Will the buyer's market continue?
By Albert Genna -- Purchasing, 12/10/1998
The struggling Asian economies and increasing production capacities have loosened chlorine supplies in the U.S., and significant new capacity still is being added. While caustic soda has tightened up some and prices have risen, a long view shows ample supply ahead.Purchasing's forecast: Chlorine prices will continue to decline in 1999, following a downward trend seen throughout this year. While demand for chlorine will remain relatively stable, increasing capacities in both the U.S. and abroad, coupled with weak Asian demand, should further weaken chlorine prices in 1999. Caustic prices will benefit from strong demand but, for now, supplies are ample. Prices for rayon-grade material will rise from '98 prices, while diaphragm-grade caustic will slip lower.
"The Asian crisis has had a significant impact," says David Rosenstock, U.S. marketing manager for chlor-alkali at Dow Chemical. "Chlorine prices have been hit and operating rates have fallen." The amount of caustic in the U.S. has been affected. "We're seeing very unusual trade flows for caustic," says Rosenstock. "There are imports coming in from Korea and Indonesia, and that doesn't normally occur." Quite simply, the export market is not as healthy. During the first quarter of this year, exports reduced by 10%. Also, there was a 30% increase of foreign material coming in. "If you've got an extra 100,000 tons of caustic here, the whole supply/demand picture will be affected," Rosenstock says.
Chlorine remains the driver of chlor-alkali production, and chlorine continues to be directed by polyvinyl chloride (PVC). PVC is expected to maintain good growth in the years ahead, but could face temporary problems if international demand and economies don't flatten out and start to pick up. A vast amount of PVC goes into the developing world. If the economic troubles worsen or remain truly long term, there will be far too much chlorine capacity available. The result: Collapsing prices and production-level reductions. If this happens, caustic soda prices could boom.
Price slides will continue
Chlorine contracts fell sharply early this year, according to Purchasing's monthly survey of chemical buyers. Prices dove from a fourth-quarter '97 average of $248/ton, to $231/ton in the first quarter of this year. Prices continued to slip all year long, dropping to $227/ton by the third quarter. Buyers expect tags to continue to decline in 1999--falling to an average of $200/ton by the second quarter. Tags are projected to flatten out at $198/ton for the second half of next year. Spot buyers of chlorine were able to find bargains this year, with spot price averages running anywhere from $4 to $10/ton behind contracts. This is not expected to be the case in '99, where buyers say contracts should be fairly close to spot market prices.
Caustic soda (diaphragm grade) prices rose steadily in 1998, according to buyers. Contracts leapt from $190/ton in the fourth quarter of '97, to start this year at $210/ton. Further increases followed, with tags hitting $214/ton in the second quarter and $216/ton in the third. Prices are expected to dip in early '99--falling to $190/ton in the first half of the year--and decline further in the second half, dropping to $184/ton. Spot tags for diaphragm-grade caustic were $9 to $20/ton higher than contracts this year, and buyers predict spot prices to run $5 to $16/ton higher than contracts in the year ahead.
Rayon-grade caustic contracts started the year off sharply, dropping from $286/ton in the fourth quarter of '97 to a first-quarter 1998 average of $258/ton. Tags rose to $270/ton in the third and fourth quarters. Contracts should decline a bit next year, down to $242/ton as the year begins and $255/ton by the second quarter. They should be in the $240-$245/ton range by the end of the second half of next year. Spot tags for rayon-grade caustic also are expected to rise in 1999, jumping to $250/ton in the first quarter and $270/ton in the second.
A word of warning: While Purchasing sticks by our transaction pricing data, it is clear that our contract and spot averages for chlor-alkali are higher than what is actually happening in the marketplace at this time. It is key to examine the price ranges being reported. For example, in October, buyers reported diaphragm-grade caustic contracts as low as $160/ton and as high as $320/ton. Some producers have confirmed that chlorine tags for some customers have dropped as low as $60/ton! Different industries, different contracts, and different volumes all need to be taken into consideration to accurately track this very fluid market.
