Global oleochems brace for shock amid uncertain supply chains

HOUSTON (ICIS)–Global oleochemicals markets are bracing for potential shocks to the supply chain, as demand across the cleaning products and food and beverage supply chains surges alongside the continued spread of the coronavirus (Covid-19) pandemic.

A number of Malaysian oleochemical producers declared force majeure on 20 March amid confusion after Prime Minister Muhyiddin Yassin announced the Restricted Movement Order (RMO) on 16 March following a spike in coronavirus cases in the country.

The RMO – announced to contain the spread of the virus – mandates a full-on lockdown of the country apart from essential activity from 18 to 31 March, including border closures.

Following the announcement, the government approved the exemptions of several essential industries, allowing them to operate at a baseline capacity during the lockdown.

The initial exemptions included manufacturers of disinfectants, sanitisers and detergents.

Producers across the oil palm complex were initially thought to be included in the lockdown, prompting the Malaysian Palm Oil Association to request for the expansion of the exemption list to include palm plantations. Palm producers were granted exemptions as of the afternoon of 18 March.

Oleochemicals producers in the meantime continued to press on, unclear on whether the exemptions included the suppliers of the raw materials that go into these products.

Several Malaysian oleochemical producers subsequently declared force majeure amid uncertainty on whether they were allowed to operate during the lockdown, despite both upstream and downstream sectors being included on the exemptions list.

A source familiar with the matter said individual oleochemical companies also need to apply for exemptions to keep their plants running.

Some plants continue to run, but it remains unclear whether they will be granted the exemptions.

Malaysia is the world’s second-largest producer of palm and oleochemicals after Indonesia.

The continued spread of the virus could prompt Malaysia to take more drastic measures and prompt similar measures in Indonesia as governments look to contain the outbreak.

Asia’s oleochemicals markets felt the first impact of the virus during the early stages of the outbreak earlier in the quarter, as reduced demand from China put severe downward pressure on feedstock palm oil costs and squeezed production margins.

China is one of the largest consumers of palm oil and the largest consumer of oleochemicals in the world.

Reduced operating rates failed to stop the downward pressure, even as Indonesia and Malaysia’s palm oil inventories continued to fall amid the pursuit of increased biodiesel blending mandates of 30% (B30) and 20% (B20) rolled out at the beginning of the year.

The second major impact came after Saudi Arabia and Russia launched a crude oil price war against the backdrop of the continued spread of the virus outside China in key markets like western Europe and the US.

Decreased demand for diesel in fuels as governments impose heightened restrictions on transit, in addition to low oil prices, is putting increased pressure on Indonesia and Malaysia to fulfill the B30 and B20 mandates, raising concerns about crude glycerine production in the region and refined glycerine supply across the globe as demand for oleochemicals surges with the continued spread of the virus.

Glycerine is a byproduct of biodiesel production, so lower biodiesel output would also lower that for crude glycerine.

Biofuels production in Europe and North America is falling, while production in Argentina has come to a halt, adding to the concerns. Producers in Brazil – a major producer and exporter of crude glycerine – have also raised concerns that decreased diesel demand could lead to production cuts.

Asian, European and US glycerine markets have already started to react, with prices in all three regions increasing as supply-chain uncertainty grows and demand for applications in the cleaning-sector booms with the continued spread of the virus.

Even as China apparently starts to emerge from the worst of the outbreak, cases in Europe and the US continue to rise, sustaining demand in the market.

One US producer said a buyer increased the volume from its contracts by 50% for Q2 amid the supply-chain concerns.

Fatty acids and fatty alcohols are the next markets to face major disruptions along the global oleochemicals supply chain, as supply and demand start to outstrip declining feedstock costs in the negotiations for volumes.

Southeast Asian oleochemical producers continue to run at reduced rates to counteract squeezed margins. The force majeure declarations in Malaysia are unlikely to aid in the situation, as edible oils demand remains limited in the global market.

Vessels shipping oleochemicals to both Europe and the US were already heard to be delayed amid constraints posed by the coronavirus. The supply of fatty alcohols to both Europe and the US is heard to be growing particularly tight, as both regions are dependent on southeastern Asia for their supply of natural alcohols, while the US also imports a significant amount of synthetic alcohols from Europe.

The addition of local supply constraints will only further challenge the situation as increased travel restrictions delay the transit of goods, especially in regions hard hit by the virus like southern Europe.

In some instances shipping and delivery costs have heard to as much as doubled.

As such, global oleochemicals markets are likely to face upward pressure in the face of increased shipping and logistics constraints as supply chain uncertainty grows alongside increased demand for goods to combat the spread of the coronavirus.

In the meantime, market players are likely to closely watch developments in southeastern Asia and Europe, as disruptions in these markets typically trigger a trickle-down effect on markets in North and South America.

Glycerine is mainly used in personal and oral care products such as skincare creams, toothpastes and mouthwashes, as well as food products either as glycerine directly or one of its derivatives such as glycerol mono-stearate.

Mid-cut alcohols are mainly used to produce surfactants. This class of chemical products comprise numerous cleaning and detergent uses, ranging from household agents to oilfield applications.

Derived from animal fats and greases like tallow or vegetable oils and fats like palm and coconut oil, fatty acids are mainly used in cosmetics and toiletries, as well as for the production of lubricants and plasticizers in rubber and polymer processing.

Focus article by Lucas Hall

Additional reporting by Jackie Wong, Samantha Wright

Visit the ICIS Coronavirus topic page for analysis of the impact on chemical markets and links to latest news.