Chlorine prices spike in complicated supply scenario
With caustic soda prices diving, producers up chlorine prices in an effort to save margins
Dave Hannon -- Purchasing, 10/28/2009 3:53:01 PM
Buyers were caught off-guard by a spike in chlorine prices
in the last couple months, which market watchers say has been driven not by
supply and demand, but by chlor-alkali producers looking to firm up margins.
According to Purchasing's October buyers' survey (available for sale at Purchasindata.com), buyers are seeing chlorine prices as high as $400/net ton this month, more than twice what they were paying only a month ago. Joel Lindahl, director of chloralkali and vinyls at Houston-based CMAI, tells Purchasing.com the chlorine price increases are the result of two main drivers. First, in July and August, chloralkali producers were forced to shorten production of chlorine because they had high inventories of its co-product caustic soda. "This led to a rapid increase in spot chlorine prices and announced price increases on contract chlorine, all justified by lack of supply," Lindahl says. "Demand remained pretty weak, but supply was curtailed."
The second main driver came when, in order to move the growing stockpiles of caustic soda, producers dropped caustics soda prices quickly from record high levels. Diaphragm grade liquid caustic soda has dropped to under $200/net ton according to the most recent Purchasing buyers' survey.
"With caustic soda prices much lower, the producers needed to get more value from the chlorine they are making in order to stay above costs...so the price increases have been pushed into chlorine markets."
The good news for buyers, says Lindahl, is that chlorine prices seem to have stabilized at this new, higher level, and may soften in the near term. And a report from Bank of America-Merrill Lynch Research analysts says that "chlorine price momentum has stalled and the $75/ton nomination announced earlier appears unlikely to be implemented."
A buyer responding to Purchasing's monthly survey concurs with Lindahl: "To make up the margins [of low caustic soda] the producers are increasing the price of chlorine which is in high demand from late spring to early fall for use in pools and waste treatment plants. Then demand drops off when the temperatures drop. In the real world of supply and demand chlorine should be dropping because demand is now in the slow season and the producers cannot store chlorine like they can caustic."
KMG Chemicals buys chlorine for use in its wood treating product, Penta. KMG president and CEO Neal Butler said in its recent earnings report that, "Due to fluctuations in the supply and demand balance for this chemical, the spot price for chlorine has recently risen dramatically, and we are watching to see where it will settle in the near-term. We do expect chlorine prices for the second half of calendar 2009 to be significantly higher than the first half, which will cause some erosion of our Penta margins."
The rise in chlorine prices has also been mentioned in recent earnings reports from several chlorine producers. For example, in its third-quarter earnings call, producer Olin Corp. said, "Demand for chlorine and caustic soda remains a major challenge facing the business. Specifically, third-quarter chlorine shipments to vinyls, urethanes, and titanium dioxide customers declined 18%, 43% and 1% respectively compared to the third quarter of 2008 levels." But despite the decline in demand, Olin officials said, "Chlorine prices increased during the third quarter compared to the second quarter as we began to see a portion of the benefit from the chlorine price increases that were announced in the second quarter."
Olin expects chlorine prices to increase further in the fourth quarter of 2009 and continue to increase into the first quarter of 2010.
Chlorine producer Canexus Income Fund said in its most recent financial report it announced chlorine price increases "reflecting reduced industry capacity and increased chlorine demand from seasonal water treatment. Previously announced price increases for chlorine continue to be implemented while caustic soda price increases have been announced for the fourth quarter."
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