Surfactants demand, pricing up in 2005

Bigger retail outlets drive price pressure through the supply chain.

By David Hannon -- Purchasing, 1/13/2005

Growth in the soaps and detergents market pushed demand and pricing for surfactants up through most of 2004, and 2005 looks about the same, as manufacturers in this market strive to offset increased raw materials costs. The increasing influence of major retailers like Wal-Mart on the soaps and detergents market also adds pricing pressure to the entire supply chain.

In both the household and industrial cleaning markets, products geared toward convenience and multifunction are in highest demand, which drives demand for more flexible surfactants. Market researcher Mintel Group puts the 2003 U.S. household cleaning products market at $3.3 billion in sales, and forecasts 2% growth annually through 2008. The largest segment of that market, household surface cleaners, is expected to decrease 9% as consumer demand for convenience-driven products erodes sales of traditional cleaners.

On the industrial side, demand for industrial and institutional cleaning chemicals is expected to push surfactant demand up 2.2% annually through 2008. The emphasis on hard surface cleaners will increase demand for surfactants, which help concentrate the cleaners without sacrificing performance. According to a newly released report from the Freedonia Group, "Formulators of cleaning products increasingly look to surfactant suppliers for innovative, unique and cost-effective chemicals that will allow them to gain a competitive advantage in emerging product categories." The report goes on to say that benefits of multifunctional surfactants include reduced costs, improved efficiency and fewer environmental and regulatory issues. The more flexible a product is, the fewer products and suppliers a surfactant buyer has to manage.

Among the surfactant capabilities considered most desirable in today's market are antimicrobial capabilities and low foaming action. Nonionic surfactants account for the majority of product in the industrial market mostly because of their performance and flexibility. Freedonia expects nonionics including alcohol ethozylates and glucose-based products to see increasing growth in the next five years.

Neil Burns, vice president of marketing at surfactant maker Pilot Chemical in Santa Fe Springs, Calif., says surfactant demand picked up in January 2004 in the soaps and detergents end market and has not let up since. While Pilot has been able to meet the increased demand from the market, Burns says the company's capacity utilization has been at an all-time high in the past year and the company is working on adding more capacity and eliminating bottlenecks in its production.

"We put more work into managing the raw material side of our business than we ever have to make sure we did not have any issues," Burns says.

Raw materials issues have been a challenge for most surfactants makers since 2004, adding cost to the entire supply chain. One of the building blocks for surfactants, linear alkylbenzene sulfonates (LAS), has risen from 48¢/lb to an all-time high of 53¢/lb in late 2004 while benzene has dropped to $3.37/gallon in November from a high in late August.

"The price of oil drives a lot of the petrochemicals we use in this market," says Burns. "We buy a lot of linear alkylbenzene (LAB) and pricing for that is driven by kerosene and benzene, which is driven also by oil. Pricing of LAB has been up based on the price of oil, but LAB supply has been pretty consistent. In contrast, alcohols, especially oleochemical alcohols derived from coconut or palm oil, have been tight so there has been a squeeze in terms of demand vs. supply. We've watched that market closely and pricing has gone up."

The Freedonia report says product advances "may be slowed if the cost of feedstock and raw materials for surfactants continues to rise, squeezing profit margins and prompting surfactant producers to significantly increase prices despite resistance from buyers."

The increased raw materials demand and pricing may drive more buyers to look for alternatives to surfactants while many surfactants makers look more to overseas suppliers than ever before for lower-cost raw materials. Rhodia recently took full control over its Chinese subsidiary Wuxi Specialty Chemicals as part of a strategic policy to grow its business in China. On the sell side, Burns says Pilot has been competing with international surfactant makers for nearly a decade and the global expansion into those markets is nothing new.

"The main trend in this industry is consolidation," says Burns. "Our customers are getting bigger via consolidation and the retail outlets are getting bigger. That means bigger purchasing power and more pressure on suppliers to be more efficient. I think our industry will see more consolidation and rationalization in response to those pressures."