Prices Rise as Soda Ash Tightens, but Margins Stay Slim

02 February 2004 00:00  [Source: ICB Americas]

A surge in exports in the wake of the weak dollar, improved supply fundamentals and a stronger US economy have put the North American soda ash market in much better shape. Producers place operating rates in the mid-90s and above, a situation they expect will continue for at least the next few months. A price increase nominated in the fourth quarter 2003 has been fully accepted, they say, but while pricing has improved, margins have not.

Last September, Solvay Chemicals Inc. (formerly Solvay Minerals), FMC Wyoming Corp., and General Chemical Corp., nominated a price increase of $7 per short ton. OCI Chemical Corp. nominated a price increase of $15 per ton. A price increase nominated in the industry for the same amount at the end of 2002 met with partial acceptance, but producers say the most recent price hike was successful.

"The price initiative last fall was ex-tremely successful. Prices have in-creased across all end use markets," says Marcie Peters, business director, soda ash, Solvay Chemicals.

Bill Breunig, business director, FMC Wyoming, agrees. "While each producer is different, has different contracts and competitive situations, at FMC we were able to get the full increase of $7 per short ton where we has no contact restrictions," he says.

"The market increase announced last fall was successful, with $7 being passed through to all spot customers," says Chris Douville, vice president, sales and marketing, soda ash, General Chemical Company. "Contract customers were increased to the maximum level allowed by their year 2004 contracts. Market pricing has risen accordingly."

Kirk Milling, director, marketing, soda ash, OCI Chemical, says that the domestic price increase nominated for 2004 was successful because of tightening market conditions. However, he adds, average bulk pricing for soda ash "will likely remain flat to slightly declining year-on-year as we see improving domestic pricing combined with lower export values."

Soda ash, dense, bulk, is in the $80 to $95 per short ton range. Pricing is at or above 2002 levels, when there was deterioration, says one producer. "However, we have had some recovery in 2004, and we're back on track," he adds.

Even so, producers say margins, eroded by energy costs, need improvement. "Domestic margins are a bit better but margins have deteriorated in exports," says Mr. Breunig.

On the bright side, producers say the market has come into better balance, with greater export sales playing a key role. "The market is in better balance than it was last summer," says Mr. Douville. "Increased global opportunities have helped to increase the industry's capacity utilization rates by an additional two to three percentage points," he says.

Operating rates should be closer to 95 percent or more this year, says Mr. Milling, who points to increased exports and reduced American Soda tonnage.

Mr. Breunig offers a similar perspective. "Operating rates were in the low 90s last summer, and are now in the mid-to-upper 90s. Rates are expected to be in that range for the foreseeable future," he says.

The weak dollar has provided a number of global sales opportunities for US soda ash, which will help keep the supply-demand balance "very tight," says Mr. Douville.

Still, the news is not all good. "Un-fortunately, market prices in many global regions, such as South America and Asia, are declining due to increased competitive pressures. In addition, the global vessel freight markets have in-creased considerably in the past year with vessel freight rates in some shipping lanes up by as much as $20 to 25 per metric ton," he says.

Solvay's Ms. Peters says there have been increases in export sales to both Europe and the Far East, "due in large part to the weak dollar and, more recently, Chinese raw material shortages." She also says a stronger US economy "is driving higher operating rates, and buyers now appear to be more concerned about product availability than the increasing product prices."

Last September, Solvay America Inc. acquired American Soda LLP, a unit of the natural gas pipelines group Williams Company. Williams had been trying to sell American Soda since early 2002 as part of a plan to raise cash and sell non-core assets. Sources say the acquired soda ash mining and processing operation in Parachute, Colo., encountered production problems early on, uses an energy-intensive process and was operating at reduced rates.

Given current low margins, industry observers have been speculating whether Solvay might close or reduce production at Parachute. "Clearly, any closure would improve supply-demand balance," says one producer.

However, Ms. Peters says that Sol-vay has not made any decisions, and that "the long-term economic viability of the Parachute operation is currently being evaluated."

"Solvay acquired American Soda for its soda ash market share and customers, its bicarbonate market share and customers, and the future value in reserves," says Ms. Peters. "As a result, Solvay has maximized production at its lowest cost soda ash facility and in-creased its bottom-line profitability."

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