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Q3 2019 Caustic Market Overview
We know it has been a while since we last posted, but there has been a lot of uncertainty in the market and now that the picture has cleared up a bit, we would like to give you an idea of where the dust has settled. Despite multiple price increase announcements for Q3 and Q4 and more likely in Q1 2020, pricing has continued to drift south and drift south in a hurry. Not just FOB the USGC, but most shipping points around the world have seen significant price erosion over the last several months. YTD, the Index has reported a drop in CSLI of about $(40) DST, while the Index Spot Low price has declined about $(100) DST. And yet, the same Index is forecasting prices to RISE by $25 DST before year end. This is very typical of “Index Reporting”. This is also why there are routine, dramatic corrections, over the course of a year or two. It’s nothing more than electing to “not post” all the data. The criteria to “post” or qualify for the “Index” to post does not necessarily include RFQ’s. That would be a catastrophe considering the ground pounding Q4 has taken. Many large RFQ’s have been completed with little or no reference from the “Index”. One very large producer has been highly aggressive trying to place incremental domestic tons and yet, it goes unnoticed or does not qualify for the standards defined by the “Index”. A price drop is a price drop as long as you meet the required definition of a price drop, which is….very confusing and explained in gibberish. Imagine if 100% of the market did an RFQ, no movement would be reported. It would be unnoticed. The short answer to accuracy is a lot of phone calls to a lot more customers. If you call the same people over and over again, your market intelligence becomes stale and is no longer valid.
Let’s look at the data and see what we can learn:
Production (CI) (Sept.)
Imports (US Census) (Aug.)
Exports (US Census) (Aug.)
*Apparent demand is calculated by taking production, adding in imports and subtracting exports to determine the total number of tons available for sale in the US vs. prior year. We know the US market has not contracted in the last year, therefore, it is reasonable to assume the market has tightened from last year. We have reported in previous market overviews that there was an inventory build in the USGC of roughly 280,000 DST from mid-2018 to early 2019 but as you can see, the number of tons actually available for sale in the US has decreased by more than 440,000 DST this year, thus eliminating the inventory build. If we just look at the numbers, one would believe the US caustic market is much tighter than last year and this would in theory be supportive of higher prices, but the opposite is happening. This is because, despite what the Index is telling you, demand is much softer than anyone realizes.
Below, is a graph depicting US PMI (Source: IHS Markit) going back to January of 2018 and you can see the precipitous fall. Keep in mind, any rating above 50 is supposed to be indicative of growth. But as you can see, the growth rate has slowed severely.
When you look at ISM, the numbers are even worse, reflecting a PMI of 47.8, indicating contraction in manufacturing. The following is directly from the ISM website:
“Of the 18 manufacturing industries, three reported growth in September: Miscellaneous Manufacturing; Food, Beverage & Tobacco Products; and Chemical Products. The 15 industries reporting contraction in September — in the following order — are: Apparel, Leather & Allied Products; Printing & Related Support Activities; Wood Products; Electrical Equipment, Appliances & Components; Textile Mills; Paper Products; Fabricated Metal Products; Plastics & Rubber Products; Petroleum & Coal Products; Primary Metals; Transportation Equipment; Nonmetallic Mineral Products; Machinery; Furniture & Related Products; and Computer & Electronic Products.”
A number of the industries listed above are large caustic consuming industries. Numbers out of Europe and China are not much better with the German economy in recession and Chinese manufacturing output at its lowest levels in 17+ years (WSJ). No doubt things are slowing down. This in turn means there is plenty of caustic available for sale both here and abroad.
As we look at Exports, the US exported a record 860,000 DST in June and July of this year, fueled by exports to Brazil for the Alunorte and Braskem. This again in theory should be tightening the US market, however, exports in August were only 266,000 DST, the lowest level seen since June of 2018. Keep in mind, Braskem may be importing 100% of their requirement due to production issues but this is purely incremental operating rates for those producers supplying this product due to the EDC/caustic combined ratio. Multiple Producers have been very aggressive pursuing market share as the year has gone on which would indicate higher than usual inventory levels, even with elevated exports. Looking forward, information coming from the market suggest there are limited spot opportunities and aggressive import pricing to both the West (Asia) and East (Europe) challenging US exports for the rest of the year.
Globally, Alumina is still in ample supply, with pricing falling below $300 / metric ton and the global demand growth outlook has been cut revised to only 1.9% annually. This is important because when you hear talking points around the assumptions global caustic demand will exceed supply for the foreseeable future, that assumes global alumina demand growth of 2.5% - 3%. One must note that higher purity bauxite deposits have had a large impact on caustic demand. The better the bauxite deposit the less caustic used for alumina production. A large smelter in Jamaica recently announced it would be ceasing operations by the end of the year. This Jamaican smelter reportedly consumed over 125,000 dmt’s of caustic soda shipped by a gulf coast producer.
Domestically, the largest consuming caustic industry is pulp / paper and we have seen an overall decrease in demand related to mill closures in Louisiana, Maryland and Arkansas. We anticipate this “closure” trend to continue in the short term. There are a number of mills who have converted to soda ash as a replacement for caustic soda and other mills are taking extended outages due to a “global glut” of pulp.
Given all of this information, there can be no doubt demand has slowed significantly and will continue to slow as we head into 2020. This coupled with ample supply available internationally, pricing is being driven south. European caustic prices to the east coast ports, has made domestic competing “gulf coast” supply netbacks, fall to record low levels compared to the rest of the domestic market. However, it is important to remember that caustic is co-product with chlorine, and these plants run on chlorine demand alone. The USGC is still the low-cost producer in the world and they will continue to run the hardest, the longest, at the expense of Europe and Asia. Operating rates in the USGC slowed to 84% in September and it will be very interesting to see where they go for the rest of the year.
We will continue to monitor the market closely and make sure we keep all of our customers abreast of the fluid situation. As always, we are here to provide an honest assessment of the market as it stands today and should you have any questions or concerns, my team and I are here to help. Thank you...
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