Conditions ripe for caustic soda hikes

By By Christopher Reilly -- Purchasing, 12/8/2000

The market for chlor-alkali has transitioned to a state of unbalanced demand. Typically, demand for chlorine and caustic soda grows at the same rate on an annual basis. However, in the short term, demand for these related chemical products seems to be headed in opposite directions.

While many factors combined are affecting the current market situation, the most important, say analysts, is declining global demand for chlorine and exports. With no significant new material scheduled to come on line in the next two years, producers have cut back production in the U.S. Less chlorine production has tightened caustic soda supply and allowed producers to raise prices.

Sustained demand for caustic soda, lower demand for chlorine from the derivative markets, high energy feedstock costs, the changing global export market, and other factors are also making an impact on the chlor-alkali price picture.

Price situation

In terms of price, conditions in the chlor-alkali market often paint a volatile landscape. Because chlorine and caustic soda are co-products (each ton of chlorine produced yields about 1.1 tons of caustic soda) and are used in very different end-use market applications, supply for one is dictated by demand for the other.

Due to the sheer volume demand for chlorine use in producing derivatives such as vinyl chloride monomer, and polyvinyl chloride-primary materials used in global construction markets-chlorine demand drives chlor-alkali supply.

Purchasing forecast: As chlorine prices flatten and begin to erode, look for current and proposed caustic soda price increases to take hold through the first quarter of 2001, barring a drastic change in the market's dynamics. For the next six months, buyers should watch energy costs and the supply/demand balance as indicators as to whether caustic soda prices will continue to surge or stabilize.

Two price increases were announced in the past two months in a united front by the major caustic soda producers. In August, producers proposed a $50/ton increase, followed by a $60/ton increase in September. Both these increases were to be fully implemented by October 1.

And while these price increases appear to have gone through, major producers, led by Olin, Dow Chemical and Vulcan Chemical, have announced additional price increases for liquid caustic soda. Olin and Dow have proposed $60/ton increases, effective November 1, while Vulcan Chemical announced a $70/ton increase, which the company expects to implement on November 15.

Most analysts believe that prospects look good for the third price increase to go through, though many buyers will not see the full increase for another month. Mary Blackburn, chlor-alkali analyst with Houston, Texas-based chemical consulting group, Chemical Market Associates Inc., comments, "By itself, caustic soda is a poorly contracted commodity material," she says. "Many monthly contracts for caustic soda have 15-day price-increase notifications and price-protection clauses. Buyers without notifications written into their contracts will likely see a little bit of a price increase for caustic soda in mid-November to December," she says. "The majority of the price increase will actually be felt in the marketplace during the first quarter of next year."

For some buyers, seeing the rapid increase in caustic soda pricing in the past couple of months has made them skeptical of further increase announcements. However, the majority of buyers believe that additional increases will go through if current market conditions remain the same through the end of 2000.

"A lot of buyers are really getting hit hard with the price hikes over the past couple of months," says an Arkansas-based buyer. "Suppliers are announcing additional increases for caustic soda, and the way things look right now, they'll get them," says the buyer.

"We've heard rumblings about further price hikes in November," says a buyer located in Texas. "If supply remains tight, increases will continue to be pushed through. However, if the supply situation changes and the market begins to stabilize, there's no reason to support additional increases," she says. "Producers just got $110/ton for caustic soda. We'll have to wait and see if the market will bear further price hikes."

Not everyone agrees. One buyer, based in McIntosh, Ala., says that following the $110/ton total caustic soda increase in October, "prices will stay right where they are through the end of the year."

Data from buyers responding to Purchasing's monthly survey of chemical transaction prices seem to echo other market observers' estimates. Buyers place average chlorine spot tags at about $240/ton for fourth quarter 2000. With strong demand for chlorine through the first half of 2000, these prices had risen nearly $100/ton on average since this time last year. Chlorine contract prices, however, have risen more modestly. Buyers place average contract prices at about $230/ton, up from about $203/ton for the fourth quarter of last year.

