What is the future for the bio-chemical industry with crude oil below $50?

4 February 2015 update: Crude continues to be volatile, jumping to above $50/bbl  before relaxing to around $48/bbl on 4 February.  And some biomaterials manufacturers are competitive at this crude price level. BioAmber has stated in a 6 November earnings call addressing the issue of lower crude oil pricing, that $5 per bushel, oil prices would have to drop below $30 a barrel for the company to lose its cost advantage.

The buzz at the ICDC downstream chemical conference held in Mumbai on 29 and 30 January 2015 and jointly organised by Tecnon OrbiChem and Elite ++  in the first session of Day 2 is all about alternative feedstocks, including Biomaterials.  All these discussions are taking place under the cloud of low crude oil prices, which have fallen about 40% since OPEC decided not to curtail production in late November 2014. 

On 28 January, the WTI price was $44.45/bbl. Can bio-materials be viable with the current $50 price of crude oil? Will new bio-based projects survive the low-cost crude environment? What are the factors that can allow the bio-materials industry to flourish? Market participants commented that biomaterials prices should not fall at the same rate as those for petroleum-based product prices, which are falling with the price of crude oil.    

Bio-materials should be based on commercial viability and should be able to compete in the petrochemical market: There should be “no mandate, no subsidies; differentiation is key.” But all markets are not created equal when it comes to potential for differentiation. The Indian market presents a lot of challenges in taking bio-based materials to the market as, overall, buyers are quite sensitive to price. 

This is also true of China and other developing or emerging economies in Asia and elsewhere. So how competitive can bio-chemicals be in the current market? What is the petrochemical context in this brave new crude oil world? If we take the example of maleic anhydride, feedstocks here have dropped from $1600/ton fob China Main Port in October to $1000/ton in January 2015.  This sharp fall in the cost of maleic anhydride has implications for the price of downstream succinic acid,, currently priced at around $2000/ton.  The lower cost of benzene feedstock for maleic anhydride in China has had a knock-on effect on maleic anhydride and related products, including succinic acid. 

Following the lead from crude oil, benzene prices in China dropped about $300/ton in one month.  Downstream prices are almost certain to follow these feedstock cost leads and maleic and succinic were no exceptions. And it’s not just a pure cost issue; once lower benzene prices were seen, higher cost, usually uncompetitive benzene plants in China started to run again, creating a surplus of product on the market that adds to downward price pressure downstream.

Another concern that was voiced during the conference was efficiency in biomaterials production, not just because of actual feedstock costs but also  due to the challenge of being carbon efficient when operating, as most biomaterials plants do, at a small scale.  At the same time, there are larger scale plants coming up, including bio Succinic in Sarnia Ontario starting up this year and for 2017, BioAmber plans to bring up a world scale bio-succinic acid plant with a capacity of 70ktpa and 100ktpa of BDO. BioAmber has also pointed out on the plus side that that glucose-based feedstocks insulate downstream buyers from price volatility seen in the crude oil market.

There is some encouragement from the home and personal care sector where oleochemicals already make up an estimated 50% of the feedstocks for these products and where customers are demanding “safe” products, which are free-from parabens and are green and mild, according to Shrikant Waghode of Croda India. The short answer to the question, “can bio-materials compete with petrochemicals when crude oil is around $50/bbl” may be, “no.” 

However, differentiation may be able to mitigate this to some extent.  And the bio-materials industry can take some comfort from the growing recognition amongst consumers around the world that crude oil, while cheap in the short term, may cost us more than we are willing to pay in environmental terms sooner than we might care to think.