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The Current State of the US Caustic Soda Markets and Things to Consider

11/15/2017

With caustic soda pricing steadily rising over the last 2 years, and with no new capacity scheduled to come online in the foreseeable future, the upward pricing trend looks as though it will continue unchecked.  Robust exports and limited imports have given the US chlor-alkali producer the ultimate pricing power and tightened the US market despite plants operating at 94%+ utilization.  With seemingly no end to this upward push in sight, we wanted to look at the chlor-alkali market as a whole to see if there is anything that could swing things back into the consumer’s favor.

Over the last several years, consolidation of chlor-alkali producers and in turn, their reliance on indexed based pricing, has made the steady upward march of pricing inevitable.  Recently, there were shockwaves sent through the industry as one verified spot barge transaction was relayed to the “Index” and that “one-off,” was then used to set the price for the entire market.  The transaction in question caused one publication to move their Spot price fob USGC up $115 DST or 27%.  The methodology employed here, makes forecasting how or why the price moves, an extremely daunting and challenging task.  

While these “one off” transactions can’t be predicted or even comprehended, the one thing in the caustic world that is all but a foregone conclusion is, “ANOTHER ANNOUNCED INCREASE” for implementation on the first day of the next calendar quarter.  Our industry has witnessed an attempted increase nearly every quarter since August of 2009.  Yes, that’s correct, almost 36 quarters in a row, there’s been at least one major chlor-alkali producer who’s announced a price increase for liquid caustic soda.  

Even with all of that, on the surface, when looking at the global market, one cannot argue the US consumer is getting the best deal in the world.  Export pricing is currently significantly higher than domestic pricing which is a historical anomaly.  This would lead one to believe there is yet further upward pricing coming to the US market soon to move the US consumer more in-line with the global market.  

But when you dig a bit deeper and look at another chlor-alkali product, closely tied to caustic, a different story altogether, begins to emerge.  The product we are going to look at now is Sodium Hypochlorite or Bleach.  With only a handful of chlor-alkali producers participating in the merchant chlorine market, one must wonder why Caustic soda is discounted so heavily when going into bleach.  Specifically, there is one of the major chlor-alkali producer who seems to be pushing bleach and therefore caustic prices in the opposite direction.  We have seen municipal bids in recent months for sodium hypochlorite awarded at caustic price equivalents under $250 DST if you assume chlorine values @ $200+ and remove all logistics costs back to the USGC where 80% of production is located.  With export numbers well above $500 DST plus and domestic pricing well in excess of $400 DST, what are municipalities doing to warrant discounts of $200 DST or better?  How, as caustic soda buyers, do we collectively tap into these great deals that are popping up all over the country?  

What makes this even move baffling, are the recipients of these great deals on caustic are municipalities.  One would think chlor-alkali producers would be eager to work with their loyal customers and yet these “accounts” have access to caustic prices well below the rest of the world.  In each instance, these public municipalities are straight bids, where “no relationships” are required and “no sales people” are needed, just a sharp pencil and the willingness to firm that price up for a year.

This phenomenon causes one to wonder; are the astute buyers of caustic soda going about their pricing negotiations the wrong way?  Should the bleach market and the caustic soda pricing used in the bleach market, be the real barometer for prices versus “Indexing”????  One would only need to do a case study on the City of Sacramento, the City of Milwaukee and the Northshore municipal bid to see there is real value here. And in one blatant example out west, even $200 DST for caustic is too high.

What if one was to track, disseminate and “Post” a large sample size of municipal accounts for sodium hypochlorite, breaking down the logistics involved and the subsequent chlorine and caustic values fob the USGC.  Would that be a better barometer than an “index” posting supposed “one-off” transactions and using those to set the price for a 10MM ton market.  At least a public bid is public! Can’t fake the results.  

Because these municipal bids are firm for a year, what if the changes YOY were tracked and those values taken in the aggregate, were to become an “index.”  Not all municipal bids fall within the same time-frame i.e. begin on January 1st, but are rather spread out over the course of the year with various start dates.  The opportunity exists for someone to again aggregate the data to be posted quarterly.  Both quarterly and yearly trends could be studies and used to adjust pricing for contracts moving forward and a purely “public” index would be created for one to follow.  What a world of difference that would make.  Just saying...