The surfactant industry, squeezed between soaring feedstock costsand customers in turmoil, is getting a new roster of leaders

MICHAEL MCCOY, C&EN Northeast News Bureau

Courtesy of Novozymes

Surfactant manufacturers who thought their business couldn't get any more difficult in 2000 than it was in 1999 were in for a surprise. The combination of steadily rising raw material costs and turmoil at many customers in the laundry detergent industry made for a tough 2000. The thin silver lining is that the restructuring that is following in the wake of these woes could lead to a new cast of leading surfactants players and a stronger industry in the long run.

"A roller-coaster ride" is how Richard Lundgren, senior vice president for surfactants, oxides, and derivatives at Huntsman Corp., describes the year just ended. Business started slowly, Lundgren says, due to stockpiling at the end of 1999, but it soon ramped up. "Sales, volumes, and revenue were rolling along well," he says. "Profits were mixed but almost unacceptable."

Then, as oil and then natural gas prices suddenly skyrocketed, profitability "went through the floor," Lundgren says. "The business went from okay, bordering on not okay, to a nightmare."

So far, Lundgren estimates, Huntsman has been able to pass through to customers only about 30% of the increased cost of raw materials it uses to make surfactants such as alkylphenol ethoxylates (APEs), linear alkylbenzene (LAB), and alcohol ethoxylates. Factor in energy used to run chemical plants, and the pass-through rate is even lower, he says.

James White, global business manager for surfactants at Union Carbide, one of the world's largest producers of APEs, estimates that, in the best cases, his company has recouped one-half of its cost increases. "We ended the year in a lot worse shape, relative to margins, than we began the year," he says.

Georg Schöning, board member at the German utility RWE-DEA responsible for the Condea surfactants business—soon to be sold to South Africa's Sasol—describes a similar situation. "We were able to increase our LAB prices by only 3 cents per lb, although 7 to 9 cents per lb would have been necessary" to recoup costs, he says. "The situation was similar for fatty alcohols."

Lundgren says Huntsman has announced energy surcharges and price increases on "everything that we make," but notes that profitability difficulties among customers in the detergents sector makes it extremely tough to ask them to pay more for raw materials.

THESE DIFFICULTIES played themselves out over the summer as two of the major U.S. detergent makers—Procter & Gamble and Dial Corp.—stumbled badly in the eyes of Wall Street.

At P&G, the troubles started in March when the company warned that earnings per share in its fiscal third quarter, which ends in March, would drop 10 to 11%, rather than rise 7 to 9% as previously expected. Three months later, the company announced a warning about its fiscal fourth quarter, revealing at the same time that its chief executive officer, Durk I. Jager, had resigned.

Similar problems emerged at Dial, producer of budget-priced Purex laundry detergent. In March, three days after P&G's first bombshell, Dial announced that its first-half earnings would be down 10 to 12%, compared with previous expectations of a rise of that amount. Dial issued another warning in June, and by August its CEO, Malcolm Jozoff, had announced his retirement. Company executives have since indicated that Dial is for sale.

"We ended the year in a lot worse shape, relative to margins, than we began the year."

Meanwhile, in June, Church & Dwight and USA Detergents, both second-tier detergents marketers, announced they would combine their laundry product businesses into a new $400 million venture. Called Armus, the venture is the third largest player in the $6 billion U.S. retail market for laundry detergents and fabric softeners, Church & Dwight says, after P&G and Unilever.

William Steele, who covers cosmetics, household, and personal care companies for Banc of America Securities in San Francisco, says the basic problem for these household product companies is that they are not able to grow as fast as they used to grow. "What we're facing is a global maturation of the industry," he says.

The U.S. market has been mature for a while, Steele explains, but until recently the big soapers were able to make up for slow growth at home with rapid international expansion. Once they established their worldwide infrastructures, however, "all these companies start to look to each other for incremental growth," Steele says. The result has been increasing competition and falling profits.

In an attempt to fix the situation—to bridge the gap between the profits they expected and those they were making—household product companies launched aggressive growth programs. Before resigning, Jager tried to coax P&G into bringing products to market faster. He also pursued transforming moves such as the dual acquisition of Warner-Lambert and American Home Products. Dial's Jozoff signed a deal with Henkel, Europe's number two laundry detergent maker, to bring out a premium version of Purex that would move the brand out of the value-price category.

