Leonardo: Welcome to this Chemical Conversations podcast brought to you by the Argus Pine Chemicals and the Argus C5 and Hydrocarbon Resins services.
Consumption taxes on gasoline blend stocks in China, including C5 components, have the potential to impact the C5 tackifier markets both for adhesives and the road marketing sectors. This in turn can make Chinese rosin esters more competitive and obviously impact demand. Steve, how do you see the consumption taxes playing out now for the Chinese C5 market?
Steve: Consumption taxes on C5 blending streams in China are still a work in progress and are continuing to evolve as the national and local governments determine how to calculate and apply the taxes. While there had been some talk of the taxes being retroactive to C5 separation plant and tackifier plant start-ups, it seems the regional levels of Chinese government at least are more focused on the period commencing last July, when the announcement relating to the inclusion of a number of gasoline blending components including C5’s, C9’s, oxygenates and mixed aromatics was made. Little happened until the beginning of 2024, at which point we saw more activity relating to the collection of taxes from the various levels of government. In response, we have seen smaller C5 tackifier producers who may typically purchase crude C5’s as feedstock to produce road marking grades buying higher quality piperylene streams to minimize the production of leftover C5’s. C5 separation plants will continue to maximize sales of C5 raffinate streams to ethylene plants or possibly back to integrated refiners to help minimize their exposure to the impacts of the taxes. When coupled with what has been a stronger market for epoxies which use piperylenes as curing agents, the impact has been a noticeable increase in the price of feedstock piperylene since the beginning of the year, squeezing margins for C5 tackifier producers in China. While we did see price increases for C5 tackifiers at the beginning of the second quarter, weaker demand at the higher price points in what has been a weaker market for C5 tackifiers led to Chinese domestic prices retreating once again as we moved further through April into May.
It appears that the more industrialized provinces in China such as Zhejiang, Jiangsu, Shandong, Hubei and Guangdong are the initial focus for most of the tax collection efforts. While the driver behind the collection of consumption taxes is to undoubtedly help improve government revenues, there is a balancing act for companies and an industry whose margins remain questionable much of the time, with regional governments, particularly those in the less developed provinces, nervous about imposing any undue tax burdens which would negatively impact employment or short term economic growth for their local industries. We have heard of sizable initial tax bills for several large tackifier producers, we will follow developments closely as to whether these may be negotiated lower and if not, how they may impact ongoing operations.
The market is expecting a price increase for C5 derivatives including C5 tackifiers but may need to wait until demand improves to help capture the increase. It has been speculated that an increase of $200-$300/t in the price of tackifiers may be required to help cover the decreased processing margins because of the consumption taxes. Of course, any price increase of this magnitude will make Chinese tackifier exports less competitive. This would not be unwelcome news to other C5 tackifier producers in Asia-Pacific and the west who continue to battle with Chinese producers for market share. A strong market for C5 derivatives might help hide this effect, but that is not the situation we find ourselves in now. We have also seen recent price decreases in both C5 and C9 feedstocks as consumers shy away from some purchases or look for price reductions to help cover the reduction in value for the raffinate/solvent “leftover” streams used in fuels blending, and as we enter the summer season when C5 based fuel blend stocks typically have lower value.
Leonardo: The consumption tax issue certainly has the potential to impact the tackifier markets both in China and in the export markets. Another noteworthy item has been the announced shutdown of several C5 tackifier plants in Europe and the US. Can you expand a bit on the shutdowns that have been announced and how this might impact trade flows and regional supply/demand balances?
