Unfortunately for surfactant producers, these big changes in ownership were not accompanied by big improvements in the financial fortunes of the sector, which continued to suffer from low profit margins in 2001. Most observers say meaningful restructuring has yet to follow the deals.

According to David Ford, Dow's global business director for surfactants, "2001 was probably as bad as, if not worse than, 2000."

In Ford's view, the industry wasn't able to take advantage of the fall in prices for energy and other surfactant raw materials that began in the second half of the year. "The economy had a downward pull on the industry," he says. "You saw producers scrambling to maintain volumes, which put pressure on selling prices and caused them to fall faster than raw material prices."

THE BUSINESS slowdown following the tragic events of Sept. 11 only magnified this trend.

The household cleaning products business is generally considered to be recession resistant, but only about half of surfactant output goes into this market, Ford notes. The rest goes into the industrial and institutional cleaning sector and into noncleaning uses such as paint and textile manufacture. "These segments clearly were impacted," he says.

Individual companies were also buffeted by factors above and beyond economic ones. For example, Rob Frohn, general manager of Akzo Nobel's surface chemistry unit, notes that on top of the price concessions that are to be expected in a down economy, his company's U.S. cationic surfactants business faced some unfavorable consumer product reformulations. As a result, sales and profits at Akzo Surface Chemistry will be down slightly in 2001.

On the plus side, Frohn says, demand in Asia continues to grow. In October, Akzo announced that it will build a $21 million cationic surfactants plant on Jurong Island, Singapore, by 2003. The company will also expand its fatty acids plant in Malaysia and its industrial surfactants joint venture in Japan with Lion Corp.

The sales news is better at Shell Chemicals, whose line of Neodol detergent alcohols and ethoxylates is used heavily in consumer products. Kate Johnson, Shell's global business manager for alcohols and derivatives, says sales should be up 2 to 3% this year. The profit picture, however, is not as rosy. "We're coming off of two to three very bad years, and the recovery so far has been marginal," she says.

	"In difficult economic times, customers focus on how much flexibility they really have. Some of the old barriers come down, and they are willing to try new things." GENENCOR INTERNATIONAL PHOTO

THE ALCOHOL PROFIT picture would seem to be on the verge of getting worse, as Shell and competitor Sasol are building new linear alcohol plants that together will increase global capacity by more than 12%. However, two factors are working to offset the impact of new capacity.

One is BP Chemicals' recent announcement that it will close its linear alcohol plant in Pasadena, Texas, by the fourth quarter, taking 60,000 metric tons of capacity off the market--or about a quarter of the amount Shell and Sasol are adding.

Huntsman Corp. is the major consumer of BP's alcohol output, but Janice Mabe, Huntsman's surfactant intermediates director, says the shutdown was anticipated. "Significant expansion in global alcohol capacity is occurring," she says. "As the largest merchant buyer of fatty alcohols in the world, we are in a favorable position to secure competitive supply."

Harry Hyatt, president and managing director of Sasol Olefins & Surfactants, a division Sasol formed last year after the Condea purchase, expects that all smaller, older alcohol plants will be pressured by the new capacity. "I would be concerned if I were running a plant that's older and less efficient," he says.

Hyatt confirms that Sasol's new alcohol plant--a 120,000-metric-ton unit in Secunda, South Africa, that uses Sasol's unique coal-based feedstock--will be in production by the end of the second quarter.

Shell's 150,000-metric-ton expansion in Geismar, La., will start around the same time. However, Johnson points out that the new plant at the center of the project will be dedicated to making a proprietary methyl branched linear alcohol that Shell developed jointly with a major customer. She won't identify the customer, but others say it is Procter & Gamble.

Plus, Johnson adds that much of the rest of the new capacity is being used for shorter chain length alcohols sold into the plasticizer market. "The project will have some impact, but it will be marginal compared to the volume that some are expecting," she says.

Customers may welcome the new capacity from Shell and Sasol, but it will be a headache for producers of the chief competing surfactant raw material, linear alkylbenzene (LAB), that have made modest market share gains during the period of tight alcohol supply.

"For 2002 we expect some reformulations against LAB because of the changing detergent alcohol market conditions," says Mark Quintyn, commercial director at Petresa, the world's largest LAB producer.