But, as Steele says, these efforts "came back to bite them." Jager's exhortations didn't go over well in P&G's cautious corporate culture, and Dial and Henkel failed to convince customers to spend more for an advanced version of Purex.

Indeed, Henkel and Dial announced in early January that the premium detergent, Purex Advanced, has been discontinued and that the Purex brand has been removed from their joint venture; the venture now includes only the Custom Cleaner home dry-cleaning business. In addition, Henkel has purchased Dial's interest in a Mexican detergents venture.

HENKEL, which had been seeking a laundry products toehold in North America, is now focusing only on Mexico. The company recently agreed to acquire Colgate-Palmolive's $76 million-per-year Viva brand of laundry detergent in Mexico. Colgate, a minor player in the North American detergents market, says it is de-emphasizing detergents in favor of higher-margin oral and personal care products.

In this cutthroat environment, detergent industry suppliers are making use of whatever leverage they can find. According to James Coletta, vice president of Lonza's biocides unit, being able to help customers grow is one sure-fire way to get on their good side and avoid competing on price alone.

Although some of the soap manufacturers' grander schemes have failed, they are still very interested in sales, or top-line, growth, Coletta says, because earlier efforts to improve the bottom line by cutting costs out of the supply chain have largely run their course.

TO SUCCEED, specialty chemicals makers must offer the innovative ingredients that the soapers need to expand their offerings. "If you don't have new products and new ideas that attract consumers, then the power of your brands goes away," Coletta says. "I've been to more meetings in the last few months where there is a renewed emphasis on having strong brands and innovating with them."

Commodity surfactant suppliers, on the other hand, are more limited in the innovation they can bring. In the big-volume detergent alcohol market, producers are relying on a dearth of new capacity in recent years to thwart attempts by buyers to bargain down prices.

Bill Colquhoun, product vice president for higher olefins and derivatives at Shell Chemicals, the number two detergent alcohol maker, notes that in a global market of close to 2 million metric tons annually, no new alcohol plant has been built in more than five years.

The only major expansion has come from Condea, which over the past three years has increased capacity across its system of three fatty alcohol plants by 120,000 metric tons per year, to a total of 500,000 metric tons. Schöning says the company will bring on an additional 10,000 to 20,000 tons by the end of 2001, "securing Condea's position as the world's leading supplier."

But with growth rates for alcohol-based surfactants expected at 2 to 4% per year in developed countries and 3 to 7% in developing economies, Colquhoun says there is a need for a new world-scale plant every two to four years to sustain growth.

Shell stepped up in November by announcing board approval for a previously proposed 150,000-metric-ton alcohol capacity expansion in Geismar, La. The project, set for completion by mid-2002, involves construction of a plant employing Shell's Hydroformylation process and incremental expansion of three existing units.

Sasol, meanwhile, said in May that it would go ahead with its own new detergent alcohol plant in Secunda, South Africa. Expected to be commissioned in March 2002, the plant will add 120,000 metric tons of capacity to the world market.

Sasol officials say this project will go ahead as planned despite the acquisition of Condea, announced in December. In fact, they expect to reap synergies by being able to market the new plant's output through Condea's existing distribution network.

The market for LAB, the other major commodity surfactant raw material, is somewhat better supplied, but still in good balance. Max Negrin, project director for a new study of the global LAB market put out by the consulting firm Colin A. Houston & Associates, says 425,000 metric tons of LAB capacity will be added around the world between 1999 and 2005—enough to keep the market in balance. After 2005, however, planned new capacity will not be sufficient to satisfy global demand growth of 3.6% annually, Negrin says.

According to Negrin, 70% of the new LAB capacity in the next five years will be installed in the Asia-Pacific region. However, the two industry leaders today are Western companies—Condea and Spain's Petresa—and they manufacture mostly in Europe and North America.

Schöning says Condea is in the midst of expanding LAB capacity at its Augusta, Italy, facility from 120,000 to 220,000 metric tons per year—a project that will make Augusta the largest single LAB plant in the world, he notes.

Condea's Baltimore plant is undergoing conversion from older monochloroparaffin technology to the newer Pacol process developed by the process technology firm UOP. Schöning says Condea expects to decide later this year on the "medium term" future of its Porto Torres, Italy, plant, which also uses the monochloroparaffin route.