Steve: We have seen recent announcements for the permanent shutdown of two C5 tackifier plants. Resin Solutions, formerly the Cray Valley producing assets, has announced that they will cease production of Wingtack C5 tackifiers at their Beaumont, TX plant here in the US. This is expected to occur shortly with production winding down as orders placed during the first quarter are fulfilled. This will leave the US with two C5 tackifier producers, ExxonMobil at Baton Rouge and Synthomer at Jefferson, Pennsylvania. C5 tackifier producers, both domestic and foreign, are expected to complete for some of the Resin Solutions market share. There is no shortage of global capacity for C5 tackifiers, but the balances within the US and Europe are expected to change due to this shutdown. The US, which has historically been a net exporter of C5 tackifiers, will move to a balanced to even slightly short position on C5 tackifiers. C5 tackifier exports from the US are expected to decline and imports from outside the region (which now means Asia-Pacific) will increase. It is anticipated that Korean and Japanese producers will be somewhat aggressive to move additional volumes given the competing tariffs on Chinese imports. To the extent that Resin Solutions was a regular exporter of C5 tackifiers to Europe, this means that Europe will be in an even larger deficit position with respect to their C5 tackifier supply/demand balance, with the Chinese C5 tackifier producers likely to make up much of this volume.
The second announcement relating to the shutdown of C5 tackifier capacity came from ExxonMobil, who announced what will be a complete shutdown of all chemical production at their NDG site in France. This includes both the waterwhite tackifier plant (which has been idled for some time), and the C5 tackifier plant which produces Escorez 1000 series resins. In the case of C5 tackifier production, and unlike waterwhite tackifier production at the site, ExxonMobil has more limited ability to make up the C5 tackifier production volumes elsewhere, with the logical conclusion being that ExxonMobil’s presence in the European C5 tackifier market will be greatly reduced. Once again, this will put Europe in an even bigger deficit position for their C5 tackifier supply/demand balance, with the Chinese producers expected to fill much of the increased imbalance. Korean and Japanese/Thai import volumes may also increase, but unlike the US, there are no protective tariffs in place for Chinese imports to Europe which would provide an advantage to the other foreign producers.
Leonardo, I wanted to talk a bit about shutdowns impacting tall oil rosin and derivatives, given that they are in some instances a competing product with C5 and other tackifiers. Specifically, can imported rosin esters gain more competitiveness in the US with the recent closure of the Ingevity DeRidder site and its associated crude tall oil processing?
Leonardo: The recent closure of a crude tall oil fractionation facility in DeRidder, Louisiana, has cut the supply of low-rosin tall oil fatty acid as well as certain rosin-based products serving industries like printing inks.
Brazil, which is a relevant gum rosin and gum rosin ester producer, has significantly increased its exports of gum rosin to the US this year and several derivative producers are eyeing the adhesives and road marking segments.
According to trade data, Brazilian gum rosin exports into the US increased to over 2,300t in the first quarter of 2024 from nearly 1,300t in the same quarter of 2023. Brazil’s gum rosin exports to the US in the first quarter of 2024 already represent over half the 4,444t the North American country imported in the entire year of 2023.
Market participants attribute the higher gum rosin exports to the closure of this CTO fractionation facility and the need of substitute products for printing inks.
According to market participant estimates, the closure of this CTO refining plant plus the conversion of another facility from CTO to non-CTO feedstocks has roughly cut nearly 30pc of the US total CTO fractionation capacity.
Sources said Brazil has increased gum rosin ester sales this year to the US not only because of the changing supplying dynamics in North America, which affect availability for certain applications, but also because of the more bullish demand outlook for road marking applications.
Suppliers expect a more active road marking season as this is an election year in the US, and because of active infrastructure projects that would require more thermoplastic resins made from gum rosin esters. Additionally, Brazilian gum rosin pentaerythrityl esters for adhesives and gum rosin glycerol esters for road marking have become competitive cost-wise.
In adhesive applications, European suppliers for both tall oil rosin esters and gum rosin esters have become increasingly interested in supplying the US market as buyers seek to diversify their supply base following the DeRidder shutdown.
Suppliers have already been in touch with buyers and certain products have already been approved, while others are sending samples in the hopes of opening a new trade flow.
Steve: How is the overall CTO situation in the US and Europe, as the feedstock becomes more available amid still lower fractionation rates?
