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Caustic Soda Market Recap - June 2018

6/18/2018

As usual, the caustic market has been in a state of flux recently with a multitude of pushes and pulls on the supply/demand balance.

Keeping with an “all to familiar trend,” US Producers have announced a July 1st price increase ranging from $40 - $45 DST.  This is in addition to the $85 DST increase announced for Q2 and the $70 - $100 DST increase announced for Q1 2018.  As we always do, we will look at the overall market dynamics at present and give you our opinion on where we think this market is headed.  As is the case with caustic, we are taking a set of facts as they stand today and making predictions about the near-term future of the market with the understanding that the underlying facts could change rapidly thus altering the market and this outlook altogether.  Nevertheless, here we go…

               Through April, total caustic production is 4.19MM DST, down roughly 40,000 DST or less that 1% from 2017.  As producers come out of planned outages in March and April, it is expected that operating rates will increase this summer and production in 2018 will surpass 2017.  Recently, the Federal Reserve revised their US Growth forecast (GDP) for 2018 up to 2.8% from 2.7%.  As we all know, chlorine demand is approximately 2/3 of GDP growth so we should be expecting chlorine demand to grow between 1.8% – 1.9%.  To put that into context, that would equate to an additional 235,000 s/t of Chlorine being produced which would equal an additional 259,000 DST of caustic soda available for sale in 2018 vs. 2017.  Near decade-low ethylene pricing has pushed chlorine values for EDC into positive territory, increasing demand for Chlorine into the vinyl chain.  Oil has also continued it’s upward trend with Brent briefly getting about $80/barrel before setting in the mid-$70’s, while the WTI price has been increased and is currently in the mid-$60’s.  What this means, is demand for HCL into O/G will only increase in coming months as the global economy seems more than able to consume the additional supply.  Even the joint announcement from the Russia and the Saudi’s, indicating they are looking at increasing production has not deterred Oil’s upward move over the last several months. 

               With the mercury-cell conversions in Europe and the environmental crack downs in China, the US has become the dominant player in the global caustic market and they will all nonchalantly tell you the market for exports will continue to increase year over year thus consuming the additional caustic produced.  They have to keep pushing this story as domestic demand, while improving, is not improving quick enough to absorb the increased production. 

               YTD, the US has exported 1.186MM DST which is up 12,000 DST or 1% from 2017.  Of note, April exports were only 263,000 DST which was the lowest volume export month dating back to February of 2017 and down 41,000 DST or 13% vs. April of 2017.  Now, this could simply be a function of vessel timing and export numbers for May could be very strong reflecting the robust global trade market producers continue to tell us about.  OR, it could be that the Alunorte production curtailment in Brazil is starting to have the effect on the market, most believed it would.  In the last two months, IHS has posted reductions in the Spot Export number, coming down $(40) DMT in April and $(20) DMT in May.  It has been a belief that multiple decreases in the export market would signal US Producer inventories building.  The US Producer then needs to discount product in the export market to keep the domestic price elevated. 

               On the Import side, YTD, Imports of Caustic are 127,000 DST, which is down 2700 DST or 2% from 2017.  However, the tide of YOY declines in imports could be changing.  In the last 20 days, we have seen the export price from NE Asia drop from $535 DMT to $450 DMT.  Prompting some distributors and end-users to look at bringing an Asian vessel into the USEC.  With most of the Mercury-cell conversions complete in Europe, we are beginning to see a renewed interest by European suppliers in establishing consistent shipments to the USEC as well.  The European economy is improving and with regular shipments from the US to Southern Europe underway, the norther European Producer is looking for places to ship the new capacity that is online post-mercury cell conversion. 

               At this point, the conversation in most circles has turned to the question, “have we reached the peak of the caustic price cycle?”  There is no doubt there is extreme fatigue in the market after the constant barrage of price announcements.  While some producers are quick to downplay the risks of alternative products, there are multiple companies in multiple industries looking to soda ash as a substitute or replacement for caustic.  Depending on application, it takes approximately 1.4 tons of soda ash to do the job of 1 DST of caustic.  At today’s price levels, a large buyer of caustic soda could potentially save millions of dollars by converting and we are seeing numerous companies move forward with such projects.  The overall impact of this cannot be understated.

               All of that being said, there other factors to consider.  While we expect all chlor-alkali plants to run very hard this summer based on strong demand for chlorine, it’s true the current market is in a “balanced” state.  Any type of unplanned outage at a major facility or some type of natural disaster (Hurricane Harvey) could quickly tighten the supply balance forcing pricing up.  It is also uncertain what affect the new US Administration’s trade policies will have on our industry.  Recently, it was reported China is considering tariffs on US PVC and EDC.  Estimates are that 250M tons of EDC and PVC are exported from the US to China annually.  If the tariffs go through, then that will be a hit to chlorine production.  Also, while Alunorte is running at reduced rates currently, it is expected they will resume full production by Q4, increasing their caustic consumption by 300,000 DST annually which will be supplied from the USGC. 

               One last closing note.  While we feel conditions for price relief exist today, consolidation within the chlor-alkali market make that unlikely.  Producers like Westlake and Oxy have enjoyed record (or near record) profits in Q1 2018 and it’s expected they will fight hard to maintain the price levels that have allowed them to achieve those earnings.  With the likelihood that the supply/demand balance will tighten as we get into Q4, the Producers will tell themselves all they have to do is hold on to current levels for another few months and the balance will be back in their favor. 

               As always, OWI is here to serve as the voice of the consumer in today’s market.  If you have any questions about the caustic market, you can always reach out to me or any member of my team and we will be happy to assist you in anyway we can. 

 

Thanks,

 

Mike Hurley