The Future of LAB

March 2012

Global demand

The global linear alkylbenzene (LAB) industry has experienced depressed margins and feedstock shortages during the past few years. The following is an analysis of the industry’s current state and its most likely future.

LAB is a vital ingredient for synthetic detergents. Nearly 98% of LAB production is used to manufacture linear alkylbenzene sulfonate (LAS), which is used in household synthetic detergents. The remaining 2% of the demand for LAB comes from other applications, such as agricultural herbicides, emulsion polymerization, wetting agents, electric cable oil, ink solvents, and the paint industry.

Global LAB demand for all uses is projected to grow by a 2.7% compound annual growth rate until 2015. This growth will be heavily driven by developing regions because of low penetration and low per capita expenditure on detergents. Growth in mature regions will be flat owing to highly penetrated and saturated markets. There has been a shift in consumption pattern of detergents as liquid detergents are gaining foothold over powder detergents in developed regions. Liquid detergents have higher surfactant levels per wash load compared to powder detergents.

 Strong demand regions such as the Middle East, China, South America, and India will exhibit a growth rate of 3.5% to 5 % from 2010 to 2015. Although LAB production is considered to be a recession-proof industry, the demand in developed and mature economies slackened in 2009 compared with 2008, mainly due to destocking and liquidation of inventories by major producers and reduction of surfactant loads by formulators. Pre-recession demand levels of 2007 became the new industry peak for developed regions, where the demand almost reached 2007 levels in 2010. The demand in these regions will track gross domestic product (GDP) at best and is expected to grow at a modest rate of 1%. Figure 1.

Consolidation/rationalization of mid-bracket, nonintegrated players

Another squeeze in the merchant n-paraffin market may result in consolidation or rationalization of mid-bracket nonintegrated LAB players. (Integrated capacity denotes presence in upstream feedstock kerosene territory whereas no kerosene presence denotes nonintegrated capacity). Figure 2.

The global LAB capacity in 2010 was estimated as 3.62 million metric tons (MMT) and is estimated to reach 3.95 MMT by 2015. Industry leaders who are aiming to strengthen their core business of LAB are looking for acquisitions to retain their market share and keep their production capacities within the top 25% of the global capacity. Likely candidates for acquisition are nonintegrated LAB manufacturers with annual capacity ranging from 50,000 to 100,000 metric tons. New capacity additions are to take place in Saudi Arabia and China to meet the regional growth. Existing Middle East manufacturers already set up with an export-oriented strategy, along with new additions, will cement the Middle East as the major export hub. The Middle East is expected to hold 19% of the global LAB capacity by 2015. Middle East facilities are blessed with cheap feedstock and better supply integration across the chain.

Sustainable competitive advantage of facilities has been mapped based on core strength and competence metrics, to assess the company’s current position. This analysis measures a company’s core strength against its ability to compete effectively. Some of the important factors considered in determining core strength include total capacity, backward integration, capacity expansions, and technological setup. Competency of the company is measured by determining factors such as capacity utilization, feedstock and sales guarantees, and investment in upgrades.

Fragmented industry heading toward a likely consolidation

In a globally fragmented industry, the global LAB trade appears to be rapidly consolidating to players based out of the Middle East and Asia Pacific. The future looks less certain for some middle-bracket players who are nonintegrated in upstream feedstock territory and are currently facing the brunt of price volatility of feedstock economics, leading to underutilization of their current facilities. Erosion of market margins was witnessed globally with weak pricing power affecting all players. This may lead to consolidation via existing players. Figure 3.

	Strong Performers	Growth Seekers	Weak Performers	Laggards
Total No. of Companies	12	10	2	2
Backward Integrated Candidates	83.3%	20%	0%	0%
Average Capacity Utilization (2010E)	98.6%	87.3%	66.8%	58.9%
Average Total Installed Capacity (2010)	112.25 TMT	119.2 TMT	200 TMT	115 TMT
Average Degree of Backward Integration Source: Company Websites	91.6%	35%	50%	50%

Powerhouses

Large facilities and access to financial resources typically define industry powerhouses. Their core strength is their presence in the entire supply chain with easy access to cheap feedstock. They can easily sail through industry down cycles with little concern for capacity utilization owing to their efficient management of feedstock input and managing output as per foreseeable LAB demand. Being strong in their core competency—and as part of their expansive strategy—they can acquire mid-bracket players to strengthen their market share and boost their margins and fight any competition arising in strong demand markets.

Strong performers

With 83% of the companies being backward integrated and having high operating rates, strong performers have efficiently handled the industry down cycle. With the common trait being efficient performance and strong competence, strong performers have heavily invested in technology upgrades to keep up with new technological developments to increase their LAB production and quality. Foreseeing considerable demand from developing economies on account of low penetration and low per capita expenditure of surfactants, many strong performers are planning future expansions. They have consistently generated high sales with better returns on account of their core competence in upstream feedstock and technology front. They cater to the global as well as regional markets and account for most of the global trade.