Asia's negative impact
"The Asian situation has had a fairly big negative impact," says Roger Shamel, president of Consulting Resources Corp. of Lexington, Ma. "Ethylene dichloride (EDC) and vinyl chloride monomer (VCM) exports are way off." This has led to a sizable decline in projected chlorine demand. "Demand is about equal with last year, but there has not been the 3%-4% growth we've seen in recent years," says Shamel. He adds: "Caustic soda exports are also off, but not by quite so much." The question of what will happen in 1999 still hangs open. "The year ahead will be interesting because both chlorine and caustic soda are walking a tightrope between being long and short," says Mike Dye, director of marketing at Vulcan Materials.
Caustic presents the most uncertainty. "For caustic soda, the pulp and paper business has been down, so if there is an upturn, caustic soda could go short," says Dye. "On the other side, it has been a strong year for chlorine demand from water treatment, due to the hotter weather." Demand from alumina also has been strong this year.
For chlorine, the results are fairly typical. "There is more significant impact on chlorine consumption, because it is more responsive to changes in the economy," says Rosenstock at Dow.
The co-product nature of chlorine and caustic soda presents a constant question of balance. The equation is further complicated by economic issues. A slowing of the economy (or a drop such as in the Asian markets) generally slows demand for chlorine first. Caustic is more protected, because it is used in a wider variety of applications. A slowdown in chlorine demand results in a lowering of production levels for both products--and demand often drives the price of caustic soda up. Conversely, an improving economy often pushes up chlorine production and caustic soda prices tend to decline.
While the Asian crisis has dried up demand from many foreign markets, so far the U.S. economy (and for the most part that of Europe) has kept chugging along. Chlorine demand has softened, but not evaporated. At least not yet. Chlor-alkali industry sources don't expect much of a downturn domestically, so this economic crisis won't see a free-fall of chlorine tags or a soaring of caustic soda prices.
The co-product balance of color-alkali is a result of the production process. The most common method used to produce chlor-alkali results in the creation of 1.1 tons of caustic soda for every ton of chlorine. The "balance" is often unstable, and can easily slip. As demand for one of the products shifts, demand for the other can be too great, or too little. This is the main cause of some of the surprising wide swings in price of the two chlor-alkali materials.
Electrolysis of salt brine is responsible for most of the chlor-alkali production in the U.S. (around 95%), and results in the chlorine/caustic soda ratio are called an electrochemical unit (ECU). There are three electrolytic processes currently used in chlor-alkali production--diaphragm-cell, mercury-cell, and membrane-cell technologies.
The mercury-cell process still results in mercury waste and is considered by some to be unfavorable. It should be noted that significant improvements in mercury recovery have been made within the process over the past few years. Still, most new facilities are being built with membrane-cell technology. For example: OxyTech Systems, a supplier of membrane-cell systems, recently announced contracts for five new projects over the next two years, including one domestic plant--at HoltraChem's North Carolina facility. Mercury-cell plants do have a place, however. The mercury-cell process produces a low-salt caustic, which is in demand for some applications, and it is much easier to scale up or down production levels. "Diaphragm and membrane plant evaporators don't scale up or down as well," says Shamel.
Shifts in applications continue
Economic problems have hampered chlor-alkali growth--for now. "Even if the Asian economy picks up, we will see another weak year in 1999," says Shamel. "The best bet is that demand will be flat." But with even a modest Asian recovery, many industry observers see chlorine demand rising around 1%-2%/yr into the next century. Just a few years ago, some had predicted negative growth for chlorine, but this will not be the case.
Chlorine does continue to be phased out of some market areas, especially within the pulp and paper industry, where it has been replaced as the principal bleaching agent. Chlorine is also coming out of many solvents as those products are replaced with non-chlorinated solvent versions. But overall, chlorine demand will continue to perform well. Solid demand from water treatment applications and general industrial chemistry will continue.
Although the drop in Asian demand has struck hard this year, the future should be especially good for chlorine's major end use: polyvinyl chloride (PVC). Chlorine will continue to be increasingly driven by global demand for PVC and vinyl derivatives. Until this year, over 20%/yr of chlorine was exported from the U.S. in the form of vinyl or EDC. As the Asian and world economies recover, expectations are that this percentage will be restored and surpassed in the years ahead.
Caustic soda serves mainly for neutralization in a wide array of areas including chemical processing, petroleum refining, alumina production, and pulp and paper manufacturing. For the most part, the market breakdown for caustic is stable. Predicting what will happen to caustic soda is fairly easy because demand growth often tracks the general economy. In the next few years demand for caustic should increase at least 2%/yr, although as with chlorine, growth has been slightly lower this year.