Most buyers believe that with energy prices still high, chlorine prices should weaken in the coming months, with a continued falloff of chlorine demand. Look for chlorine contracts and spot prices to average about $225/ton and $230/ton respectively through the first half of next year.

While chlorine prices stagnate and begin to erode, caustic soda producers have enjoyed sizable price gains during the second half of this year. According to buyers, spot prices for liquid, 50%, diaphragm-grade material averaged about $158/ton at the start of the year, and have jumped to about $269/ton on average for the fourth quarter. With price protection and other contract terms, buyers expect about half of the price increases currently on the table to be in place by the end of the first quarter of next year. At that time, buyers forecast spot prices to average about $303/ton. Contract prices will peak at that time at about $237/ton and will likely remain flat through second quarter 2001.

The same trend is true for liquid, 50%, rayon-grade material, though these prices generally run slightly higher than those for diaphragm-grade material do. According to buyers' data, rayon-grade spot prices averaged about $245/ton for third quarter 2000. Based on the current market situation and the price increases scheduled, buyers expect spot prices in the fourth quarter to average $281/ton. As price increases continue to take hold, buyers see spot market prices breaking the $300/ton mark, and then leveling out at about $320/ton on average for first quarter 2001.

Contract prices will increase proportionally, from about $234/ton for third quarter 2000, to about $273/ton in the fourth quarter, say buyers. Rayon-grade caustic soda contracts will then peak at about $309/ton in the first quarter, and level off through the end of the second quarter of next year.

Pricing for caustic soda beads has also seen an upward swing. According to buyers who responded to Purchasing's monthly survey of chemical transaction prices, caustic soda bead prices averaged about 26¢/lb for contracts and on the spot market during the first quarter of this year. From there, contract prices increased about 2¢/lb on average through the second quarter. Spot pricing increased about 4¢/lb for the second quarter, say buyers. Prices remained flat at 28¢/lb for contracts and 30¢/lb for spot tags in the third quarter.

Third- and fourth-quarter price increases announced by producers are being felt in the fourth quarter, according to buyers'data. Spot prices are forecast to jump 4¢/lb in the fourth quarter, to average 34¢/lb. Contract prices will increase to 32¢/lb on average, say buyers. As producers continue to gain momentum, buyers predict that prices will continue to increase in the first quarter of next year. Price averages are estimated at 38¢/lb for contracts and 40¢/lb for spot tags.

Midterm, buyers expect market conditions to stabilize, which will flatten pricing. And by the end of second quarter 2001, buyers expect to see some slight price erosion. Look for third-quarter contract and spot prices to average 36¢/lb and 38¢/lb, respectively.

Many factors influence demand

Most analysts estimate U.S. chlorine demand at about 2.5%/yr in 2000, which is in line with GDP. However, according to Joel Saltzman, vice president and general manager at Northbrook, Ill.-based Old World Industries, a reseller of caustic soda, chlorine demand grew at more than 7% for the first half of the year, then fell off in the third quarter, and behind that demand decrease is the performance of the end-use markets for the vinyl chain, chlorine's largest application.

"Automotive production is off a little this year, and that market consumes a lot of vinyl," Saltzman says. "Also, housing starts are down for the first time in several years. These reasons, along with inflation creep, have brought down chlorine demand," he says.

Mary Blackburn agrees, "Demand for vinyls, especially polyvinyl chloride (PVC) and vinyl chloride monomer (VCM), has been much lower this year than anticipated," she says. "With lower demand for vinyls, producers can't move as much chlorine and have been forced to cut their production rates."

According to Blackburn, chlor-alkali producer operating rates have gone from the high-90% range for the first half of this year, to about 88% currently.