Growth seekers

Companies in this category are trying hard to move in the direction of the “strong performers” category, with a few who trail and are facing the possibility of being engulfed in the “laggards” category.
Because only 20% of the candidates are backward integrated till kerosene, the rest of the category such as (growth seekers) will face a constant struggle to arrange their required purchase feedstock volumes. Apart from a few plants, which have captive feedstock requirements to feed their downstream facilities, others have to gamble on their margins to increase sales volume and retain key accounts. Technology employed in this category is at par with industry consensus although some plants use their own alkylation technology. They usually cater to their regional markets.

Weak performers

Despite strong industrial setup, huge scale to leverage, and large capacities, plants in this category face escalating raw material costs, weak pricing power, and falling margins. High feedstock exposure as a result of no backward integration has led to below-average profitability or continual losses in the past. At one time, industry struggled with serious oversupply in LAB and upstream feedstock space, which led to intense rivalry and low margins and a rationalization wave was imminent to keep the industry competitive. These players have to bring in a second rationalization wave to keep up with industry margins and growth.

Laggards

Companies in this category are usually nonintegrated in feedstock territory and face the brunt of feedstock price volatility. They are the victims of the tight merchant feedstock market and are currently pursuing moves for long-term supply assurances. The latter consequences have led to lower operating rates in the past. Their prime market is regional in scope. They are currently facing margin erosion and stagnant sales as a result of their feedstock exposure and low utilization rates. They constantly face the threat of acquisition and, to survive and move to their desired target of “growth seekers,” they must either rationalize their capacity to become competent or look for long-term supply assurances.

Three possibilities

Scenario 1: consolidation

FIG. 4. In this scenario, there could be consolidation by upper-bracket players as part of their expansion strategy to retain their LAB market share and to compete with upcoming expansions in Asia and the Pacific (APAC) and the Middle East. The likely consolidation candidates are middle-bracket nonintegrated LAB manufacturers facing poor operating rates and eroding margins. In addition to securing their captive LAB requirement for their downstream applications such as LAS and other surfactants, this move will result in partial capacity rationalization to improve price margins and efficient operation. With supply tightness continuing in the paraffin market that will not ease with the opening of the Qatar Petroleum/Shell Oil Pearl gas-to-liquids project in 2012, there will be further rationalization of capacity by some players in APAC. Abbreviation: F, forecast.

Scenario 2: modest growth

Fig. 5 In this scenario, the industry remains fragmented with the same multiplicity of players expected to continue. Supply and demand will grow flat, tracking GDP at best in mature economies of the United States and Western Europe. There has been a shift in consumption pattern of detergents as liquid detergents are gaining foothold over powder detergents in developed regions. Low per capita expenditure on detergents and low penetration in emerging regions such as India, China, and the Middle East—where per capita consumption is low compared to the Western world—will keep the global demand growth rate at 2.7% till 2015, compensating for flat growth rate in the high-volume and highly penetrated markets of the Western hemisphere. New capacity expansions will be concentrated in the Middle East and China.

Scenario 3: flat growth

Fig. 6. Flat growth involves a stalled growth period beause of an industry shift toward oleo-surfactants owing to increasing demand for renewable surfactants. This trend is not situation based compared to last two years where the price of oleo-feedstocks was lower than LAB but is due to the growing interest in greener surfactants even though the prices between the two have narrowed down (i.e., oleo-based surfactants and LAB). Many formulators are now looking toward oleo-based surfactants even though the price spread between the two surfactants has narrowed as the demand for biobased surfactants surges in developed regions. High feedstock exposure and inheritance of upstream price volatility in the current supply crunch places LAB in a weak position compared with competing oleo-based surfactants made from fatty alcohols and methyl ester sulfonate.

Road ahead

A blend of the consolidation and modest growth scenarios is the most likely outcome for the global LAB industry.

The LAB industry is heading toward further consolidation where the likely consolidation candidates lie in the APAC and Middle East regions, which are high-growth regions and located near cheaper feedstocks.  Fig. 7.

Amandeep Singh is a senior research analyst with Beroe, a procurement intelligence provider specializing in market intelligence, risk management, green procurement, and best-cost country sourcing. The author may be contacted at amandeep.singh@beroe-inc.com.

information

Organizations

1. American Cleaning Institute
2. World Surfactant Congress and Business Convention
3. China Surfactant Detergent & Cosmetics
4. European Committee of Organic Surfactants and Their Intermediates
5. Household and personal products industry
6. Company web sites