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 Whats 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)

9 8 7

Million Tonnes

6 5 4 3 2 1 0 2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

North America

E urope

S outh E Asia ast

Rest of Asia

S outh America

Rest of the World

Historic and forecast fatty acid production volumes, by region (2005-2020)

9 8 7

Million Tonnes

6 5 4 3 2 1 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 North America E urope S outh E Asia ast Rest of Asia S outh America Rest of the World

Historic and forecast fatty alcohol consumption volumes, by region (2000-2020)

4.0 3.5 3.0

Million Tonnes

2.5 2.0 1.5 1.0 0.5 0.0 2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

North America

E urope

S outh E Asia ast

Rest of Asia

S outh America

Rest of the World

Historic and forecast fatty alcohol production volumes, by region (2005-2020)

4.0 3.5 3.0

Million Tonnes

2.5 2.0 1.5 1.0 0.5 0.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 North America E urope S outh E Asia ast Rest of Asia S outh 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)

26 24 22 20 18

Million Tonnes

16 14 12 10 8 6 4 2 0 1995 1998 North America India 2001 E urope Other Asia 2004 S outh E Asia ast S outh America 2007 China Rest of the World 2010

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

750

625 500 375 250 125 0 -125 -250 -375 -500 Jan-06

Year-on-Year Price Change, M$/tonne

600 450 300 150 0 -150 -300 -450 -600 Jan-01

Year-on-Year Stock Change, '000 mt

Jan-02

Jan-03 Price Change

Jan-04

Jan-05

Stock Change

The relationship has broken down since mid-2007

2,000 1,000 800 600 400 200 0 -200 -400 -600 -800 -1,000 Jan-03 Jan-05 Price Change Jan-07 Jan-09 Jan-11 Stock Change

Year-on-Year Price Change, M$/tonne

1,600 1,200 800 400 0 -400 -800 -1,200 -1,600 -2,000 Jan-01

Year-on-Year Stock Change, '000 tonnes

Brent nominal crude prices plotted against ethylene, US$ per tonne

1,750

100

1,500

85

1,250

70

$ US per tonne

1,000

55

750

40

500

25

250

10

0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

-5

E thylene

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.

500

300 250 200 150 100 50 0 -50 -100 Jan-09 Jan-10 Jan-11 Average US & German Biodiesel Premium

Monthly Biodiesel Demand, '000 tonnes

460 420 380 340 300 260 220 180 Jan-07 Jan-08 US + German Demand

Premium, US$ per tonne

Edible oil prices vs crude oil 2006 - 2011

2,250 2,000

EU Prices, US$ per tonne

1,750 1,500 1,250 1,000 750 500 250 0 Jan-06 Brent Crude

Jan-07 Palm Oil

Jan-08 Soy Oil

Jan-09 Jan-10 Jan-11 Rapeseed Oil PKO Coconut Oil

Other oils vs crude oil

1,400 1,200 1,000

US$ per tonne

800 600 400 200 0 Jan-06

Jan-07 Brent Crude

Jan-08 Olein

Jan-09 Tallow

Jan-10 Stearin

Jan-11 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.

1,800

1,600

US$/tonne

1,400

1,200

1,000

800 Sep-09 FAME 0

Mar-10 RME (B100)

Sep-10 PME (B99-100)

Mar-11 Tallow ME

Sep-11 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

9 8 7

Million Tonnes

6 5 4 3 2 1 0 2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

North America

E urope

S outh E Asia ast

Rest of Asia

S outh America

Rest of the World

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

1,400 1,200

EU Crude Glycerine, $ per tonne

1,000 800 600 400 200 0 1996

1998

2000

2002

2004

2006 EU CPO

2008

2010

EU Crude Glycerine

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

2,000 1,800

EU Crude Glycerine, $ per tonne

1,600 1,400 1,200 1,000 800 600 400 200 0 1996

1998

2000

2002

2004

2006

2008

2010

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

25%

20%

Export tax rate, %

15%

10%

5%

0% <700 750800 850900 9501000 10501100 11501200 >1250

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

25%

20%

Export tax rate, %

15%

10%

5%

0% <700 750800 850900 9501000 10501100 11501200 >1250

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, doesnt care about the rest and certainly doesnt want to pay for it For oleochemicals the danger is being hijacked by the edible/biofuel industry problems

Whats 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