Market and Technology Foresights for the Oleochemical Industry,

and Market Outlook for the Southeast Asia Region

W.F. KeeSenior Industry Analyst

Technical InsightsJune 1, 2010

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Focus Points

Oleochemicals Background

Key Drivers and Challenges

Value Chain of the Oleochemical Industry

Existing and Emerging Applications

Technology Roadmap

Market Outlook

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“Oleochemicals” refer to chemicals derived from natural oils and fats of both plant and animal origin.

In the last decade, the oleochemical industry has been growing steadily due to increased global demand for more environment-friendly products. This is because of oleochemicals’ attractive traits;

•Derived from renewable resources; •Non-toxic;•Readily biodegradable.

As such, oleochemicals are greener alternatives to petrochemicals, which are obtained from exhaustible or non-renewable fossil fuels.

In Southeast Asia, the major raw material being used to produce oleochemicals are palm oil, palm kernel oil, and coconut oil, as these crops are grown abundantly in this region.

The main oleochemicals manufactured in Southeast Asia are fatty acids, glycerine, methyl esters, and fatty alcohols.  .

Oleochemicals BackgroundWhat are Oleochemicals?

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Crude Palm Oil Crude Palm Kernel Oil

Crude Palm Oil Crude Palm Kernel Oil

RBD Palm OilRBD Olein

RBD Stearin

RBD Palm OilRBD Olein

RBD Stearin

Fatty Acids, Fatty Alcohols,

Esters, Glycerine

Fatty Acids, Fatty Alcohols,

Esters, Glycerine

Soap Noodle,Ethers,

Amines/ AmidesMethyl stearates

Soap Noodle,Ethers,

Amines/ AmidesMethyl stearates

Soaps, cosmetics,

pharmaceuticals, rubbers, plastic, food additives, confectionary

Soaps, cosmetics,

pharmaceuticals, rubbers, plastic, food additives, confectionary

OIL PALM PLANTATION

CRUSHERS /MILLS

REFINERS

BASIC OLEOCHEMICALS

DOWNSTREAM OLEOCHEMICALSEND USER

Specialty Fats

Specialty Fats

Palm Fruit - FFBsPalm Fruit - FFBs

SPECIALTY FATS

Value Chain of the Oleochemical IndustryValue Chain Analysis

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Value Chain of the Oleochemical IndustryTypical Profits Along the Value Chain

PALM PLANTATION

CRUSHERS /MILLS

REFINERS BASIC OLEOCHEMICALS

DOWNSTREAM

OLEOCHEMICALS

END USER

PR

OF

IT

MA

RG

IN (

% O

F T

UR

NO

VE

R)

CHAIN

SPECIALTY FATS

< 3%

10-18%

50-100%Profit Margins are higher for Plantation companies due to high price of

FFB in 2008/09.

Profit Margins are lower for processing companies due to high raw material cost, forcing processors to run below capacity in 2008/09.

3-6%(10-15%)

5-10%(8-15%)

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DRIVERS 1-2 years 3-5 years

Higher demand of oleochemicals coming from consumer market

HIGH HIGH

Wide availability of raw material Medium Medium

New uses and new demand Low Medium

Growing markets for green chemicals Low Medium

Market ForesightsIndustry Drivers

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CHALLENGES 1-2 years 3-5 years

Global downturn of economy HIGH Medium

Cash rich plantation companies eyeing the market, increases threat to existing participants

Medium Low

Growth of biodiesel industry Medium Low

Occurrence of “boom and bust” cycle Medium Low

Market ForesightsIndustry Challenges

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Biolubricants

Existing and Emerging Application Sectors

Existing and Existing and Emerging Emerging

ApplicationsApplications

Food Emulsifiers

Cosmetics

Green Chemicals

Bioplastics

Biopolymers

Soaps and Detergents

Misc.

Existing Application Sectors Emerging Application Sectors

Surfactants

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Biolubricants Future …

Cost & Properties Regulations

• Biolubricants are 2,5 to 3,0 times more expensive than conventional but also half as much as fully synthetic lubricants

• Vegetable oils present issues with their oxidative and temperature stability

• European Eco-label harmonises specifications across European countries

• National legislation and initiatives in Germany, Austria, Switzerland, Sweden, France and Portugal

SUSTAINABILITY

It is expected that by 2030 the majority of lubricants will be made biodegradableIt is expected that by 2030 the majority of lubricants will be made biodegradable

Negative Positive

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Other Emerging Applications

Bioplastics

In the industrial sector, bioplastics hold applications chiefly in market sectors such as packaging, electronics, automotive and agriculture. For now, bioplastics have the largest application in the packaging industry.

