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Q1 Caustic Market Recap

5/19/2017

The caustic market in the first quarter of 2017 was one marked by both planned and unplanned outages at key producers. 

Key Outages –

  • Covestro – Baytown, TX (unplanned)
  • Formosa – Point Comfort, TX (planned & unplanned)
  • Olin – Charleston, TN (reduced rates)
  • Olin – Freeport, TX (planned)
  • Olin – McIntosh, AL (reduced rates)
  • Olin – Plaquemine, LA (reduced rates)
  • Oxy – LaPorte, TX (reduced rates)
  • Westlake – Geismar, LA (reduced rates)
  • Westlake – Lake Charles, LA (unplanned)
  • Westlake – Plaquemine, LA (planned)
    ** It should also be noted Formosa had a FM announcement in April due to flooding at its Pt. Comfort facility and Oxy will have a number of maintenance outages in April as well. 

In particular, membrane production was significantly restrained, leading to different price nominations  for Q2 application.  Producers are currently in the process of implementing the announced $60 DST / $85 DST price increases on diaphragm and membrane respectively.    

At AFPM, Chlor-Alkali producers seemed to all be on the same page and the general consensus was caustic was extremely tight and pricing was moving up across the board, without exception.  Production disruptions, both planned and unplanned as outlined above, coupled with record exports meant the increase was all but a formality; we were told… But does the data support that? 

For most of Q1 and for the first time in many years, the export price fob USGC was higher than the spot domestic price for barges.  This changed in April as producers pushed through the majority of the announced increase but the significance of this cannot be overstated.  Global supply constraints coupled with international alumina demand pushed the Export price up and up and up and the domestic producer was more than happy to export all they could.  

But what was leading to reduced supply in the international market?  Supply out of Europe is constrained as they continue with Mercury-cell conversions, while at the same time, China is consuming more caustic internally to support their internal alumina demand.  This is happening at the same time operating rates are challenged due to poor domestic chlorine demand and new environmental concerns in mainland China.  These circumstances are making the North American Producer the dominant force in the export market.  The phrase, “we are heading towards a 1,000,000 DST export first quarter,” was sentiment that was widely reported by producers and market publications alike.

It is an industry consensus that US Chlorine demand will outpace US Caustic demand for the foreseeable future.  This is thanks in large part to exports of chlorine derivatives i.e. Vinyls (PVC / EDC), Isocyanates, etc. and a recovering US economy.  The US advantage on i.e. Gas vs. Oil makes exports of these products possible.  It is vital therefore the US Chlor-Alkali producer export the excess caustic tons produced to keep the market “balanced” from their perspective.          

But will exports truly eclipse the record set in 2016?  Let’s take a look at the numbers: 

Basic Market Stats:

  • Caustic Production DST (CI):
    • January = 1,108,467 DST
    • February = 933,296 DST
    • March = 1,141,147 DST
  • Caustic Imports DST (PIERS):
    • January = 29,535 DST
    • February = 38,422 DST
    • March = 37,841 DST
  • Caustic Exports DST (PIERS):
    • January = 271,948 DST
    • February = 247,889 DST
    • March = 350,506 DST

Here is a look at the total number of tons of caustic available for sale in the US in Q1 of 2017 compared to 2016.  We are taking production numbers provided by the Chlorine Institute, adding in imports coming into the market and subtracting exports leaving.  The numbers in the following chart are in DST:  

 

2016

2017

Net Difference

Caustic Production (CI)

3,247,414

3,182,910

(64,504)

Imports (PIERS)

111,271

105,797

(5,474)

Exports (PIERS)

889,821

870,343

(19,478)

Net Available to US Mkt.

2,468,864

2,418,364

(50,500)

 

After reviewing the numbers, the first thing that jumps out is the difference in caustic production between February and March.  February was the lowest month in terms of tons produced, going all the way back to October of 2015.  This was to be expected given the number of outages the industry had during the first part of the year.  But as quickly as production fell off, it came right back in March with the Chlor-Alkali industry producing more tons in March than any other month dating back to July of 2015.  And that was with six separate plants running at reduced rates or having an outage for a portion of the month.  We may see a small step backwards in April with the Formosa FM (force majeure) announcement but expectations are industry operating rates will exceed 90% for much of Q2 and Q3.  While this was not unexpected, we were told all additional production in 2017 would be exported keeping the market balanced to tight.  The fact Q1 exports were lower than Q1 2016 definitely came as a surprise.  The expectation is exports will pick up in Q2 as producers most likely pushed contract shipments later in the year so they wouldn’t conflict with planned outages, but the point remains that Q1 Exports were well below the level most thought they’d be at.     

Now let’s pivot to look at where these exports are going; International Alumina.  A recent article in the Wall Street Journal took a look at the Chinese Aluminum market and indicated that due to environmental concerns, anywhere between 6-30% of aluminum smelting capacity could come offline.  We know the producers and the indices have made the point REPEATEDLY that Chlor-Alkali rates in China have been reduced due to environmental concerns, but it stands to reason those same concerns would affect other industries i.e. alumina / aluminum.  Furthermore, Alcoa in their recent earnings call stated Global Aluminum demand, excluding China, is only supposed to grow at 2.5-3%.  They also stated the Global Alumina market will remain balanced assuming China imports 3.3MM Metric Tons of Alumina.  If Chinese Aluminum smelting capacity is truly cut, then it may be difficult for them to import what the rest of the world expects leading to a potential surplus of alumina.         

It’s key to watch these developments, because as previously stated, if exports do not continue to increase alongside increasing chlorine production, then inventory will start to build in the USGC, challenging potential increase attempts in the future.    

With pricing momentum squarely in the Producer’s court, a Q3 price increase is all but a formality.  The magnitude of the increase announcement we believe will be determined once April production numbers are released by the Chlorine Institute sometime later this month.  Membrane product will be in extremely short supply in the short term as Producers re-build inventory from lost production over the last few months due to operational issues.  As we head into the summer months, Chlorine demand should be strong i.e. Bleach, PVC and Isocyanates (MDI / TDI) and the domestic producer should be able to restock adequate inventory.  The ultimate question is, will demand, both domestic and export, keep pace with supply which will certainly be there.