Market Topics

Narrower Options for Waxes


Paraffin wax, once a near-after-thought to base oil manufacturing, has become a valuable prop to API Group I refinery margins. Due to falling Group I capacity over the past decade, U.S. wax production slipped from an average of 500,000 barrels per month in 2005 to about half that now, making for a balanced to snug market. End-use demand in a number of sectors appears set to grow again, and mid-melt paraffin prices have held in the $1,585 per metric ton range for most of the year.

Thats all good news if youre a wax producer, but from the viewpoint of wax buyers, its a source of unease, says Gregg Ublacker, director of regulatory compliance and product safety at Yankee Candle Co. in South Deerfield, Mass. Yankee Candle boasts of being the largest U.S. maker of premium scented candles, and the countrys biggest buyer of candle-grade wax. Speaking Nov. 1 in Houston, Ublacker described what his company wants from wax producers, its need for consistency in supply and quality, and how regulations are affecting these requirements.

Were a premium candle company and fragrance company, and our wax needs are different than [floor-wax maker] SC Johnson & Sons, he told the International Lubricants and Waxes meeting of the American Fuels & Petrochemical Manufacturers. Yankee Candle is a consumer product manufacturer, with 2011 revenues of $786 million. It also is a retailer, selling its candles at some 550 company-owned stores and via wholesale to another 28,000 outlets in 42 countries.

Paraffin wax is the only material Yankee buys that it considers to be a commodity, and historically its price moved not with the price of petroleum but with inflation. In recent years, though, wax prices outpaced inflation, threatening the companys ability to control its cost-of-goods.

When it comes to wax, Ublacker told AFPM, the simplest fix for Yankee Candles needs would be an unlimited supply of fully refined paraffin waxes that never changes, at a low cost that never increases.

Thats never going to happen, he conceded. In reality, the price of wax will fluctuate. And while wax demand will increase, it appears that supply could be decreasing. That means that changes in wax sources and quality are likely to continuing having an impact on Yankees current and future offerings.

Hot-button issues for wax, he said, include:

Regulatory pressures. Regulations are becoming more stringent, and REACH [Europes chemical registration and approval program] is tough for a company our size. In Europe, were a plus-$100 million company. Our candles are more than 95 percent wax, and the next REACH deadline comes June 1, 2013. Any change to our products made after this date will require a new chemical registration. But if we need to switch waxes, or if theres a change in the Chemical Abstracts Service number or chemical chain, we could become the only source using that material in Europe, and our cost of compliance will be very high.

Green initiatives. Here, Yankee Candle is being urged to use alternatives like soy waxes. We get a lot of pressure because paraffin is not renewable. However, the consumer really wants our model candles characteristics, and soy doesnt give the same experience, Ublacker said. So we will continue to use paraffins, although we also will use renewables and blends.

NGO demands. Nongovernmental organizations such as health and environmental groups have raised questions about candle safety, said Ublacker. Plus were hearing demands for transparency in our operations and chemicals. Trying to be transparent to the consumer, though, can make it difficult for our suppliers.

Refining changes. Any time theres a change in the CAS number for one of the companys waxes, its difficult to deal with the fallout. There are also sourcing pressures as U.S. and global wax supply changes. A change in a refiners crude supply, for example, can create headaches for Yankees candle formulators. For example, how do we handle a higher-oil-content paraffin? pondered Ublacker.

The candle industry also has developed reams of data regarding the health effects of candle-burning in the consumers home, including emissions of gases or soot from the combustion process. We dont know yet how a change in the wax or in the refining method may affect the value of that data, Ublacker pointed out.

He appealed to refiners to work more closely with Yankee Candle. We want to collaborate on sales and technology, but also with your regulatory group to foster stronger collaboration there. We dont have a lot of strong technical experts, but were facing regulations that are getting stronger, and customers who are asking questions. We need help with that, and perhaps we can share resources, he concluded.

