OUTLOOK ’10: US chlor-alkali on a tightrope

30 December 2009 15:41  [Source: ICIS news]

By Judith Taylor and Leela Landress

HOUSTON (ICIS news)--US chlor-alkali producers hope they will see price increases in 2010 as the market walks a tightrope balancing operating rates and wobbling demand for driver product polyvinyl chloride (PVC).

The stabilising factor for the chlor-alkali tightrope could come mainly from producers’ efforts to balance operating rates to cope with changes in demand following the drop in activity in the US housing sector.

The US construction industry, which accounts for three-quarters of PVC demand, lies at the crux of the issue as it stumbles along on its own tightrope, with little in the way of a safety net despite enormous government attempts to mitigate the sinking effects of the mortgage crises.

The National Association of Home Builders (NAHB) has forecast an increase in housing starts for 2010.

Housing starts for single-family homes, regarded as the core of the US construction sector, are expected to increase to 615,000 units, a 36% increase over 2009 levels. The expected increase is largely steady with single-family housing starts in 2008, but still far below the 1.47m starts in 2006 and 1.04m starts in 2007, during the peak of the US housing boom.

After hitting estimated effective rates up to 94% in January 2008 during the height of building activity, chlor-alkali producers moved to stem oversupply and staunch the fall of caustic soda prices by cutting rates as low as 50 % by December 2008, according to The Chlorine Institute.

By January 2009, suppliers had ratcheted back rates to 69%, then moved up rates to hit 85% in August and pulled back to 80% by September and October.

Caustic prices bumped the floor by late July of 2009, with South American buyers consuming large amounts of material at rock-bottom prices under $15/dry metric ton (dmt). Also, buyers in China and India entered the market to soak up discounted volumes.

The buying spree tightened US Gulf supply for several months, giving producers a chance to initiate and implement a $60/dst (dry short ton) increase.

US domestic contracts in December were $160-240/dst.

Most US caustic producers have announced a $75/dst increase effective 1 January, basing the move on the relative strength of caustic versus softness in the chlorine chain.

Caustic soda and chlorine are essentially equal co-products in the chlor-alkali process. While alumina and pulp/paper production use huge quantities of caustic soda, the chlorine derivatives drive the chain due to PVC, a dominant building polymer.

Pipe grade PVC contract prices plummeted 12 cents/lb ($265/tonne, €186/tonne) between October 2008 and January 2009, sending tremors through the chlor-alkali market until March.

PVC producers pushed through a full 3 cents/lb increase in March 2009 on the back of tight ethylene supply and a slight uptick in demand. 

Despite a faltering US housing market, PVC producers continued to press for margin improvement and were able to regain the 12 cents/lb on domestic pipe and general material, bringing respective ranges to 63-65 cents/lb 67-69 cents/lb by late October.

In response, buyers mounted strong resistance throughout the series of increases and stalled producers’ attempts to move prices up again by 3 cents/lb in November and December.

“There are credit issues and bankruptcies going on,” one pipe manufacturer said.

“If it keeps up, there will have to be more mergers and consolidations upstream,” another buyer added.

But PVC producers face blistering feedstock ethylene prices, with the olefin values rising over 6.5 cents between July and October, still pressured up due to short ethane supply. Additionally, the chlorine portion of PVC offered scant relief, even for integrated producers.

Chlorine prices moved to benchmark highs in the second and third quarters of 2009, jumping by $225/dst to a range of $390-410/dst.

The high chlorine contract price versus the exceptionally low caustic price underscored the skewed chlor-alkali fundamentals and would likely continue to challenge producers into 2010.

PVC buyers and some non-integrated producers said they hoped for chlorine price relief, but not much has shown up. Some pipe makers hinted about a $10/tonne reduction, but no industry-wide price decrease has taken place, as suppliers continued to struggle with feedstock and operating costs.

Neither the credit crunch nor flat demand were proving to be sufficient deterrents to suppliers, because more than one supplier was said to be considering hefty PVC increases in January, although formal announcements were not yet seen.

In the upstream vinyl chloride monomer (VCM) and ethylene dichloride (EDC) markets players were cautiously optimistic for the 2010 outlook.

“In the domestic market it all hinges on construction,” a buyer said. “If that sector improves, we will see demand improve and prices will follow suit.”

EDC spot prices out of the US Gulf gradually increased through the second quarter of 2009 from a low in January 2009 of $170/tonne FOB (free on board) US Gulf. EDC spot values retreated slightly during the third quarter and early in the fourth quarter, but have trended higher in the final weeks of the year.

Market players said they expected spot values to trend higher in 2010 on increased demand from China and a modest increase in US housing starts.

VCM spot values, trending higher since the second quarter, retreated slightly at the close of the year. Values were expected to slowly increase as the domestic construction sector is expected to see an uptick in building activity in 2010.

US chlor-alkali producers include Dow Chemical, Georgia Gulf, Shintech, Formosa Plastics, Olin, PPG and Occidental Chemical.

($1 = €0.70)

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By: Judith Taylor
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