OUTLOOK ‘10: Asia caustic soda sees greater price flexibility

04 January 2010 07:15  [Source: ICIS news]

By Ng Hun Wei

SINGAPORE (ICIS news)--The Asian caustic soda industry will see greater pricing flexibility in 2010 as buyers and sellers expect to face continued market uncertainties, traders and producers said on Monday.

Major caustic soda consumers were typically locked into fixed-price contracts lasting six months but clamour for a more flexible arrangement grew over the past year as spot prices plummeted.

Contracts linked to spot prices and lasting a much shorter period were negotiated towards the end of the year and would come into effect in 2010, market players said.

“There is a greater variety of contracts in the first half of 2010. Some will be based on a fixed price or linked to spot prices while others will be a combination of both. Buyers are also asking for three-month contracts instead of the usual six,” said a caustic soda producer.

The move to greater pricing flexibility was already seen as a seismic shift by some players in an industry that had long placed price stability as among its topmost concerns.

“The economic crisis really affected buying mentality and behaviour. Buyers are now reluctant to commit themselves to fixed price contracts, whose relevance really just depends on the forecasting ability of the negotiators,” said a caustic soda trader.

Supporters of the old system believed that the shift away from fixed-price contracts could be just a cosmetic move since historically, fixed contract prices rarely deviated far from spot prices.

Others argued that as most caustic soda supplies were already tied up in fixed price contracts, the small price difference was more a testament to the producers’ capacity to control their operating rates than to their forecasting ability.

“I do not think the shift to floating pricing will merely be a cosmetic one. Depending on the contract volume, buying and selling behaviour in the spot market will surely change as there is now greater interest to influence spot prices,” said a caustic soda trader.

The shift away from the fixed-price format was also driven, in part, by the belief that market conditions would remain as unpredictable this year as they were in 2009, buyers and sellers said.

A stuttering global economy saw Asian caustic soda prices fluctuate between $120/dry metric tonne (dmt) (€84/dmt) FOB (free on board) NE (north east) Asia and $240/dmt FOB NE Asia in 2009, ICIS pricing data showed.

Economic indicators appeared to be stabilising at the start of 2010 but the supply and demand outlook of the caustic soda market remained cloudy, market players said.

“Caustic soda supply will be determined by what’s happening in the chlorine markets, especially PVC (polyvinyl chloride). No one can predict for sure the PVC price trend, much less for caustic soda,” said a Chinese chlor-alkali producer.

Chlorine is produced simultaneously with caustic soda but it is generally the former that determines production rate as chlorine is difficult to store.

Caustic soda demand depended on a recovery in the US market—a key export outlet for Asian material prior to the financial crisis—which had been anaemic so far, industry sources said.

Aluminium producers in Australia, another major caustic soda consumer, added they could not discount the possibility of another industry downturn in 2010 due to the high aluminium inventory levels globally.

“We do not believe caustic soda prices will be going up sharply and we do not want to be caught out of the market by committing all of our requirements to a fixed price contract,” said an aluminium producer late last year.

($1 = €0.70)

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Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections

By: Ng Hun Wei
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