Besides lessened demand from the vinyls chain, another reason for this summer's decreased chlor-alkali production rates was high production costs, which was driven by ramping energy costs. This caused concern for producers because natural gas costs make up more than 60% of chlor-alkali production costs. Production costs went up as prices trended down, which put a significant dent in producer profit margins.

"During the summer it became unprofitable for many chlor-alkali producers to make product," says Mike Dye, vice president of marketing at Vulcan Chemical, based in Birmingham, Ala. "At that time, many producers found it more profitable to sell their power back to the grid, rather than produce material," he says. This created a base for the tightness the chlor-alkali market is seeing today.

A delicate balance

Analysts and buyers point to the ongoing supply/demand balance as the main factor that will affect price in the short- to midterm for chlorine and caustic soda.

"Supply and demand for chlor-alkali are often delicately balanced," says Bill Osborne, vice president and general manager of LaRoche Industries' chlor-alkali business, based in Atlanta, Ga. "Caustic soda demand is essentially determined by the GDP, and, more specifically, by the global GDP. "However, in the U.S., the chlor-alkali market is largely self-contained, which is to say that most product consumed in the U.S., is produced in the U.S.," he says. "Because there isn't much chlorine and caustic soda coming into the U.S. market to moderate supply and demand swings, it doesn't take much to drive prices upward or downward," Osborne says.

Export levels have also been a factor in the current supply tightness for caustic soda. "Caustic soda exports were at record levels during the second quarter," according to Mary Blackburn. "But these levels seem to have dropped in the third and fourth quarters, simply because there just isn't enough caustic soda available in the domestic market," she says. "Producers are finding other ways to honor their international contracts."

Supply will remain tight

Buyers will continue to fight price increases, but with no significant capacity expansions planned (or at least announced) for the next two years, suppliers will likely have the upper hand in spot price negotiations if the tight market continues.

The current supply of caustic soda has become tight enough for some of the major producers to announce material allocation programs. "PPG and Olin are currently on allocation, and OxyChem will probably announce a supply allocation in the near future, says Old World Industries' Joel Saltzman.

In supply news, OxyChem, based in Dallas, Texas, recently shuttered its Deer Park chlor-alkali plant. According to a company press release, the plant was to be shuttered for at least 30 days in order to improve production balances.

In other supply news, HoltraChem Manufacturing Co. has closed its Orrington, Maine, and Riegelwood, N.C., chlor-alkali production facilities and exited the business, effective September 15 for the Orrington plant, and October 13 for the Riegelwood facility. High capital and operating costs and low pricing were cited as reasons for the failure of the ventures, which were begun in 1994.

PPG Corp. has completed a joint venture to reduce energy costs at its chlor-alkali facility in Lake Charles, La. The JV, with Ethergy, New Orleans, La., the power development arm of Entergy Corp., The Woodlands, Texas, will provide a 425-mw co-generation plant. The construction of the co-generation plant, scheduled for completion in 2002, will make the PPG facility 15% to 18% more efficient, according to PPG estimates.

The Dow Chemical Co., Midland, Mich., has shut down its 500,000 ton/yr chlor-alkali plant located in Freeport, Texas. According to a company source, the plant will be shuttered for an estimated three to six weeks. The shutdown will represent a loss of approximately 20,000 metric tonnes of production.

Vulcan Chemical brought on a new 600 ton/day membrane cell plant expansion in Geismar, La., as part of a joint venture with Mitsui & Co., USA, which has its offices in New York, N.Y. The expansion yields 600 tons/day of chlorine and about 660 tons/day of caustic soda.

Commenting on the success of the venture, Mike Dye, vice president of marketing at Vulcan Chemical, Birmingham, Ala., says, "We're shipping most of the chlorine to the isocyanates productions next door (basf Corp. and Rubicon International). They're using the chlorine and giving us back the anhydrous HCL," he says. "Then, through an oxy-chlorination expansion, we're making EDC out of that. EDC is the main product Mitsui takes to market," Dye says.