But caustic remains under the heavy control of chlorine demand. Caustic could face shortages whenever markets are cutting back on chlorine. The demand for alkalinity can be met from soda ash, but another option is chemical caustic. Chemical caustic is produced by a lime-soda reaction process using trona ore as a feedstock. It does not co-produce chlorine. This market is small, but is a serious option for buyers when caustic becomes tight due to chlorine production fluctuations.
The markets for chlorine and caustic soda continue to diverge. In the past, the two often shared similar end uses, but PVC production uses no caustic soda, and pulp and paper uses a great deal of caustic--but increasingly little chlorine. Chlorine is now growing faster as a raw material than as an intermediate. In fact, according to Purchasing estimates, vinyl chloride accounts for near 40% of U.S. chlorine demand. Expectations are that within a few years it could represent over half.
Looks like overcapacity ahead
The Asian crisis has helped slow chlor-alkali demand, but even if chlorine demand shrinks further, buyers should not be that concerned about supply tightness ahead. The industry was running full out early last winter, but operating rates have been in a nosedive all year. According to The Chlorine Institute, rates dove to 92% by April and 91% by June. Rates rebounded slightly later in the summer, up to 95% in August. "It really has not been that bad a year for U.S. production," says Dye. "PVC is still growing at 4%-5% in the long term, and we still see steady 1%-2%/yr long-term growth for chlorine."
Capacity conditions combined with the Asian crisis has led to an overcapacity on both chlorine and caustic soda. Operating rates have remained higher than anticipated. "The reason is that EDC producers are able to sell material overseas at a discounted price, and that is keeping chlorine production running," says Tom Rice, director of customer alliances for Olin Corp. This has led to downward price pressure on caustic soda. "It is really up to the EDC/VCM producers who are back-integrated to chlor-alkali plants to decide how much to keep running, and if it is worth it as the value of caustic continues to fall," he says. The question is: Will producers cut rates? If so, caustic could become short, and prices much higher.
But buyers need not be that concerned, because even if some plant operations are slowed, there is a tremendous amount of new capacity coming on stream--reportedly as high as half-a-million tons/yr. Dow Chemical has added 120,000 metric tonnes of chlorine capacity to its Stade, Germany, facility, and is expected to raise chlorine capacity at Freeport, Texas, by 300,000 tons/yr by the end of 1999.
Vulcan Chemicals also is expanding. The company will increase chlorine capacity at its Geismar, La., facility, bringing it up to 210,000 tons/yr of chlorine and 231,000 tons/yr of caustic soda. There are other reported expansions on the books as well--including Formosa in Taiwan and Tosoh in Japan. "It is fairly typical of the chlor-alkali cycle that after a few good years, new capacity comes on stream," says Shamel. "The end result sometimes is lots of supply chasing too little demand."
There are over 20 producers of chlor-alkali in North America, including such large players as Dow Chemical, Elf Atochem, Oxychem, Olin, Pioneer, PPG, and Vulcan Chemicals. Pioneer this year completed the acquisition of the North American chlor-alkali business of ICI North American. The business included three production facilities with capacities of 376,000 tons/yr of chlorine and 423,000 tons/yr of caustic soda. Pioneer also acquired the Taft, Wash., facility formerly owned by Oxychem. In other business changes, The Westlake Group purchased B.F. Goodrich's chlor-alkali facility in Calvert City, Ky.
Some observers fear overcapacity and a sluggish economy could prompt a shakeout of some of the older North American plants. Several industry insiders feel that plants that predominantly serve the pulp bleaching industry, or those which are geographically isolated, could be in trouble. Says one observer: "Once you get away from the U.S. Gulf Coast, things start to get shaky."
Looking further ahead
Looking beyond the world economic crisis of today, chlor-alkali should remain plentiful and with reasonable price tags. Projected capacities are such that the market is unlikely to take surprise price jumps. Chlor-alkali buyers should have a good year in '99, and even further beyond that.
A growing trend is the "reuse" of chlorine. Chlorine used isocyanate production results in hydrochloric acid, which is then used in EDC. It could be something to consider when looking at the future of chlor-alkali.
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