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OWI Caustic Market Update - First Half of 2018

8/17/2018

It was an interesting first half of the year in the chlor-alkali market and as we always do, we will take a step back and provide our perspective and insight as to what’s transpired so far year to date.  In Q1, the consensus was 2018 would be another year of unchecked increases in the caustic market, fueled by ever rising exports and rising demand.  This was proven out by successful price initiatives in April.  The amount varied based on supplier and contractual terms, but almost everyone took some type of price increase.  IHS CSLi moved from $735 (January) to $795 (June) before coming down slightly to $790 in July.  

Now, let’s take a look at the market stats YTD and compare them to where we were a year ago:

July marked the third straight month where operating rates exceeded 92%.  This was expected as there were relatively few planned or unplanned outages and chlorine demand continues to be robust both here and abroad.  Remember, Chlorine demand tracks closely with the economy and in Q2 2018, US GDP grew at an annualized rate of 4.1%. 

Through July, the total number of caustic tons produced was 7,619,412 DST, up 31,596 DST or 0.4% vs. 2017.  The consistent message from Producers as well as the Index, was growing demand globally would absorb increased production and the market would remain “very tight.”  So now, let’s look at the caustic import / export numbers to see if this argument holds water. 

Through the first 5 months of the year, caustic exports were indeed ahead of the robust pace set in 2017, where more than 3.9MM DST were exported from the USGC.  However, according to the US Census Bureau, only 196M DST were exported in June vs. 392M DST exported in June of 2017.  This was the lowest monthly total for exports dating back to November 2016.  This brought the YTD total to 1.72MM DST exported from the USGC which is 177M DST LOWER than the total exported in the 1H of 2017.  How cold this be????  Two things were at play here.  First, it appears the long discussed Alunorte curtailment was finally being felt.  Remember, this is the plant that consumed 600M DST annually and was forced to run at reduced rates which meant there was an additional 25M DST of product available per month.  Second, international competition has stepped up.  In the last two months, we’ve seen the export price fob NE Asia drop $185 DMT as they now have more product to market.  There is also renewed interest from Europe in regular shipments to the USEC now that plant conversions in Europe have been completed and they have excess product to move as well. 

As the global market continues to ebb and flow, there was even product available from the middle east into the USEC.  One SE distributor was reported to have brought in product well below the prevailing market pricing and multiple distributors are looking at bringing in additional material in September. 

Through June, Imports to the US total 195M DST which is 16M DST LOWER than through the same time period in 2017.  However, given all of the competitive activity in the international market, we expect 2018 Imports to exceed volumes imported in 2017. 

Bringing all of these numbers together, we can see the following:

-          Increase in Production YOY = 31,569 DST

-          Decrease in Exports YOY = (177,000) DST

-          Decrease in Imports YOY = 16,000 DST

So, in theory, when we look at the market, we should take the increase in production, 31,569, add 177,000 DST because these tons were not exported and subtract the difference in imports because they did not come into the country (16,000) DST, the US Market has 192,569 MORE DST available for sale domestically in 2018 vs. 2017.

Now, we need to look at the demand side of things and domestic demand has improved although not to the level domestic producers would have you believe.  According to IHS Market Statistics, US Domestic Demand was expected to grow at 0.8% in 2018 vs. 2017.  That would equate to an additional 85,000 DST of demand. 

So, if we take the increase of tons available, 192,569 DST less the increase in demand 85,000 DST, that still leaves the US Market with roughly 108,000 more DST available for sale in 2018 vs. 2017.  This is why the July 1 increase nomination failed to materialize and why some buyers have reported receiving decreases so far in Q3. 

Despite the consolidation in the industry and growing power / influence of the index, we have to remember caustic is still a commodity.  The price cycle has elongated, but caustic will still behave as all commodities do. 

Now, as we look towards Q4, there are a few things to keep in mind.  Operating rates will decrease as they always do late in the year and it is possible Alunorte will resume full production although nothing has been officially announced.  This would push monthly exports up and help to tighten the US market once more.  Sure, as the sun will come up tomorrow, domestic producers will use these two key points as justification for an October 1 price nomination.  However, unless something dramatic happens, it does not look like the market conditions will warrant an increase.  But the announcement will prevent further price erosion which is really the ultimate goal of the producer.    

As we look forward, it has been rumored a gulf coast producer will lose a large piece of export business as we head into 2019 and at the time of this writing, it is believed they have not placed all of those tons as of yet in the market.  There is a strong chance, they could look to the US market to place those tons which could create some competitive situations as various players try to protect share.  We hope to have further clarification on this in the coming weeks.

As always, OWI strives to provide all of our customers and contacts with the most comprehensive and in-depth market analysis possible.  We try each and every day to be the voice of the consumer and myself and my team are always available to help you in anyway possible with your caustic needs. 

Thank you again for the faith you have put in OWI as a supplier.