Leonardo: CTO is available as closure of DeRidder and the conversion of another facility to run on non-CTO feedstocks has significantly cut US domestic refining capacity.
Trading activity in the spot market has been limited with several European buyers securing volume for the coming months. Annual contracts have also been closed and there are discussions suppliers are already eyeing sales for 2025, according to a market participant.
According to trade data, US CTO exports in the first quarter of 2024 rose to 70,561t from 44,706t in the same period of 2023, which reflects some interest for the material in Europe.
France, which had not been in the market for US CTO in 2023 due to higher pricing and soft downstream markets, went from buying only 301t in 2023 to over 5,000t in the first quarter this year.
In Europe, fractionation rates are slightly higher this year relative to 2023 but they are still not at the desired levels and there is some idle capacity.
Rosin and rosin derivatives markets in Europe are yet to rebound to the levels seen in previous years, although US CTO pricing in the spot market for volume going into fractionation in Europe has become more attractive, according to buyers.
Business sentiment is mixed, with buyers of adhesives reporting stronger activity in the first quarter this year and likely steady demand by the end of the second quarter, while other buyers see mostly flat markets.
Steve, we would be remiss if we did not touch on capacity expansion in China for hydrocarbon based tackifiers. You detailed some of the planned shutdowns in the west earlier, what do you see on the horizon for expansion in China?
Steve: The period through 2026 will continue to see tackifier capacity, particularly for C5 and hydrogenated (also known as water white) tackifiers, growing much more than demand growth. All this growth is coming from China. From the fourth quarter of 2023 through the second quarter of this year, we expect to see 130,000t/yr of new water white tackifier capacity come online, representing more than 10pc of current global capacity. Luhua in Zhangzhou, Henghe in Ningbo, Tianli in Dushanzi City, and Derong in Zhoushan all have new expansions online or are likely to start-up very shortly. 2025 is expected to be a little quieter for expansions with two smaller lines, one for C5 tackifiers and one for waterwhite, coming online at LangYing in Sichuan province. 2026 returns us to much more dramatic growth, with new C5 tackifier capacity from Jinhai at Ningbo, Ecisco at Jieyang City and the Sinopec/Henghe JV at Tianjin adding well over 100,000t/yr of new C5 tackifier capacity along with more than 160,000t/yr of new water white tackifier capacity at Tianjin. Much of this new tackifier capacity is being built in conjunction with new upstream ethylene production facilities. So, production capacity continues to grow dramatically, concentrated in China.
Leonardo: Looking forward, what can we expect for the second half of year in terms of HCR supply and demand dynamics?
Steve: Structurally, we remain very long globally for production capacity for tackifiers. But with what appears to be improving demand as we progress through the year and supply chain costs and delays once again on the rise, having the right product in the right place at the right time will become more important and is already leading to some pinch points for supply in the US and Europe and presenting sales opportunities for those with inventory in the right location. Prices in the west are on the rise again as we approach the midpoint of the year.
Leonardo, any final thoughts on pine chemicals as we look towards the next few quarters?
Leonardo: Market participants agree softer and even stable rosin and derivatives markets will continuously affect tall oil rosin and tall oil rosin esters margins as well as CTO fractionation rates. Although CTO volumes into fractionation this year are discussed slightly higher over 2023 levels, they remain low from the levels seen in previous years.
Gum rosin saw increased pricing dynamics on the back of more expensive pine oleoresin costs in Brazil, but prices are not increasing as fast as suppliers wish, and southern European buyers face competition with hydrocarbon resins, whose pricing is getting competitive again, and in some cases, there is also competition with competitively priced TOR esters. Chinese business sentiment is not strong for gum rosin and China hasn’t been much of an active buyer for South American gum rosin and turpentine as it was last year. Prospects indicate a still challenging third quarter for CTO, rosin and rosin esters markets unless demand really picks up and feedstock costs are balanced to derivatives demand and selling prices.
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