Petresa, which rivals Condea for capacity leadership in LAB, expanded its global reach in late 1999 through the acquisition of Deten, Latin America's leading LAB producer. Mark Quintyn, Petresa's commercial director, says the purchase increased the company's capacity to 560,000 metric tons per year among plants in Spain, Brazil, and Canada.

Although LAB supplies are adequate, both Quintyn and Schöning point to limited availability of feedstock n-paraffin as something of a wild card in the LAB market. A downed Shell plant in Malaysia restarted last year, providing some relief, but no new paraffins capacity is expected for the next two years, Schöning says.

Fast Action Detergent granule formulation disperses quickly on addition to water.

PRICES ARE RISING everywhere, but they are rising on some products more than others. Consequently, detergent buyers and suppliers alike are seeking out those products where raw material increases have been the least onerous.

Shell's Colquhoun acknowledges that there has been some "tactical switching" from ethylene-based surfactants like detergent alcohols to paraffin- and oleochemical-based surfactants as a result of the recent underlying feedstock trends. "There have been such excursions in the past and no doubt will be in the future," he says. "Long term, we believe the growth prospects for alcohol-based surfactants are robust."

Oleochemical surfactant makers in particular are smiling because prices for palm and coconut oils have fallen sharply in the past year while that of ethylene was rising. The change for coconut oil is most dramatic: prices earlier this month were 16.5 cents per lb, versus 41 cents a year ago. Ethylene, meanwhile, is about 30 cents per lb, up from 20 cents a year and a half ago, and is poised to rise as much as 5 cents per lb in January because of the recent natural gas price surge.

Rob Frohn, who heads Akzo Nobel's surface chemistry unit, says the impact of lower feedstock prices has been dramatic in Southeast Asia, where Akzo operates a joint-venture fatty acids plant. "Two years ago, Asian plants were at 60% of capacity or less," he says. "Today, they are running full out. That's an amazing turnaround."

Fred Hessel, North American Care Surfactants business director at Cognis, the chemicals unit of Henkel and the world's leading oleochemical producer, agrees that companies like Cognis are enjoying the current picture. "Right now, it's a fairly good market for the oleochemical producers versus the petrochemical producers," he says, although oleochemical-based surfactants typically contain ethylene oxide or other petrochemicals that are rising in price.

WHOLESALE SWITCHING from one surfactant class to another is unlikely, Hessel contends. Long-term contracts and formulation restrictions keep some consumers from changing their surfactants. Plus, he adds, supply is just as snug for many oleochemical surfactants as it is for synthetic detergent alcohols.

Still, Hessel sees growth opportunities for Cognis, although not so much due to the price of its surfactants as their performance benefits. For example, he notes that the new highly compact detergent tablets launched last year in the U.S. by P&G and Unilever run the risk of "nonionic bleed"—a phenomenon in which liquid nonionic surfactants such as alcohol ethoxylates bleed out of a product when formulated at high concentrations.

Cognis' APG brand alkylpolyglucoside surfactants, on the other hand, are solid at room temperature and are well suited to tablet manufacture, Hessel says. APGs can also help soapers get around a second tablet problem called gel phase, in which a nonionic surfactant gels up during dilution in the wash—an unwelcome occurrence when quick dissolution is desired.

RESPONDING to customer concerns over ethylene-based surfactant prices, Stepan is coming out with a new oleochemical-based laundry surfactant. Edward Buening, Stepan's vice president for laundry and cleaning products, says the company is applying its expertise in producing sulfonated methyl esters for the bar soap market to feedstocks like palm oil. The process, which Stepan wants to apply to U.S. vegetable oils, yields a long-chain surfactant suited to laundry applications.

Buening says the new product will compare favorably to workhorse LAB sulfonates and alcohol ether sulfates. "Oleochemicals haven't had the same price runup," he says, "so there's an opportunity to look at an oleo-based sulfonated methyl ester for laundry use that has an attractive cost target."

Among synthetic surfactants, price-pressured customers are taking a new look at alkylphenol ethoxylates, according to Huntsman's Lundgren, and are coming away with a new appreciation for their cost-performance advantages. Lundgren acknowledges that APEs have come under fire for perceived degradation and endocrine disruption problems, but he says industry efforts to explain the science behind APEs to customers are working. "If anything, we are seeing a rejuvenation of the APE business," he says.

