs with local players in Korea and Holland
RECENT DEALS
INTEGRATION
• Emery planning JVs with local players in Korea and Holland RECENT DEALS INTEGRATION Creating value

Creating value is our business

What does the Future hold?

Emergence of BRICS Demand • Low current per capita consumption -> great potential • Emergence
Emergence of BRICS Demand
• Low current per capita
consumption -> great potential
• Emergence of the Indian middle
class – increased consumption
of consumer goods
Oleochem Demand 2015 • Developed nations demand stagnating: growth @2%-3% pa • Emerging economies to
Oleochem Demand 2015
• Developed nations demand
stagnating: growth @2%-3% pa
• Emerging economies to grow @
9%-10% pa
Oleochem Demand 2020 • Industry expected to grow at about 8% pa • Palm’s share
Oleochem Demand 2020
• Industry expected to grow at
about 8% pa
• Palm’s share expected to rise
• Petrochemicals are NOT
substitutes
about 8% pa • Palm’s share expected to rise • Petrochemicals are NOT substitutes Creating value
about 8% pa • Palm’s share expected to rise • Petrochemicals are NOT substitutes Creating value
about 8% pa • Palm’s share expected to rise • Petrochemicals are NOT substitutes Creating value
about 8% pa • Palm’s share expected to rise • Petrochemicals are NOT substitutes Creating value

Creating value is our business

How is the Industry – Porter’s Analysis

Threat of New Entrants: VERY LOW 1. Capital-intensive 2. Low margins 3. Powerful and competitive
Threat of New Entrants:
VERY LOW
1. Capital-intensive
2. Low margins
3. Powerful and competitive
existing players
Bargaining Power of Consumers:
VERY HIGH
1. Consolidated consumer base
2. Large and powerful players
like Unilever and P&G
Oleochemical
Bargaining Power of Suppliers:
Industry
VERY LOW
1. Large number of suppliers
2. Palm oil is an abundant and
ATTRACTIVE ??
widely traded commodity
is an abundant and ATTRACTIVE ?? widely traded commodity Threat of Substitute Products: LOW 1. Tallow
Threat of Substitute Products: LOW 1. Tallow becoming obsolete 2. CNO short supply & higher
Threat of Substitute Products:
LOW
1. Tallow becoming obsolete
2. CNO short supply & higher
priced
3. Petrochemicals are only
complements and not substitutes
Competitive Rivalry
within Industry
VERY HIGH
1. Large players like
Wilmar and Sime with
plantation backing
2. Squeezed margins
Government Policy:
SE Asian industry highly

dependent on export tax exemptions

Creating value is our business

Critical Success Factors

1. Sufficient scale to match the bargaining power of customers

2. Raw material availability and sourcing capability

3.

Ability to do large volumes

Necessary since the margins are very low

Relationship-based business: Ability to meet specific consumer demands like quality and sustainable/traceable production

4.

Ability to run at full capacity/ Efficiency in operations to minimize production costs/fixed costs per unit of output

5.

THE EDGE: Favorable government policy (tax exemptions) OR logistic advantage

5. THE EDGE : Favorable government policy (tax exemptions) OR logistic advantage Creating value is our

Creating value is our business

Long-term View

• Greater integration and consolidation in the industry • Expansion of Asian majors into consumer
• Greater integration and consolidation in the industry
• Expansion of Asian majors into consumer markets through acquisitions and JVs to
achieve scale
• Emergence of BRICS are major consumers
• Indonesia – a lot depends on the final outcome of the export tax duty structure
• Africa – being a net importer of edible oil, governments might discourage exports of
palm products until they become self-sufficient
3-5 YEARS
• Forward integration of Asian majors into final products in local markets since this is
• Forward integration of Asian majors into final products in local markets since this is
where value lies
– Companies like KLK already doing this
• Demand will be driven by research and identification of new uses
• African demand for oleochemicals will become significant – will be the new Asia
• Emergence of a large number of niche players to cater to diverse needs for specialty
chemicals, especially in personal care, cosmetics and pharmaceuticals
10 YEARS
specialty chemicals, especially in personal care, cosmetics and pharmaceuticals 10 YEARS Creating value is our business

Creating value is our business

Future Scope

Future Scope 1. Better understanding of Indonesia and China 2. Greater detail into the cost structure

1.

Better understanding of Indonesia and China

2.

Greater detail into the cost structure and duty structure

in Africa

3.

Study and estimation of demand for sustainable palm

products

4.

Understanding the industry from a customer perspective FMCG companies

5.

Study of niche oleochem derivatives players

perspective – FMCG companies 5. Study of niche oleochem derivatives players Creating value is our business

Creating value is our business

ACKNOWLEDGEMENTS

Sources of Information & Insights

Research/Study ICIS News ICIS Pricing News articles & commentary Published expert opinion Research papers Company research reports Company websites & annual reports Conference presentations Cost sheets of existing plants MPOB/MPOC statistics & publications

Face-to-face Meetings

Mr. M R Chandran, Platinum Energy

Mr. Sudarshan, Lipotech Engineering

Mr. George Joseph, NatOleo

Mr. Raghunathan Nair, Virgoz Fats & Oils

Dr. Hazimah, AOTD-MPOB

Dr. Faizah, EID-MPOB

Telephonic Conversations:

Mr. Azemal, GAPKI

Ms. Lei Lei Wong, ICIS Price Reporter

DISCUSSION
DISCUSSION

In the pipeline:

Unilever and P&G

Matrix

Mr. Symon Lee, Eastport Maritime

DISCUSSION In the pipeline: Unilever and P&G Matrix Mr. Symon Lee, Eastport Maritime Creating value is

Creating value is our business