Another upward price spiral

Tight supplies, rising feedstock prices will boost these specialty chemical prices again in 2005

Gordon Graff -- Purchasing, 2/3/2005

Like most commodity chemicals, inorganics were buffeted in 2004 by major run-ups in energy, feedstock and transportation costs. But demand for these products was generally robust, enabling many producers to push through significant price increases. The hikes were also spurred by constrained supplies in some categories such as chloralkali and hydrogen peroxide.

The bad news for buyers: Manufacturers and analysts say a strong economy and elevated energy rates should keep inorganic prices spiraling upward in 2005.

Looking at some specific commodities, chloralkali supplies "are very tight," says Steve Brien, an analyst with Chemical Market Associates, Houston, Texas. He notes that almost 1 million tons of choralkali capacity have been taken offline over the past two years.

Reserves of titanium dioxide (TiO2) are also constricted. Dan F. Smith, president and CEO of Lyondell Chemical, which recently acquired leading TiO2 producer Millennium Chemicals, recently pegged TiO2 operating rates at "90% or more" of capacity, which he said was the highest level since the early 1990s.

For hydrogen peroxide, North American capacity utilization averaged 95% for 2004, reports Richard H. Wylot, business manager for hydrogen peroxide and peracetic acid at Solvay Chemicals, Houston, Texas. He says U.S. demand for peroxide will outstrip supply by this summer.

Meanwhile, the soda-ash industry is operating at "full capacity utilization," says Ted Fastert, national sales manager for soda ash at Solvay. He expects "continued shortages" for this commodity throughout 2005.

As for sodium bicarbonate, supplies and demand "are pretty much in balance," says Arthur Esposito, a senior business director at major bicarbonate producer Church & Dwight, Princeton, N.J. U.S. sodium bicarbonate producers are operating "slightly above" 70% of plant capacity, says Scott Schreiber, business manager for sodium bicarbonate at Solvay.

Volumes of inorganic chemicals sold in the U.S. during 2004 were 1.2% greater than in 2003, and are likely to be 1.4% higher this year than in 2004, reports the American Chemistry Council (ACC).

ACC notes that inorganics are weaker than chemicals as a whole, which had sales volumes 5.5% higher in 2004 than the previous year. ACC economist T. Kevin Swift attributes that result to softness in certain inorganic end-use markets, such as steel, which has cut back its use of oxygen.

Among the inorganic products growing at close to the industry average (1% to 2%/year) are sodium sulfate and sodium chlorate, according to Commerce statistics. On the other hand, those figures show that production of aluminum sulfate declined by 4% for the first three quarters of 2004 over the same period a year earlier.

But many inorganics are growing faster than average. Titanium dioxide sales are expanding by about 3% annually, estimates Smith. Demand for chloralkali products was about 6% higher in 2004 than in 2003, reports Brien, adding that growth for these two commodities this year should be "equal to or maybe slightly greater than" last year. And hydrogen peroxide demand has been improving in recent months at the yearly rate of "over 3.5%" since 2001, says Wylot.

While higher energy rates have put upward pressure on prices of inorganics, the impact has varied. Increases have been steepest for products with limited supplies and surging demand.

Chlorine, for instance, started off 2004 at an average selling price of $210/ton and soared to $340/ton by year end, according to PURCHASINGs customer surveys.

The same figures show that caustic soda's price nearly doubled over the course of 2004, from $120/ton to $210/ton. Soda ash rates also climbed significantly in 2004—from $95/ton to as high as $131/ton.

Tags for sodium bicarbonate showed "a slight uptick" over the last year, says Esposito. While prices of titanium dioxide declined slightly during 2004, contract rates are now trending upward on the back of a strong demand and tight supplies.

Among other large-volume inorganics, tags for sodium chlorate, calcium carbonate and calcium chloride changed little over the past year.

Manufacturers of soda ash, sodium bicarbonate and hydrogen peroxide say their margins are under strain, a situation that usually prompts companies to seek higher rates.

As for chlorine and caustic soda, Brien says tags will continue to escalate in 2005—but perhaps at a more modest rate than in 2004—"as long as world economic conditions stay as good as they are now."