Producers had hoped that consolidation would lead to a more stable industry, and they worked hard to achieve this. In the past few years, there were some big deals: Dow Chemical acquired Union Carbide with its large surfactants operations; Sasol completed the purchase of Condea; Rhodia took Albright & Wilson, then sold part of it to Huntsman; and Degussa acquired Goldschmidt. In addition, there were a number of smaller deals, such as the acquisition of Manro Performance Chemical of the U.K. by Stepan Co.

In contrast, 2002 saw just two small but reasonably significant buys. Akzo Nobel purchased Crompton Corp.'s industrial surfactants business for about $95 million, and Stepan added to its portfolio by acquiring the European quaternary biocides and specialty surfactants business of Pentagon Chemical Specialties of Workington, U.K. Pentagon had earlier been spun off from Dow Halterman in a management buyout.

Thus, the industry has become much smaller, in terms of the number of producers, according to Joel H. Houston, president of Colin A. Houston & Associates, a market research and consulting firm specializing in surfactants. Houston, based in Brewster, N.Y., says that fewer than a dozen global producers of primary surfactants now remain.

This consolidation precedes what may be a period of better growth, however. Houston estimates that global surfactants demand on a volume basis will increase 3.0% annually between 2002 and 2010. Of the main world regions, growth will be led by Asia at 4.4% per year, followed by Latin America at 3.3%, North America at 2.0%, and Western Europe at just 1.5%. All other regions will see demand increase at 5.1% annually. The combined growth will increase world demand from about 11.2 million metric tons in 2002 to some 14.2 million metric tons in 2010.

Growth was erratic last year. After a very lackluster 2001, David Ford, global business director for surfactants at Dow, says the company and probably the industry "started last year very slow. But then demand began to build, and toward the middle of the year, things were looking pretty good. Unfortunately, it plateaued and went up and down in the second half of the year." However, he says, volumes continue to be good on a year-to-year comparison.

Fortunes seemed to be a little better at Stepan. When announcing third-quarter 2002 earnings, Chairman and Chief Executive Officer F. Quinn Stepan said: "Even though the overall economy remains sluggish, the continued solid performance of last year's acquisition in the U.K. has contributed to our top line and earnings growth. In North America, surfactants and polymers have both generated higher earnings."

BUT GROWTH isn't everything. "Restructuring of supply is an important factor," Houston says, "but the market is still having to contend with overcapacity issues, new surfactants being developed, the increasing impact of environmental regulation, and changes in the product value chain."

Overcapacity in the industry is especially vexing to producers. Despite a pickup in demand for some companies last year, the increase in consumption has come nowhere close to soaking up excess capacity. And the consolidation in the industry has produced very little in the way of capacity rationalization.

Thus, though standard wisdom says that fewer producers result in greater price stability, this has yet to be seen in the surfactants business. Terry A. Laine, North American business director for textiles care at Degussa's Goldschmidt unit, says: "Consolidation advantages have been overridden by overcapacity in the softer cationic actives industry. As a result, margins are thin. That inhibits investment."

Dow's Ford agrees. "Prices are down considerably, especially in the commodity side of the business, putting a squeeze on margins," he says. "Even though volume is looking good, revenue is down, and I think we are all suffering from the fact that there is too much capacity, giving our customers more leverage. Surfactants producers are working very hard to squeeze every penny, nickel, and dime out of the product."

Frustrating producers even more, according to Ford, has been the rise in raw material costs, especially ethylene, which suppliers have not been able to pass along to the marketplace.

And he notes that the pressure on surfactants prices is coming both from customers and from producers. "Most of our customers are having a fairly good year and have been able to increase their own prices. The real pressure has come more from within the industry as producers cut prices to protect their share of the market."

Another issue of concern, according to Houston, is surfactant intermediates' availability. After a period of tight supply, new capacity for detergent alcohols and linear alkylbenzene is threatening to create a surplus and drive prices down. Houston says detergent reformulations are already shifting some consumption from linear alkylbenzene sulfonate to alcohol derivatives. This, he says, will benefit some surfactants producers and negatively impact others.

Producers see growth areas for surfactants, both in products and in geography. Asia, with its 4.4% estimated growth rate, is a natural. And that was a key point in Akzo Nobel's acquisition of Crompton's industrial surfactants business, with its plant in Singapore along with its North American production facilities.

Rob Frohn, general manager for surfactants, says: "In recent years, Akzo Nobel Surface Chemistry has undergone a major rationalization and restructuring, mainly within our European operations, while investing in the Americas and Asia. While the acquisition of the industrial specialties business considerably boosts our position in North America, we also see it as a step forward to become well established in Asia."

In addition to the Singapore plant, the unit has R&D and technical service facilities there, plus it has Asian sales offices in Indonesia, Malaysia, the Philippines, and Taiwan.

Degussa also sees Asia as a region of expanding cationic softener opportunity, along with Eastern Europe.

ENVIRONMENTAL issues will also drive the industry over the next few years. The European Union is developing a new detergent directive with rules for the cross-border movement of detergents. But it also is revamping directives for biodegradability, including a revision of how biodegradability will be measured.

Thus, Degussa sees biodegradability as a major driver in the future for cationic fabric softener additives. Degussa's Laine says, "As always, this will be balanced with economy and performance, but we feel all three of these factors can be attained to the satisfaction of the formulators."

He also says, "Value-added concepts such as fiber ultraviolet protection, odor control, antiwrinkling, and easy ironing are driving our technology in building new and better cationic surfactant molecules for fabric softener systems."

And Dow's Ford sees upside potential in cleaning, especially in selected segments such as hard-surface cleaning and industrial and institutional applications.

Thus, despite suffering through overcapacity, abysmal pricing, and uncertainty in environmental regulations, surfactants producers are looking to a better day. Although he was talking about Dow, a comment from Ford could apply to the whole industry: "We have to capture short-term value, but can't stop building for the future."

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BLEACHING
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HOLY GRAIL
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SURFACTANTS MAKERS ARE SUFFERING
Lower prices and higher costs crimp margins for producers, despite higher demand

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Copyright © 2003 American Chemical Society