On the other hand, Quintyn notes that LAB competitiveness is being helped by falling prices for one of its feedstocks, benzene, and increased availability of another, n-paraffin. Petresa itself is doubling paraffin capacity at its San Roque, Spain, facility by 2003 in order to become more self-sufficient.

Although Quintyn is confident that LAB can continue its global growth pattern of 3 to 4% per year, he and other industry executives acknowledge an increasing competition among the various surfactant materials as consumers become more flexible in their formulations and consumption patterns.

Joel Houston, president of the consulting firm Colin A. Houston & Associates, says surfactant switching will be a key industry theme during 2002. "We expect intercompetition to intensify this year," he says. "Customers know that spare capacity is available, so substitution issues are on their minds."

Shell's Johnson, for one, is preparing for an increase in experimentation by customers. "In difficult economic times, customers focus on how much flexibility they really have," she says. "Some of the old barriers come down, and they are willing to try new things."

SHE CLAIMS that customers in industries such as personal care that historically insisted on surfactants made from natural feedstocks are increasingly willing to use petrochemical-derived products. As a result, Shell is trying to broaden its detergent alcohol presence beyond the household cleaner sector on which it has traditionally focused.

Akzo Nobel's Frohn counters that oleochemical-derived surfactants are more than holding their own against petrochemicals--as evidenced by strong demand for the fatty acids the firm makes in Malaysia. But he concedes that this is as much due to their low prices today as their natural origins.

Another key surfactant industry theme for 2002 will be the extent to which the big acquisitions that took place in 2001 manifest themselves in the marketplace.

Executives at companies like Shell and Akzo Nobel that stayed on the merger and acquisition sidelines say they haven't seen much impact so far. "At the moment," Johnson says, "the M&A activity has only really resulted in changes in ownership." Likewise, Frohn says, "I wish they had provided some improvement to the surfactant business, but there's no evidence of that so far."

Sasol's Hyatt figures it will take another year to 18 months for any stabilizing effects to show up, and even then he doesn't expect sweeping changes. "We will have fewer players in the industry, but still enough that competition can be tough," he says.

Within his own organization, Hyatt says, the process of integrating Condea into Sasol is almost complete. Interestingly, he says the challenge has been not so much meshing two businesses--after all, Sasol didn't have a significant surfactants unit before the acquisition--as it has been reorganizing what was Condea along global lines.

Condea was developed largely through acquisition--Vista Chemical in 1991, Italy's Augusta in 1996, and Hüls's Contesio unit in 1998--but, according to Hyatt, the purchases were never combined into a truly integrated unit. "Our game plan is to switch over to global business management, which is a significant change from Condea's regional approach," he says.

Huntsman's Mabe says her firm has successfully transferred technology from Europe and Australia into North America--and vice versa--since completing its acquisition of the Albright & Wilson business in April 2001.

"WITH THREE technology centers, we will be able to focus development expertise regionally and then share the results globally," Mabe says. For example, she adds, Huntsman will be launching a personal care product line in the Americas this year on the strength of surfactant technology brought from Europe.

Commenting on the impact of the Union Carbide deal, Dow's Ford says 2001 was "a very exciting year for us as we tried to bring in and understand all of the technologies, products, capabilities, and people and how to integrate them."

He notes that the components of the new Dow surfactant line--$300 million a year worth of products pulled from Dow, Dow's Hampshire Chemical subsidiary, and Union Carbide--are sold into many of the same end markets. "Going into things like cleaners or paints, we found a tremendous amount of overlap where we work with similar customers," he says.

Ford sees a particular opportunity to expand outside North America into regions where Dow is strong but Union Carbide was not. A starting point will be the Optimal joint venture in Malaysia, which will open during the first quarter with capacity to make alkylphenol and alcohol ethoxylates.

A broader cross-fertilization is in the works, Ford adds, as Dow studies how surfactants can be marketed in combination with products such as chelating agents, solvents, polyglycols, and biocides. "We have an opportunity to be a tremendous provider of services to the customer," he says.

As to when the surfactants business will pull out of its funk, Ford is counting on the second half of the year. He's hopeful that by then the industry will start to see benefits of restructuring that today are obscured by a poor economy.

Johnson at Shell isn't quite as optimistic. "We don't have huge hopes that, across the detergents business, economic conditions will particularly improve this year," she says. "We recognize our customers' needs for economic cost and will work with them to optimize the supply chain from the upstream end to the kitchen sink."

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