Union Carbide's White gives a lot of the credit for the health of the APE business to the APE Research Council, an industry association that seeks to understand the human health and environmental profile of APEs and their biodegradation intermediates. "We continue to be bullish on the environmental acceptability of APE surfactants," White says.

Union Carbide's surfactants business will become part of Dow Chemical if and when Dow finally reaches an agreement with federal antitrust regulators on the issues that have held up its purchase of Carbide for so long. The larger Dow surfactants organization will then be one of several that are emerging as new leaders in the global surfactants industry.

UP-AND-COMErs include Sasol, which is acquiring Condea; Petresa, with its enlarged LAB portfolio; and Huntsman, which has built up a formidable surfactants business in recent years and recently struck a deal to acquire Rhodia's European surfactants business. Businesses still for sale in the surfactants industry include Henkel's Cognis unit and Crompton's industrial surfactants unit. Some industry watchers say Clariant's detergents business, which downsized significantly in Europe last year, may also be a divestment candidate.

Joel Houston, president of Colin A. Houston & Associates, says the selling of surfactant assets reflects a dissatisfaction among many players with the result of earlier restructuring efforts. "People are finding that restructuring, especially in Europe, isn't accomplishing corporate targets," he says. "There's overcapacity, profits are down, and companies can't reinvest—so options are limited."

Akzo Nobel's Frohn agrees that profits are lower in Europe than in the U.S., especially in the oversupplied ethoxylated surfactants market. As a result, Akzo's strategy has been to hunker down and streamline in Europe while expanding in the U.S. and Asia. Frohn says Akzo will decide in the next few months whether to build an Asian finishing plant for the cationic surfactants it produces in the U.S. and Europe. It's also considering a 30% expansion of its fatty acid plant in Malaysia and is looking at incremental expansion of its recently refurbished plants in McCook and Morris, Ill.

Lundgren says Huntsman remains bullish on surfactants, despite the current profitability woes. Unlike Rhodia and other exiting specialty chemical companies, Huntsman is well positioned in overall raw material integration, he says. Plus, as a private company, "our owners are more patient when it comes to earnings," he says. "They don't need to report monthly and quarterly gains."

The Rhodia purchase takes Huntsman further into specialty surfactants, Lundgren notes, as have internal moves bringing the company closer to customers in niche industries such as agrochemicals, mining, and pulp and paper. Eyeing the current unhappy corporate climate, he sees an opportunity for Huntsman to get even deeper into surfactants. "We have never been so busy studying acquisitions as we were in 2000," he says.

DOW CHEMICAL, another highly integrated company, is looking forward to a larger role in the industry as well, according to David Ford, Dow's global business director for surfactants.

Dow's traditional presence in surfactants has been through the niche Dowfax line of alkyldiphenyl oxide disulfonate surfactants. Then, in 1998, Dow acquired Hampshire Chemical, which added sarcosinate and acyl glutamate surfactants to its lineup.

Ford's job was created in June 2000 in anticipation of bringing Union Carbide's APEs and specialty surfactants into the fold. "We felt we would have enough critical mass and breadth that it warranted a dedicated business," he says. "Forming the business sends a clear signal to the market that we're very serious about surfactants."

Ford also hopes Dow can do its part to remedy what he sees as a lack of innovation in the surfactants business. "I think this industry has been stagnant when it comes to new molecules," Ford says. "Most of what's been developed has been line extensions or adaptations of existing products. There haven't been too many quantum leaps in technology."

AS A MODEST EXAMPLE of innovation from within Dow's existing portfolio, Ford points to a unique Hampshire product launched in 1999 that combines surface activity and chelating action in one biodegradable molecule. The product, Hampshire LED3A, is formed by reacting fat-soluble lauroyl chloride with the chelating agent ethylene diamine triacetic acid. "Today, our researchers are working on some products with much greater reach than where we currently play," he says.

Ford sees the current industry consolidation, although painful, as ultimately working to the benefit of innovation in surfactants. "It's healthy for the marketplace," he says. "It will force us to become more innovative and creative as we work with customers."

