Chemrez expects its oleochemical margins to improve this year

MANILA, Philippines - Listed Chemrez Technologies, Inc. expects profit margins for its oleochemical segment to improve this year, thanks to a law increasing the use of the substance in diesel fuel. Oleochemicals, derived from biological oils and fats, account for 42 percent of the total revenues at P162.58 million. The segment posted lower profit margins at 10 percent in 2008 from 22 percent the previous year amid higher biodiesel sales. The business experienced increased competition resulting in lower selling prices, Chemrez said, blaming volatility in coconut and oil methanol prices. "With the mandated biodiesel blend increasing to two percent from one percent as of Feb. 6, 2009, it is expected that oleochemicals will continue to be the largest operating business of the company, contributing the majority of the company’s revenues," Chemrez said in a regulatory filing. However, the biodiesel business is expected to experience increased competition as more new entrants start their operations, resulting in even more aggressive selling prices and lower margins," Chemrez said. Eleven companies including Chemrez registered as biodiesel producers, with total production capacity of more than 300 million liters per year, the Department of Energy said. Chemrez said this is more than double the capacity required for the B2 or 2 percent blend under the Biofuels Act of 2006. “While coco-biodiesel will be expected to be its flagship product under the oleochemical and biopetroleum segment this year the company is well underway to exploit opportunities for coconut methyl-ester based specialty products in the export market," Chemrez said. Nevertheless, it will mainly “look to the domestic market where the national mandate preempts other types of biodiesels from being introduced," it added. The company expects to be play a bigger supplier role in the local market, being a significant producer of coco-biodiesel. Its other oleochemical products include glycerine and other methyl ester derivatives, which are used mainly as surfactants or foaming agents for soaps and detergents, and are mainly produced for export. Next: Oleochemical industry contracts as recession cuts demand Oleochemical industry contracts as recession cuts demand In 2008, the oleochemical industry suffered significant contraction in its export markets when world demand for agricultural and industrial commodities collapsed, Chemrez said. "Weaker global consumer demand has sharply dampened requirements in advanced economies for oleochemicals and led to a significant drop in the prices of competing agri-feedstock due to the excess supply situation in the world market," it added. The first full-year implementation of the mandated one percent biodiesel blend for all diesel fuels propped up the company’s total sales to a record high of P4.66 billion in 2008 from P3.79 billion. However, resins and specialty products sales, which accounted for 43.2 percent sales, dipped three percent due to business slowdown in its target markets such as construction, appliance, and packaging industries. Powder coating sales slid by 11.4 percent, accounting for 4.9 percent of total sales. While it also markets and manufactures polystyrene resins grades, powder coatings, and other specialty chemicals for both domestic and export markets, Chemrez saw a 22.52 percent decline in net income to P372.39 million from P480.65 milion in 2007. This resulted in weaker earnings per share at P0.28 than P0.34 previously. Higher cost of goods sold due to rising raw materials that peaked in the third quarter dragged down Chemrez' gross profit by 17.19 percent to P528.38 million from P638.07 million. Cost of goods rose by 31.1 percent to P4.14 billion. Chemrez also said it has sufficient capacity to address any expected increases in 2009 in sales volume for its resins, powder coating, and other specialty chemical lines. "Increased marketing and research and development activities to keep its market leadership in various segments are integral to the 2009 business plan which also includes further export market development efforts," it said. Chemrez believed it has sufficient capacity to increase further its coco-biodiesel sales and its share of the domestic market. "In view of general expectations of reduced domestic economic growth in the light of prevalent volatilities in the international economy, the Company is undertaking efforts to sustain its growth and competitiveness in its markets," it said. Besides further introducing other specialty chemical products which are less susceptible to competition and which carry firmer margins, the company will continue to reduce manufacturing costs. The company will also tighten management of working capital with closer focus on customer credit quality and improved inventory planning. - GMANews.TV