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Business Plan

Basic Oleochemicals: Asia

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Oleochemicals: An Asian Perspective
What are oleochemicals? • What is the market? • Who are the players? • What does the future hold? •
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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 • 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
BASICS

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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

C16-C18 chain lengths Tallow Palm oil/Palm stearin

C8-C14 chain lengths Coconut oil Palm kernel oil

Soybean, Canola, Babassu etc

 CNO generally trades a premium to CPKO (historical average US$27.5/MT)  Yields prone to weather vagaries  Production reducing due to a wilt disease for which no cure has been found  No new plantations  Between them, PO and PKO cover the entire carbon chain lengths  Abundance of byproduct Palm Stearin

 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
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What are they used for?
• 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

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What is the Market – Evolution
HISTORY
MARGIN SQUEEZE
• A traditionally western industry with tallow as predominant feedstock • Consumer goods companies like Unilever, P&G and Henkel used to manufacture oleochemicals for inhouse consumption • 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

RISE OF MALAYSIA

• 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

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What is the Market – Current State
CAPACITIES
• 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
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RECENT TRENDS

What is the Market – Demand
• 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

CONSUMPTION

Per Capita Consumption (US$)

Source: Euromonitor, 2006

Source: ICON Group

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Who are the Players?
• 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

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Who are the Players – Strategy
• 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
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RECENT DEALS

INTEGRATION

What does the Future hold?
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 grow @ 9%-10% pa Oleochem Demand 2020 • Industry expected to grow at about 8% pa • Palm’s share expected to rise • Petrochemicals are NOT substitutes
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How is the Industry – Porter’s Analysis
Threat of New Entrants: Threat of Substitute Products:

VERY LOW
1. Capital-intensive 2. Low margins 3. Powerful and competitive existing players Bargaining Power of Consumers:

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. Consolidated consumer base
2. Large and powerful players like Unilever and P&G Bargaining Power of Suppliers:

VERY HIGH
1. Large players like Wilmar and Sime with plantation backing
2. Squeezed margins Government Policy:

Oleochemical Industry

VERY LOW
1. Large number of suppliers

2. Palm oil is an abundant and widely traded commodity

ATTRACTIVE ??

SE Asian industry highly dependent on export tax exemptions
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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

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Long-term View
• 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
• 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 3-5 YEARS 10 YEARS

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Future Scope
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

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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. 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 Mr. George Joseph, NatOleo

In the pipeline:

DISCUSSION

Unilever and P&G
Matrix Mr. Symon Lee, Eastport Maritime
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ACKNOWLEDGEMENTS