Dynamic insights from the OWI Chlor Alkali team.
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The last few months in the chlor-alkali market have been hectic to say the least and we wanted to take a breath and let everyone know where the market stands today from our viewpoint. In the aftermath of Hurricane Harvey, which affected 36% of North American chlor-alkali production, Producers were able to implement a general price increase ranging from $75 - $100 DST depending on grade and/or Producer and as contracts permit. By and large, the impact of the hurricane was relatively minimal, with most plants resuming operation after only a few days of downtime. The major issue impacting most, was on the logistics side. Whether it was by sea or rail, those logistical issues enabled the Producers to push through most of their announced increase, despite near record production levels in the months leading up to the hurricane.
Producers continue to ship large quantities of product offshore and at a significant premium to domestic pricing. This recent phenomenon is a departure from just a few years ago when exports were discounted by up to $100 DST vs. the domestic price. By now, everyone is aware of why this is happening, realizing the Hg conversions in Europe and issues in mainland China are tightening the international market. It should come as no surprise, domestic producers will push for price parity in the two markets (whether the domestic market conditions warrant it or not.)
With natural gas still relatively inexpensive and with the glut of gas coming out of west Texas, Producers are going to enjoy healthy ECU margins for the foreseeable future. These ECU margins are reflected in recent record earnings announcements by some producers and soaring stock prices. With caustic prices showing no imminent signs of slowing their upward ascent, we should expect another very good financial year for the Producers in 2018. This is also why you are beginning to hear whispers of new chlorine capacity potentially coming into the market. Granted years away, but with rising caustic prices and cheap natural gas, the ROI on a chlor-alkali project is going to justify expansion.
Now let’s take a look at the numbers;
- 2017 YTD Caustic Soda Production (through Oct.) @ 10,829,621 DST
o This is up 130,846 DST or 1.2% vs. prior year
- 2017 YTD Caustic Soda Imports (through Sept.) @ 339,303 DST
o This is down (5,256) DST or (1.5)% vs. prior year
- 2017 YTD Caustic Soda Exports (through Sept.) @ 2,836,333 DST
o This is up 115,311 DST or 4.2% vs. prior year
The first thing that jumps out at you is the parity between the increase in production and the increase in exports. This fact in and of itself is not surprising, but when you look at the import / export numbers specifically, there are a couple of things to take note of. First, it appears exports will not reach the 4,000,000 DST mark previously touted by producers. Granted, the Hurricane had an effect on export shipments and the subsequent domino effect will simply push tons from Q4 to Q1, but they will most likely fall short of what they predicted. The same is true of imports. During the second half of 2016 and the first half of 2017, producers would tell anyone who would listen, that imports numbers were going to fall off the cliff as a result of the Hg conversion in Europe along with environmental concerns in China. Those facts, along with increased exports, would severely impact the supply/demand balance and push prices higher. While true that imports are down roughly 300,000 DST when comparing 2014 to 2016, Imports in 2017 are flat with 2016, meaning the supply situation in North America in 2017 is largely unchanged from 2016 and yet prices continue to climb higher.
As we conclude the year and look towards 2018, there are a few things to keep in mind.
- Regardless of your political leaning, everyone seems to acknowledge the economy both here and abroad is improving. Two of the Federal Reserve branches recently raised their Q4 GDP forecasts to 3.8%, up from 3.4% according to the WSJ, and most economists agree that 3%+ growth is going to be the norm for 2018.
- Remember, the old historical adage still holds true; Chlorine demand growth is approximately 2/3rd of GDP growth, which means Chlorine demand should grow by 2% next year. To put that in perspective, that equates to ~ 250,000 – 270,000 DST of additional caustic soda available for sale in 2018.
- Recent market publications suggest North American Caustic demand will only grow by 0.3% from 2017 to 2018 and when Exports are added in, Total demand growth is only 0.8% or 119,000 DST.
Obviously, any information taken from trade publications needs to be regarded skeptically. Anyone who saw the supposed spot transaction that raised the Spot Index 25%+, at the end of October can attest to that, but the fact remains that these numbers are interesting and fly in the face of what we have been hearing.
To be clear, we are not saying you should expect price reduction in 2018, actually quite the contrary. The limited number of producers will again exert their muscle and raise prices in North America. The consumer will have few places to turn as Imports will most likely remain depressed and there is no new capacity coming into the market in the short term. Prices will continue to go up regardless of supply/demand balance as the market has become a true oligopoly.
We work hard to study the market and be the voice of the consumer in the market place. You have placed your trust in OWI and that trust is not taken lightly. We will always be on the forefront of market information. Should you or your colleagues ever have any questions or concerns as it pertains to the caustic soda market, please do not hesitate to reach out to anyone at OWI and we will help you in any way we can.
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