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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):
Basic Market Facts (demand) (IHS):
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:
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:
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.
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