Another speaker at the AFPM meeting, Amy Claxton, principal of My Energy consultancy in Hummelstown, Pa., held out some hope that U.S. wax supply is unlikely to shrink further. She pointed out that the countrys ranks of Group I refiners have mostly stabilized after the rationalizations and closures of the past 10 years. Americas surviving Group I refiners are not particularly vulnerable, Claxton told the gathering. So their Group I stays in the portfolio, and so do their waxes and solvent-extracted bright stocks.

But demand is poised to climb and make for a tighter market, said Frank Zaworski, markets editor in ICISs Houston bureau. He predicted that the likely production of U.S. waxes will be around 30,000 to 40,000 tons per month for the foreseeable future.

Globally, the number one market for wax by volume is candles, which accounts for 42 percent, Zaworski said at the Houston gathering. But the number one market by value is health (including cosmetics, soaps and medicines); although it buys only 3 percent of the worlds wax volume, it skims off the most refined and highest purity types.

Candles are around number four in terms of value, Zaworski pointed out. In the United States, candles are for ambience, for romance. But in Latin America, candles are used for religious purposes and as basic lighting. So while candle purchases in the United States have declined with other discretionary spending, in Latin America demand has held steady.

Industrial outlets for wax include packaging, where demand is steady, and containerboard coatings, which is growing about 2 or 3 percent a year. Wood products also use a lot of wax, and recovery in the construction industry could signal significant demand in 2013 from medium-density fiber-board, Zaworski said. This market could grow 5 or 6 percent overall as the construction industry rebounds. Weve seen particle board demand grow this year by less than 1 percent from 2011, while MDF has been up more than 11 percent.

As demand surges, so do prices, he observed. In October 2011 the U.S. price for mid-melt paraffin wax was around $1,585 per ton, and although it went down in January and February, by October it was back up and climbing, ICIS reported.

Looking at the global and long-term picture for paraffin waxes, Energy Vice President Geeta Agashe of the market research firm Kline & Co. said fairly large shortages loom ahead. Agashe is based in Parsippany, N.J., and although she was unable to reach Houston due to Hurricane Sandy, she scheduled a webinar for AFPM attendees on Nov. 8.

The next five years will be very turbulent for the wax industry, she cautioned. Wax supply is changing, with a return to recession feared in North America, Europe and Asia. Kline also expects global wax suppliers will continue to restructure, with increased capacity coming in Asia while Western Europe and North America could see more shrinkage. Synthetic wax supply – especially from gas-to-liquids plants – probably will grow, too.

According to Klines study Global Wax Industry, 2010 and current research that is updating it, Asia-Pacific firmly leads the world in wax production, generating about 43 percent of the worlds total 9.6 billion pounds in 2010. North America comes next with 19 percent of the supply, followed by Western Europe at 14 percent.

Petroleum paraffin is the dominant wax type, at 84 percent of the global output, Agashe explained. Olefin waxes account for 6 percent, while GTL waxes contribute 5 percent. The rest comes from animal, vegetable and other sources.

Kline forecasts global wax supply will reach 11 billion pounds by 2020, a modest global growth rate of 1.4 percent a year. But some wax types and regions will outperform the pack. Africa and the Middle East will see wax production grow by 50 percent over the decade, and Asia-Pacific will add about 25 percent. Elsewhere, production will be flat or even shrink slightly.

However, demand for candles – now the largest outlet for wax at 43 percent of total consumption, according to Klines research – will become sluggish due to declining demand for candles for illumination and a flat market for religious uses.

What could propel wax demand? Agashe pointed to packaging, board sizing, and rheological and surface applications such as plastics, tire, rubber and hot-melt adhesives. New applications in the health industry will also push demand (but as the industrys smallest market it wont contribute much to overall volume growth).

Kline believes global wax demand will hit 12 billion pounds by 2020, a growth rate of 2.3 percent. In fact, it estimates demand will out-strip supply and begin to leave a growing deficit after 2015. By 2020, the supply shortfall could be 1 billion pounds worldwide.

Looking ahead to the period from 2015 to 2020, Agashe said fairly large wax shortages seem likely. These shortages probably will result in higher prices, which in turn will subdue demand from price-sensitive segments. This also may drive non-traditional sources to boost their output.

If so, a turbulent wax market could persist well beyond this next five years.

Related Topics

Market Topics