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The Index Takes a Holiday as the Market Heats Up

12/28/2018

As 2018 draws to a close, we wanted to take a step back and review the events of the last few months and in particular, the last 2-3 weeks.  The 2019 “bid season” has been in full swing and as usual, the Chlor-Alkali market never disappoints so let’s dive in and see where we’re at. 

In general, I think everyone would concede the market over the last few months could be characterized as “leaning soft” despite the Q4 and Q1 2019 price increase announcements (now 37 of the last 38 calendar quarters).  One producer in particular is pulling off their own version of a “Magic Act,” whereas, in their left hand, they announce a price increase to distract you, while the right hand cuts the price of caustic at a few high-profile accounts which drags down the entire market.  A lot of this has been taking place in just the last 10-14 days and it will be interesting to see if the all-knowing wizard of wisdom, “the Index” is paying attention.  These actions have had a ripple effect in the market, affecting multiple F.O.B. points in the Midwest and USEC which trickles back to the Gulf.  There has been so much turmoil in the last few weeks, it’s our belief the market will need to recalibrate itself after the new year begins.  Now, let’s look at what’s causing these rash actions.   

The market “Index” has reported steady MOM decreases in pricing.  Between August and November, the various Indexes report the following price drops:

-          Contract fob USGC = Drop from $785 DST to $745 DST

-          Domestic Spot Low fob USGC = Drop from $480 DST to $440 DST

-          Export Low fob USGC = Drop from $585 DMT to $390 DMT

The last number is really astounding, and it underlies the main reason we’ve seen downward price movement in the domestic market.  Through October, according to the US Census Bureau, Imports and Exports of Liquid Caustic Soda are as follows:

-          Exports YTD = 2,973,251 DST / DOWN (254,000) DST vs. 2017

-          Imports YTD = 373,452 DST / DOWN (3,700) DST vs. 2017

The curtailment of the Alunorte refinery in Brazil, freeing up an estimated 300,000 DST of caustic, accounts for the majority of the YOY differential.  The rumor is this plant will come back to full production during the Q2 2019.

However, there are a few other things at play that will alter global trade flows moving forward.  The majority of the mercury-cell conversions in Europe are complete, and we’ve seen the Europeans re-enter the International market.  In all of 2017, European Producers shipped 49,560 DST into the US East Coast and already, through October of this year, European Producers have shipped 80,705 DST into the USEC, according to the US Census Bureau.  This is an increase of 63% and we still have two months to go. 

There has been additional product available out of Asia as well.  New regulatory requirements in India forced roughly 80,000 DMT of product into the international market in Q4 and we saw pricing out of SE Asia plummet as a result.  However, similar to Alunorte, this is a temporary issue and it’s expected the exporters of caustic to India should have the paperwork they need in place by Q1 and those tons will once again be placed back into India.

The other major consumer of Asian caustic has been the Chinese Alumina industry and this might not bounce back as well as India.  We are going to see a seasonal “slow down”, during the winter months of China, for pollution control, which will free up additional caustic for the market place.  There is also consensus that overall demand for aluminum and thus alumina will be challenged in 2019.  Another new bauxite stream, of higher quality, will lessen the need for as much caustic soda consumed as previous years.  It is estimated that overall alumina demand may be flat and coupled with this new bauxite stream available in Australia, we may see caustic demand decline internationally as much as a 450,000 DMT in 2019.

Meanwhile, Liquid Caustic production in the US continues to exceed the pace set in 2017.  According to the Chlorine Institute, caustic production numbers are as follows:

-          Caustic Production through October 2018 = 10,888,095 DST / UP 58,474 DST vs. 2017

So taking all of this into account, let’s circle back to the question we asked earlier.  Why is one producer in particular, being so aggressive and substantially under cutting the existing market?       

The open spicket to the international market may be drying up as there is increased global competition from both Europe and Asia.  This is due to increased production capacity (Europe), decreasing Alumina demand (Asia and Australia) and energy production costs, narrowing between the USGC and the rest of the world (NG vs. Oil).  To the last point, with Oil prices coming down into the low to mid $50’s and NG prices going up, the energy advantage is dissipating.  The domestic producers know this and they are trying to regain share in the US to make up for lower export volumes next year. 

Let’s look at a case in point, Australia.  One, possibly two, producers have been affected by a reshuffling of caustic supply positions to Australia.  Of the estimated 2.2 million tons of product consumed by the Australian alumina industry, it’s estimated that 750,000-850,000 DST of caustic has been supplied via the USGC the last few years.  It’s rumored that at least one producer lost a supply position to Australia and has been attempting to reallocate those tons elsewhere internationally.  However, it has been difficult to do so with the changing trade patterns discussed above, and an estimated 50,000-100,000 DST of caustic will need to be placed in the US market.  It seems this producer is targeting the US Midwest as this is where the market has seen the largest declines.  However, seldom, if ever, can one geographic region separate itself from the others with the exception of maybe the west coast.  Picture a domino effect, once it starts, it must play out all the way through and back to the gulf where an estimated 85% of production exist.  Most of the data points we have seen, when taken back to the US Gulf Coast, are coming in well below $400 DST FOB.  The market is now scrambling to catch up. 

All of this being said, it has to be stated that rising interest rates and an overall slowing global economy will eventually (if it hasn’t already) have an effect on housing and as housing slows and chlorine rates are dialed back, supplies of caustic will tighten even with decreased demand from the overall Alumina sector.  The US economy has been booming over the last few years, but we all know that things are bound to turn around and the recent correction in the stock market could be evidence of that.  A recent article in the Wall Street Journal, polled a number of CEO’s of American firms and the majority stated they expect the US Economic growth to slow dramatically in 2019.  And when the economy slows, we know demand for Chlorine is hit first followed by caustic 6-9 months later.  It is important we continue to follow GDP which represents 2/3 of chlorine growth as well as follow energy prices on an international basis.  But this is why we love what we do!  There is never a dull moment and there is always new information to available to read!

Because there are so many different factors at play, anyone who thinks they can forecast caustic out past 90 – 120 days is on a fool’s errand, but we will always be here to look at things objectively and offer an honest assessment of where we believe things are headed.  As it stands today it is hard to imagine, barring the Force Majeure kind of events, that caustic will not continue this slide through the 2nd quarter.

It’s been an amazing year and we truly appreciate the trust you have put in OWI as a supplier.  We are always here to serve and look forward to working with you in 2019!