Green chemicals feedstock: Thoughts about supply risks and volatility - Part 1

The green chemistry industry is developing fast because of a set of 3 major trends:

- Oil progressive scarcity

- Durable high (if not skyrocketing) oil price

- Continued population & demand growth (in particular middle class)

Needless to say, the industry is growing in a context of deteriorating environment, which also has an impact upon ‘green’ feedstock.

Many players are rightfully focusing their effort on technology development but I believe that feedstock strategy is equally important to enable a sustainable business. Although the industry currently has a small footprint, there is no doubt that major challenges will remain offer & demand balance and price, both aspects being impacted by feedstock. Feedstock risk lies in security & stability challenges. The way we address those challenges will alleviate or build up further price levels & volatility risks.

Supply security risk is hardly predictable but is real

 ‘September 2018: In this repeated context of draught Governments have decided intervention actions in the agricultural market: While the USA and Argentina have stopped exporting wheat, the EU Commission has prohibited irrigation for maize. In Brazil & China, sugar cane plantation is limited to force farmers to harvest food crops.’

The scenario may be pessimistic; however the risk is real because a limited number of countries produce the key green chemicals feedstock (figures 1 & 2). Let’s consider this: 4 countries hold 51% of wheat production; Brazil, China and India bring 65% of the sugar cane production; China and USA represent 61% of maize production; 2 countries hold 80% of palm oil production.

We often witness temporary regulations (due to adverse weather event). The risk is to have tougher regulations (quota; tax; etc.) due to more structural issues (permanent water stress & repeated adverse weather conditions; misbalance between food & feed and industrial crops; reduced capacity to finance agricultural subsidies).

This supply security risk goes beyond feedstock access & predictability issues: Are we fit to face an input shortage? What is the impact on our economics if we have to face a 15% input shortfall?

Figure 1: Global sugar cane production shares (source FAO, 2011)

Figure 2: Global palm oil production shares (source FAO, 2011)

Supply stability risk is certain & real

‘2014/2015 campaign: As nearly every couple of years the major grain producing countries are facing a severe drop in harvest due to the impact of drought. The situation is particularly dramatic in China and USA.’

This scenario is not far from reality (figure 3). If we look at the past 100 years the warmest years were in 2010, 2005, 1998, 2003 and 2002. Each time there was a severe draught in at least one (often 2 or more) of the key producing regions, meaning fewer volumes produced. Nearly each time prices skyrocketed.

The agricultural output & price levels can’t be 100% guaranteed since it depends on weather conditions. This output have a nearly captive market: Food & feed industries, in a context of demand growing faster than production, remain even more the prime end markets. The risk is to see more frequent adverse events impacting/ disrupt feedstock supply. Incremental production and yield will provide a limited solution: Arable land is limited, best soils are already exploited, yield gains are less and less important.

In the end, instable volumes raise operational issues: What & where to source? What’s the impact upon logistics? Instability put our economics at risk: What’s the impact of volume/price deviation upon margins, upon cash flow?

Figure 3: Wheat production, price & major droughts (Frost & Sullivan analysis based on USDA 2011 and National Climatic Data Center 2011 data