Surging natural gas rates will stem price erosion
By Gordon Graff -- Purchasing, 2/5/2004 7:00:00 AM
Caustic soda prices in North America have retreated over the past few months after spiking last summer. But soaring rates for natural gas, which is used as a production fuel, along with an anticipated pickup in demand, should put upward pressure on prices through much of 2004.
Supply: Idled plants
Anemic margins for caustic soda in North America have caused many producers to slash their caustic capacity in that region. Current U.S. capacity for caustic soda is about 15.7 million short tons/year, according to The Innovation Group, a Morristown, N.J. market research firm. But seven plant closures, permanent and temporary, removed some 1.5 million tons of U.S. capacity in the two year period ending in mid-2003, the firm reports.
Caustic soda, or sodium hydroxide, is made in chlor-alkali plants by a process that also produces chlorine and hydrogen as coproducts. The largest caustic soda producers in North America (each with capacities exceeding one million tons/year) are, in descending order, Dow Chemical, Occidental Chemical, PPG Industries, Olin, OxyVinyls and Formosa.
Even as chlor-alkali plants in North America continue to be shuttered or idled, new ones are being constructed in Asia. One reason is that energy costs in that region are far lower than in North America or Europe, notes Joel Saltzman, vice president and general manager for the industrial chemicals division of Old World Industries, a Northbrook, Ill.-based reseller of caustic soda. Another reason, he explains, is that there is a "booming" demand in Asia for chlorine to make polyvinyl chloride and other chlorine-based plastics.
Demand: Sluggish pattern
About 17 million metric tons/year of caustic soda, or 40% of worldwide consumption, is used in chemical processing, reports Dow Chemical. Another seven million tons, or 16% of worldwide consumption, is employed in the pulp and paper industry, the firm adds. Other leading uses of caustic include the production of alumina and petroleum processing.
Demand for caustic soda in the U.S. declined about 2.5% during 2003, estimates Saltzman. He attributes the slide to a lagging manufacturing sector, which did not spring back from recession in the past year as fast as other sectors of the economy. About 15-20% of annual U.S. production of caustic soda is exported.
Producers of caustic soda in North America are losing money on the commodity right now, says Saltzman, who adds that they are able to recoup that loss through sales of chlorine by-product, which is in considerable demand. In fact, he notes that the fairly healthy market for chlorine has contributed to overcapacity—and poor margins—in caustic soda because producers have been reluctant to idle caustic plants that are also churning out chlorine. Even after all the recent plant shutdowns, Saltzman reckons that there is still about 500,000 tons/year of excess caustic soda capacity in North America, which he says is contributing to a "soft environment" in the business.
Natural gas is also making a dent in margins. The current $7/million BTU rate for gas, notes Saltzman, contrasts with the $2.5-$3/million BTU rates chlor-alkali producers have been used to paying. When gas was around $2/million BTU several years ago, the U.S. Gulf Coast was "one of the more economical locations to build new chlor-alkali capacity," says Chemical Market Associates, a Houston, Texas consultancy. But with the present gas rates, the firm concludes that chlor-alkali expansions in the region are unlikely through at least 2008.
Pricing: Upward pressure
Tags for caustic soda slipped by almost $50/ton in the Gulf Coast during the final four months of 2003. Analysts say the continuing economic recovery should spur an uptick in caustic consumption during 2004 of about 2.5% over the previous year. That would be a welcome development in an industry where demand has dropped by almost 10% over the last five years.
But the brighter demand picture may not immediately translate into higher prices. Saltzman believes the price erosion of late 2003 may continue into this year because of lingering overcapacity and continuing weakness in some of the caustic-consuming industries such as pulp and paper. Still, he notes that cost pressures from the natural gas hikes should stem the slippage in tags as 2004 unfolds. "If natural gas gets to be too excessive," says Saltzman, "chlor-alkali producers will reduce operating rates to the point where they can absorb these losses."
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