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2016 Caustic Soda Market Recap

2/23/2017

2016 Caustic Soda Market Recap

The 2016 caustic soda market consisted of price increase announcements totaling $210 - $295 DST depending on the producer.  The “IHS Contract Low price fob USGC” increased by $110 DST or 19%; while the “IHS Spot Low price fob USGC” increased $140 DST or 56%.  There is a full breakdown of the various increase announcements along with corresponding IHS price index movements on the OWI website.  When looking at why the market moved up, you need to look no further than the trade balance. 

Basic Market Facts (supply):

  • Production (CI) Short Tons:
    • 2016 = 12,853,890 DST
    • 2015 = 12,457,142 DST
    • YOY Increase of 396,748 DST or 3.2% (Please note, Shintech does not report production statistics to Chlorine Institute.  Nameplate production capacity of the Plaquemine, LA site is 1.16MM s/t chlorine). 
  • Imports (PIERS) Short Tons
    • 2016 = 461,756 DST
    • 2015 = 664,364 DST
    • YOY Decrease of (202,608) DST or (30.5)%
  • Exports (PIERS) Short Tons
    • 2016 = 3,513,600 DST
    • 2015 = 2,894,265 DST
    • YOY Increase of 619,335 DST or 21.4%
  • Total # of Tons Available for Sale in US (Production + Imports – Exports)
    • 2016 = 9,802,046 DST
    • 2015 = 10,227,241 DST
    • YOY Decrease of (425,195) DST or (4.2)%

Basic Market Facts (demand) (IHS):

  • According to the December 2016 IHS Market Statistics Report:
    • Chlorine Demand is expected to increase in 2017 vs. 2016 by 2.5% and again by 1.6% in 2018 vs. 2017.  To put this in perspective, that means in 2017, there will be 334,200 more DST produced in 2017 than 2016. 
    • In 2018, caustic production is projected to be 211,009 DST higher than 2017 if the IHS forecast holds true, bringing the 2018 projected yearly total to 13,399,100 DST.  That means there will be an additional 545,209 DST of caustic in the market over the next two years.
    • It’s also important to note, based on current CI production capacities, at these production levels, the effective operating rate would exceed 88%.    

 

Demand:

  • Domestic US Demand, according to IHS Market Statistics:
    • 2016 = 10,505,000 DST
    • 2017 = 10,445,000 DST
    • 2018 = 10,505,000 DST
  • So, according to IHS, caustic production set to increase by 545M DST over the next two years due to both domestic and global chlorine demand but US caustic demand/consumption is projected to be flat to down over the same time period.  In order to keep the market balanced, the US producer will have to continue to export at record levels, but will there be the global demand to consume the additional tons produced?

Global Demand / Alumina:

We next need to look at where the US producer could potentially export.  80-90% of all US exports go into Alumina so let’s examine where we believe the Alumina market is headed over the next 2 years. 

Alcoa said recently, they expect global Aluminum demand to increase 4% in 2017 vs. 2016. 

Rusal indicated projected global growth of 5.3%. 

2016 Global Aluminum Demand projected was at 59.6M MT.  If we assume 5% annual growth, 2017 Projected Aluminum demand will increase 2,980,000 MT up to 62,580,000 MT.

If the market grows at the same rate in 2018, that would amount to 3,129,000 MT of additional demand and bring global aluminum demand to 65,709,000 MT. 

As a rule of thumb, it takes 2 MT of Alumina to make 1 MT of Aluminum. 

Increase in demand for Alumina:

  • 2017 = 2,980,000 MT Aluminum = 5,960,000 MT Alumina
  • 2018 = 3,129,000 MT Aluminum = 6,258,000 MT Alumina
  • Total Increase Alumina next 2 years = 12,218,000 MT Alumina

It takes 0.06 MT to 0.1 MT of Caustic Soda for every 1 MT of Alumina produced.  The variance depends on the bauxite makeup.  Different types of bauxite require different amounts of caustic for digestion.  For this exercise, we will assume 0.08 MT of caustic for every 1 MT of Alumina:

  • 2017 = 5,960,000 MT of new Alumina demand = 476,800 DMT of new caustic demand
  • 2018 = 6,258,000 MT of new Alumina demand = 500,640 DMT of new caustic demand
  • Total Caustic Demand to Alumina over next 2 years = 977,440 DMT or ~ 1.08MM DST.

As we stated, Caustic Production is only expected to increase 545,000 DST over next 2 years which means the US producer will have no problem moving the additional volume offshore.  This is of course assuming Alumina and Chlorine demand grows as projected.  If for instance, Alumina demand only grows by 2% annually as opposed to 5%, Caustic demand into Alumina would only grow by 424,666 DST.

This also assumes the US will supply all of the caustic for the new global Alumina demand.  The domestic producer is in position to take advantage of their edge on energy and do just that, but more than likely, they will not be able to supply 100% of the new demand.  This scenario also assumes China stays out of the export market in 2017 and 2018 as they did in 2016 which is starting to look like more of a reality. 

Chinese production costs for ECU’s is escalating.   Thermal coal (and associated downstream products like calcium carbide used in acetylene based PVC) hit bottom in early 2016 and have increased by nearly 50% by year end.  FOB Asia caustic prices have increased well over $100 per DMT in this same period, along with the price of PVC. 

To summarize, in our opinion, global aluminum demand will ultimately dictate where the US caustic price goes.  If Global aluminum demand does indeed increase 4-5% annually, then the US producer will have no problem moving the excess caustic that accompanies the increased chlorine demand.  If however, Aluminum demand only grows 2-3% annually, then the new demand will not be sufficient to consume the increased caustic production.  Obviously, this is also assuming chlorine grows at the rate IHS suggests. 

However, even with less than robust growth in the aluminum market, the US, with its geographic proximity to burgeoning export consumers, coupled with an improving manufacturing economy, will remain balanced to firm for the foreseeable future.  Yearly export records will become the new normal and that is the only way the US producer can balance the market. 

In times like this, you as a valued customer need to align yourself with a supplier that delivers value beyond just pounds of product.  You need a supplier that has done their due diligence and can speak about the market intelligently.  Whether your needs are a truck a day or a truck a year, OWI is here to serve you.