BiopolymersBiopolymers are a new and exciting area of research in the medical field, inciting tremendous optimism to be employed in three main end-sector applications, namely the medical devices, tissue engineering and the drug delivery market.

Environmentally friendly plastics may be made from sugar cane.

Tissue heart valve made with biomaterials.

Green ChemicalsThe emergence of oleochemicals as a viable in applications such as detergents and personal care products will also see the gradual replacement of petroleum derivatives with vegetable oil-derivatives in applications such as paints, coatings, and adhesives.

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Technology Roadmap

Present 20252015 2020

TIMELINE

Ap

plic

atio

n

Biolubricants

Bioplastics

Green chemicals

Biopolymers

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Market Outlook for Southeast Asia

Fatty Alcohol (2010)A growth of more than 5% is expected. Nevertheless, prices is expected to remain steady.

Fatty Alcohol (2010)A growth of more than 5% is expected. Nevertheless, prices is expected to remain steady.

Refined Glycerin (2010)Asian refined glycerine prices is expected to remain low due to oversupply. Overall regional supply of refined glycerine is projected to exceed 400,000 tonnes. Demand for refined glycerine is expected to grow at a slower pace of 5.8%. Anticipation is on new downstream applications for refined glycerine (e.g. epichlorohydrin plants), coming online in 2012.

Refined Glycerin (2010)Asian refined glycerine prices is expected to remain low due to oversupply. Overall regional supply of refined glycerine is projected to exceed 400,000 tonnes. Demand for refined glycerine is expected to grow at a slower pace of 5.8%. Anticipation is on new downstream applications for refined glycerine (e.g. epichlorohydrin plants), coming online in 2012.

RecommendationsLong-term prospects seem to be profitable as there is a trend to shift from petrochemicals to oleochemicals. Southeast Asian companies with the advantage of economies of scale in base oleochemicals would likely gain from this opportunity.

To withstand the current challenges in the industry, a high level of integration is a key factor for survival in this market.

RecommendationsLong-term prospects seem to be profitable as there is a trend to shift from petrochemicals to oleochemicals. Southeast Asian companies with the advantage of economies of scale in base oleochemicals would likely gain from this opportunity.

To withstand the current challenges in the industry, a high level of integration is a key factor for survival in this market.

Overall2009 was an exceptionally tough year for the global oleochemicals market. The first half of 2009 witnessed some of the slowest business conditions on record. Although a slight recovery was seen in the second half of 2009, however, profitability is still down, especially for fatty acid and glycerine producers. In 2009, Southeast Asian companies were operating at a level of 10 percent or below-profit margins.

Overall2009 was an exceptionally tough year for the global oleochemicals market. The first half of 2009 witnessed some of the slowest business conditions on record. Although a slight recovery was seen in the second half of 2009, however, profitability is still down, especially for fatty acid and glycerine producers. In 2009, Southeast Asian companies were operating at a level of 10 percent or below-profit margins.

Fatty Acid (2010)Demand for fatty acids is expected to be strong, in line with demand growth for consumer products such as cosmetics and plastics. If palm oil prices continue to rise, fatty acid prices will go up as well. Regional output is estimated to be at about 3.5 million MT.

Fatty Acid (2010)Demand for fatty acids is expected to be strong, in line with demand growth for consumer products such as cosmetics and plastics. If palm oil prices continue to rise, fatty acid prices will go up as well. Regional output is estimated to be at about 3.5 million MT.

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• The global market for oleochemicals has been thrown in the air due to the current turbulence in the market, pricing of raw materials, and the degradation of downstream markets.

• However, these markets present opportunities (especially in Asia), and some companies may have assets for sale.

• Frost & Sullivan feels more bullish about the fatty acids market, then it does with regards to the other oleochemicals which may show signs of greater competition.

• Consolidation is expected in the market and certain players will fall out.

• Growth is likely to be concentrated in Asia but logistics costs have come down making the US accessible again.

• Margin have been hit but should be recovering soon.

• Key to watch out will be higher CPO prices again.

• “Greening” of the chemicals industry presents opportunities for supply into paints, coatings, cosmetics, lubricants, plastics etc

• Companies who are dynamic during recession grow significantly better than companies which “wait to see what happens”

Conclusion

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For Additional Information

W.F. KeeSenior Industry AnalystTechnical Insights+603 6207 1051waifun.kee@frost.com