Sagging margins will spur higher rates
Gordon Graff -- Purchasing, 5/6/2004 2:00:00 AM
Producers of hydrogen peroxide say a robust demand in the manufacturing sector, particularly in pulp and paper, has injected new life into their business this year. But they report disappointing margins, despite recent price hikes, mostly due to surging energy and transportation costs. Little new production capacity for peroxide is on tap for the next few years, a fact that will gradually push up peroxide tags.
SUPPLY: An emerging crunch
Capacity utilization rates for hydrogen peroxide have been creeping up, from an average of about 90% in 2003 to anticipated "low 90s" range this year, according to Thomas F. Ball, sales and marketing director at FMC's hydrogen peroxide division. Over the next year, utilization rates "should approach" 95%, says Richard H. Wylot, North American business manager for hydrogen peroxide and peracetic acid at Solvay Chemicals, Inc., Houston, Tex.
When utilization rates rise steadily, chemical manufacturers usually build more capacity. But this is not happening with hydrogen peroxide to any great extent, say industry sources. The main reason is weak pricing. Peroxide tags "have come up, but not quite enough to instill producers to put any capacity back into the industry," says Ken Blackburn, North American business manager for hydrogen peroxide at Atofina Chemicals, Inc., Philadelphia, Pa. Instead, he adds, as business has improved, producers have reopened previously mothballed operations. But most of this debottlenecking has already been done, so that this low-cost option is "practically exhausted," notes Shawn Abrams, senior vice president and general manager for active oxygen at Degussa AG in Parsippany, N.J.
The only capacity addition underway in North America is Atofina's pending addition of 40,000 metric tons/year to its 73,000 metric ton/year hydrogen peroxide facility in Becancour, Quebec. Elsewhere, Degussa says it will expand its Barra do Raicho peroxide plant in Brazil by 50% to reach a capacity of 60,000 metric tons/year by the end of 2004. And Eka Chemicals, a subsidiary of Akzo Nobel, plans to enlarge the peroxide capacity at its Bohus and Alby, Sweden sites by 15,000 metric tons/year over the next two years.
DEMAND: Strong in pulping
Most industry estimates peg annual growth of the hydrogen peroxide industry at 3-4%, a rate that Atofina estimates will continue for the next two to three years. The pulp and paper industry, which consumes about 60% of the hydrogen peroxide output, has rebounded strongly in the past year from a recessionary slump, thereby boosting peroxide demand. Much of this pulping demand is coming from the rapidly growing high-brightness grades of paper, which require peroxide bleaching. Mechanical pulping, which uses peroxide as an integral part of the process, is also expanding at a rapid pace.
PRICING: On the upswing
Hydrogen peroxide contract prices have been inching up for several years. These include hikes of 3¢/lb (on a 100% concentration basis) announced in October, 2002, 5¢/lb in May, 2003, and 3¢/lb in November, 2003. In addition, the industry has imposed surcharges to offset some of the burden of rising rates for natural gas and transportation fuel.
The run-up in natural gas "has put us, as an industry, behind the eight ball," says Blackburn. If natural gas, which is both a raw material and fuel for hydrogen peroxide production, continues to stay in the current $5-6/million Btu range, says Ball, "hydrogen peroxide prices will need to increase significantly for producers to earn a reasonable return in the business." But the pace of price increases recently put through by peroxide producers "has not been sufficient to offset the increasing energy costs," comments Ball, "and our margins remain unacceptable." Other peroxide suppliers echo these sentiments.
So far, most price hikes have been due to suppliers playing catch-up as energy rates surged. But more fundamental issues are also at work. The estimated 95% utilization rate that the peroxide industry is approaching, "will begin to put upward pressure on pricing due to tightening supply," says Solvay's Wylot. When the rising tags begin to satisfy "reinvestment economics," adds Blackburn, the stage will be set for long-deferred capacity expansions.
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