OUTLOOK '11: More volatility ahead for Europe chlor-alkali players

29 December 2010 10:03  [Source: ICIS news]

By Stephanie Wilson

LONDON (ICIS)--Another year of extreme volatility looks likely for European chlor-alkali players as economic growth slowly regains ground and manufacturers struggle to tailor operating rates to fluctuating demand.

Despite significant price increases seen in the market over 2010, integrated producers continued to lament that they were far from balancing electro-chemical unit (ECU) margins, achieving optimum operating rates or even sufficient profitability.

Players remained extremely cautious in their outlooks for 2011 as construction activity – a key market for downstream polyvinyl chloride (PVC) – looks set to remain below expectations, particularly in regions where credit is not readily available such as the UK, Iberia and Greece

By contrast, a few smaller applications for PVC, such as automotive and the renovation industry, are expected to go from strength to strength in the coming year, with the offtake from Russia and central and eastern Europe continuing to provide key areas for growth. 

Overall demand for PVC, however – although improved from those levels seen in 2009 – will still not be substantial enough to absorb total European capacity in 2011, according to players.

“It remains a weak market in terms of offtake,” one supplier noted. “If those capacities that have been offline and running at reduced rates this year were to come back as planned in 2011, we could see the market tip into oversupply again.”

As such, several PVC producers said that they would continue in their current bid to tailor operating rates to demand.

One large manufacturer explained: “All players are keen to keep stocks to a minimum; after 2008, no one wants to be caught out with expensive inventories. We can expect a lot of volatility in the next year as producers react to cautious demand.”

The source added: “The lower rate of production will continue into 2011 and this means there will be no buffer against any potential supply constraints. This will create tightness in the market should we encounter any problems in supply.”

This view was echoed by many buyers, who felt that restricted supply was the main factor behind the average increase of €165/tonne ($216/tonne), which had been registered across much of the northwest European PVC market in 2010, as there had been no significant improvement in demand.

In the short-term, however, PVC margins are expected to come under some downward pressure. January ethylene increases of €105/tonne will prove extremely difficult to pass on to consumers given the traditionally slower demand in the first quarter, which has been exacerbated this year by a harsh winter.

One manufacturer acknowledged: “There will be a time to regain the increased production cost, but January will probably not be it.”

As such, much of the burden on electro chemical unit ECU margins is likely to fall to caustic soda – the co-product of chlorine, produced in a ratio of 1.1 tonne caustic soda to 1 tonne chlorine – integrated manufacturers said.

A number of caustic soda manufacturers outlined their expectation that availability – which had stood at 217,676 tonnes in November, the lowest figure for over two years, according to Euro Chlor data – would remain tight in the first quarter of 2011.

Several said that the traditionally slow winter chlorine offtake supported their arguments to hold current operating rates steady and enable them to reach targets of plus €50-75/dmt (dry metric tonne) for first quarter business.

However, as in the PVC market, many caustic soda consumers argued that the tight availability of product, which gave rise to an increase above €100/dmt in 2010, had now largely been resolved and therefore rejected such hikes as optimistic. 

One large consumer conceded that increases in the first quarter were likely given the strong resolve of integrated producers, but hastened to add that it anticipated reductions over the second, third and fourth quarters, as production in Europe ramped up and material become more freely available.

The source said: “Producers are still trying to use production issues and low inventories as an excuse, but this is coming to an end now. Production in the black sea region is ramping up and an Iranian seller has just come onstream and is offering material into southern Europe. There will be more supply than demand soon.”

While producers could not rule these arguments out, most were optimistic that they would be able to maintain the upward momentum as they were starting from a stronger position in terms of price and availability.

One integrated chlor-alkali producer outlined: “The speed of the recovery in both [the PVC and caustic soda] markets will probably slow from what we witnessed in the third and fourth quarter 2010, as it cannot continue, but we are hoping for a more stable situation at these higher levels.”

($1 = €0.76)

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By: Stephanie Wilson
+44 20 8652 3214

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