Consultant Houston is more measured in his view of the consolidation, saying the surfactants industry will reap its full benefit only if buyers operate their new assets more prudently, closing unneeded plants where necessary. And, although industry integration from basic feedstocks to end products is improving, he notes that imbalances remain; Huntsman, for example, is still highly dependent on purchased detergent alcohol, and Condea is still deficient in ethylene oxide needed for ethoxylation.

Houston's conclusion is that the surfactants industry has more work to do to reach its full potential. "The restructuring story is not finished," he says. "There is another chapter to be written."

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Options increase in dry bleach sector Selling sodium perborate and sodium percarbonate as bleaching agents to North American laundry detergent producers is a fairly mature business conducted by two traditional suppliers, but newcomer OCI Chemicals plans to repaint that landscape. In August, OCI, a U.S. unit of South Korea's Oriental Chemical Industries, announced plans to build a sodium percarbonate plant in Decatur, Ala. The plant, expected to start up in the fourth quarter of this year with annual capacity of 40,000 metric tons, will be the second of its kind in the U.S. Oriental Chemical Industries is a large company active in Asia in everything from petrochemicals to pharmaceutical intermediates. Its U.S. subsidiary, in contrast, makes only one product—soda ash—at a Green River, Wyo., plant that it acquired in 1996 from Rhône-Poulenc. Kyle Wendel, OCI's director of sales and marketing, says the company is building the Alabama plant in anticipation of a trend toward using sodium percarbonate in detergent powders and dry bleach products. The project also represents a downstream integration from soda ash, one of two percarbonate raw materials along with hydrogen peroxide. Today, sodium perborate monohydrate is the primary nonchlorine bleaching agent used by U.S. laundry detergent makers. This is because percarbonate can be less stable than perborate in laundry formulations, particularly in the presence of oxygen-scavenging compounds such as zeolite builders. Solvay Interox is the only current U.S. producer of sodium perborate and percarbonate, making both persalts in Deer Park, Texas. The European producer Degussa-Hüls is also a player in persalts; it acquired DuPont's sodium perborate monohydrate business in 1994. Shawn Blansett, product manager for persalts and consumer products at Solvay Interox, reports that North American demand for persalts increased last year. For perborate, growth was primarily due to increased incorporation into powdered laundry detergents to impart color-care and antimicrobial qualities. Percarbonate demand increased as well, he adds, thanks to its popularity as an all-purpose household cleaner. OCI, however, is betting that it can move percarbonate directly into the laundry market through improvements in stability. Wendel says the company accomplishes this in two ways: through a proprietary dry reaction process which avoids crystallization and through application of a thin stabilizing coating. "Our technology makes a particularly stable sodium percarbonate," he says. Wendel notes that Europe—often a harbinger for U.S. laundry developments—is already trending toward percarbonate as part of a move away from water discharge of boron-containing compounds such as sodium perborate. Indeed, Finland's Kemira Chemicals said it will more than double its sodium percarbonate plant in Helsingborg, Sweden, from 20,000 to 45,000 metric tons per year by the end of 2001. So far, according to Blansett, Solvay has seen no specific environmental pressure in the U.S. related to the elimination of boron. Nonetheless, the company is developing suitable detergent formulations that include percarbonate, he says. On top of environmental considerations, Wendel points out that percarbonate becomes active at lower wash temperatures, which could mean less need for the bleach-activating compounds—such as tetraacetyl ethylenediamine or sodium nonanoyl oxybenzene sulfonate—that are often used with sodium perborate. He claims that soapers can formulate lower-cost percarbonate-based detergents as a result. Both Wendel and Blansett acknowledge that the North American detergent market continues to shift away from powders to liquids, which for stability reasons can't accommodate a persalt bleach. However, Wendel notes that within the powder segment, more and more products are bleach-containing. Blansett adds that laundry tablets could open a new market for peroxygen bleaches as well. The bleaching agent that manufacturers of these dry products choose in the future will go a long way to determining the success of OCI's new plant. Blansett expects that both perborate and percarbonate will continue to be used in laundry formulations, with the choice depending on washing conditions, formula stability, and performance requirements. Wendel, not surprisingly, has a stronger opinion. "Sodium percarbonate," he predicts, "will play a much bigger role in detergents of the future."

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