Tightness in Chloralkali Market Brings Forth a New Round of Price Increases

16 September 2002 00:00  [Source: ICB Americas]

The North American chloralkali industry has experienced better balance during the third quarter. The demand for caustic soda has improved while chlorine demand remains strong. Caustic has been characterized as balanced to a bit snug, and chlorine has been in a tight position. But the supply side has been the key driver in this market. More than 1.5 million tons of operating capacity remains off-line, and substantial curtailments in capacity expected from Dow Chemical Company this fall will lead to nearly 12 percent of total capacity being taken out of production.

Dow will idle an older diaphragm chloralkali unit in Plaquemine, La., during the fourth quarter. "The current climate of low electrochemical unit (ECU) margins and low chlorine derivative operating rates does not support the continued operation of this facility, which has the capacity to produce approximately 375,000 short tons per year of chlorine," says a Dow official. Dow also plans to undergo a turnaround at its Freeport, Tex., facility during the entire month of October, when roughly 120,000 tons, or 11 percent of the industry's total chlorine output, will be off-line. Analysts are keeping a sharp eye on how Dow's curtailments will affect the chloralkali industry. But analysts agree the industry is likely to tighten further during the fourth quarter and into 2003 as a result of these changes.

Supply/demand fundamentals have brought a new round of price increases for chloralkali over the last few weeks. Producers announced a $40 per ton increase for chlorine and $50 per ton for caustic soda, which would mostly take effect in the fourth quarter. These are on top of price hikes for both markets implemented and mostly accepted last July 1.

Operating rates for chlorine have jumped up since the start of this year. According to the Chlorine Institute Inc., effective operating rates for chlorine began in January at 84 percent, moved up to 90 percent during March and were tracking at 97 percent during July. Many producers say they continue to be on "tight order control" for chlorine.

"Chloralkali supply and demand has been firmly balanced, moving to a tight position. There has been a steady but slow recovery in caustic demand, although demand there has not fully recovered," says Helmut Metzler, vice president, caustic soda, Occidental Chemical Corp. (OxyChem).

Mr. Metzler adds, "The reduction in supply is the key in this market, particularly with the upcoming closure later this year of a significant portion of a major producer's plant in Louisiana. As the year comes to a close, the market will get snug, and these conditions should prevail for at least two years, in both caustic and chlorine markets."

According to sources, current spot caustic soda has been pricing in the $125 to $150 per short ton range, compared to about $50 per ton in the second quarter. Contract caustic has been in the $90 to $135 per short ton range, compared to the $60 to $90 per short ton range in the second quater.

Last month, Dow headed a $50 per short ton increase for caustic soda, which has been followed by OxyChem, Olin, Vulcan Chemicals and others. This was on top of a $50 per ton increase for caustic announced last May, and implemented at the start of the third quarter. "That increase was accepted in the industry, although not fully in some cases, but about $30 to $50 of it has been," says one source.

Caustic soda producers say that current market conditions and historical values for caustic soda warrant the increase. "In the second quarter, caustic was in a very depressed state. The average price for caustic has historically been $160 to $170 per ton. With the second increase, we're just getting back into that range," says Mr. Metzler. "And if supply/ demand conditions are tight enough, pricing should reflect this."

Other producers agree, and Mike Dye, vice president, marketing, for Vulcan Chemicals, says that the $50 per ton increase "is gaining momentum and has an excellent chance of success." He also says that caustic is "balanced to slightly snug," and that "there's not a lot of material available for spot shipment or export opportunities."

On the chlorine side, contract product has been tracking in the range of $210 per ton to $250 per ton, compared to the $90 to $140 per short ton range during the second quarter. Spot product has been pricing at $195 per ton to $210 per ton.

"Chlorine fundamentals remain as they have been for most of the year-demand is excellent and other than the 'bleach season' starting to wind down, customers report they expect to continue ordering heavily in the fourth quarter and expect continued demand growth for chlorine into 2003," says Tom Rice, director of marketing for Olin Corp. chloralkali.

Julio Napoles, vice president of chlorine for OxyChem, says he expects US demand for chlorine to be 2 percent higher this year over last, and 5 percent higher for 2003, compared with 2002.

Over the last few weeks, a $40 per ton increase for chlorine has been announced by several producers, including Olin, Dow, Vulcan Chemicals and OxyChem. Last May, Pioneer Companies Inc. announced an increase of $150 per ton for chlorine, followed by a price hike of $125 by Olin. According to sources, the increase was consolidated at $125 per ton, and $100 of it was implemented on July 1.

But there is mixed opinion in the industry as to whether the $40 per ton increase will hold, because of the substantial increase in the third quarter as well as the seasonal winding down of the demand for bleach.

"There is seasonal weakness in the fourth quarter, bleach demand is gone and polyvinyl chloride has been weakened. This fourth quarter increase seems more like a defensive move from producers," says an official with Chemical Market Associates Inc. (CMAI).

OxyChem's Mr. Napoles has a different view, however. "It's too early to say if this increase will be fully accepted. There was the same number of dissenting votes with the last increase, which was successful," he says.

Average ECU values have been tracking "much higher" in the third quarter, at about $339 per ton, CMAI says. Average ECU values were about $200 per ton at the start of the second quarter, according to CMAI. However, during July 2001, ECU values were about $358 per ton.

Profit margins have improved as well in the chloralkali industry, according to an analyst. "However, on a cash margin basis, they are not yet at reinvestment levels," the analyst says.

North American chloralkali capacity currently idled includes Pioneer's 225,000 ton-per-year chlorine and 248,000 ton-per-year caustic plant at Tacoma, Wash. In addition, OxyVinyls LP's 410,000 annual ton chlorine and 451,000 annual ton caustic facilities at Deer Park, Tex., have been curtailed since last December. OxyVinyls is a joint venture between OxyChem (76 percent) and PolyOne Corp. (24 percent).

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