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OWI Chlor Alkali is committed to providing you with powerful and timely insights and how they affect the industrial chemical market. Below is a repository of alerts we’ve shared.


4/12/2019

2018 was an interesting year for the North American Caustic Soda market and we would like to take a look back at what happened, why it happened and what is developing so far in 2019. 

According to the Chlorine Institute, there were 13,098,134 DST of caustic soda produced in 2018, up 38,230 DST from 2017 and up 244,244 from 2016.

On the trade front, US Caustic Exports finished the year at 3,617,113 DST, DOWN (353K) DST vs.  2017  while Imports also finished down YOY, at 421,852 DST which was (27K) DST lower than 2017.  These numbers are according to the US Census Bureau.  When we take these numbers and put them along side the production numbers, we see the following:

 

2018

2017

% Change YOY

Production

13,098,134

13,059,904

0.3%

Imports (+)

421,852

448,876

(6%)

Exports (-)

3,617,113

3,970,299

(8.9%)

Net US Demand

9,902,873

9,538,481

3.8%

 

Whenever we look at the market, it is very easy to identify supply, because those numbers are published by the Chlorine Institute.  Demand on the other hand is more difficult to get a handle on.  One way to attempt to identify caustic demand is to go through the exercise we have illustrated above whereby, we take production numbers, add in imports coming into the country and subtract exports leaving the country to get Net Apparent Demand in the US.  As you can see above, according to this metric, “Apparent Demand" in the US is up 364,392 DST or 3.8% YOY.  Now, the “all knowing wizard” has repeatedly stated that caustic soda demand in the US grows at an annual rate of just under 1% (100,000 DST).  They look at domestic chemical manufacturing activity, pulp/paper demand etc. to come up with their estimate.  That would mean the additional material available for sale in 2018 (264,000 DST) is most likely sitting in producer tanks at present.  This might explain the aggressive behavior by multiple producers in the 2019 RFQ season and why the Q4 and Q1 price announcements failed to gain traction.

As we headed into 2019, the news that Alunorte would be able to resume 100% operating rates was the talk in every corner of the market and producers were giddy about increased export volume which would enable them to once again raise domestic prices. See April increase announcements (Olin - $50, Oxy - $80, WLK - $70, Formosa - $70).  As a refresher, Alunorte in Brazil consumes close to 600,000 DST annually.  Early last year, due to environmental concerns, Alunorte was forced to run at 50% which freed up 300,000 DST for the spot market and was the main driver in price softness in 2H 2018.  Now, what was initially thought to be a Q2 start up, looks as though it will be pushed to Q3 and that news has all but killed the Q2 price initiative.  The Industry Index written by the “all knowing wizard” who is the producer’s loudest advocate, forecasted $20 DST in their write up 1/31 presumably for the second quarter.  This forecast was prior to any announcement by producers.  In the February report, they retracted this forecasted increase to reflect a “slightly loose” market and revised their price forecast to show flat pricing through the end of Q3.  This is odd……. Why would they do that?

They did this because the facts on the ground do not support an increase at this time and even the wizard had to finally admit it.  Not only are producer inventories up, you now have increased international competition.  There is low priced material coming into both the east and west coasts from Europe and Asia respectively.  Fresh off a string of plant conversions (BREF document) there is once again renewed interest in Europe regularly suppling the USEC which is going to displace material coming from the USGC.  The next parcel due into the USEC is reported to be priced 10-12% lower than pervious shipments.  As reported in our last market update and confirmed by the wizard, the USGC lost roughly 300,000 DST of contract export business going to Australia and by default, some of those tons were “forced” into the US market.  This, in a nutshell, is why we have seen price erosion domestically and failed increase attempts.  There is “A LOT” of caustic available in the market place, plain and simple.  The reemergence of Europe supplying the USEC is an interesting development which is worth watching as 2019 unfolds.  As domestic US producers continue to export to the Scandinavian countries and Nordic countries, the Med backs up and seeks an outlet on the US East coast.  One particular producer, if not 2, seem to be shifting current east coast outlets, supplied via the Gulf for higher net backs in the river system foregoing or conceding tons to the Europeans on the East coast.

Producers, no fault of their own, dug them selves a massive hole and filled it with caustic.  Even after Alunuerte comes back on line (estimated 4th qtr) and they climb out of this hole,  they will find it’s still full of caustic, the equivalent of another one or two Alunurtes!

From our standpoint, if operating rates continue to be consistently in the high 80%’s – low 90%’s, it is going to be hard to see a scenario where caustic prices increase appreciably, barring an “event”, given the amount of product available internationally.  The domestic producer simply will not be able to export it all. Trade routes have been disrupted and caustic internationally is “long”. The global market has recalibrated on an F.O.B. basis.  The other area that bears worth watching is the fact the 2019 Alumina market is in a surplus state according to Alcoa’s Q4 earnings call.  Will these alumina plants continue to run at high rates in the face of a market that is oversupplied?  A major part of Alumina / Aluminum’s rise over the last few years is demand in China.  The WSJ recently reported that China has again cut their growth forecast to just under 6% from a previously reported rate of 6.5%.  The effects of the tariffs are still being felt and if the Chinese Economy continues to slow, demand for Alumina and thus caustic could slow further.

Trying to forecast where caustic is going is difficult because of the number of factors at play.  As we have repeatedly said, anyone who thinks they can forecast caustic out past 90 days is usually on a fool’s errand as the index has shown.  That’s why the repeated prognostications that, “the caustic market is structurally short and will remain so for the foreseeable future (leading to multiple price increases in the coming months / years) look foolish when those prognostications suddenly change 30 days later.”  Yes, if alumina demand continues to grow 3-4% annually and if the global economy continues to grow at a strong pace over the next few years and if the delta between natural gas and oil stays where it is and if there is no new capacity added, we could see future price increases achieved in the market.  But what if the economy slows?  What if the surplus in the Alumina Market and decreased demand from China lead to massive price erosion in Alumina forcing reduced rates?  There are way too many “ifs” in the last few sentences.  As we always do, we look at the market where it is today and give you our honest opinion of where we see the market and the market today is over-supplied.  We are not an index or a producer.  We are the boots on the ground, touching hundreds of customers and living and breathing the market every single day.  We will continue to work hard to provide you the best information possible from our vantage point. 

Buzzwords or thoughts to consider for 2018 & 2019:

  • Alunorte = 300,000 tons lost
  • Australia alumina contract = estimated 250,000-300,000 demand lost
  • New Australian bauxite source utlizes less caustic soda
  • Inventory US build = estimated 300,000 DST
  • East coast European impact = 60,000 – 80,000 DST new material available for sale in the US
  • Distribution = traditional large destocking of inventory due to price erosion = 150,000 DST pushed into market
  • Soda ash conversions = possibly 80,000-100,000 DST of demand lost
  • Pulp Mill closures = 50,000 DST demand lost