FocusEurope chlor-alkali margins could turn negative - producers

25 January 2011 17:50  [Source: ICIS news]

LONDON (ICIS)--European chlor-alkali margins are slipping back into negative territory in January, as both monthly polyvinyl chloride (PVC) contracts and first-quarter caustic soda prices settled below estimations, producers said on Tuesday.

Surging ethylene prices – which rose €105/tonne ($144/tonne) in January – and rising electricity costs had prompted the majority of integrated chlor-alkali producers to announce hikes of €50-100/tonne for January PVC business and €50-75/dry metric tonne (dmt) for first-quarter contracts in the market for caustic soda, the co-product of PVC feedstock chlorine.

Although many had said that they needed to capture at least the full €50/tonne increase to PVC production costs – associated with the higher January ethylene prices – the majority of PVC manufacturers fell short in their aims, settling with an average increase of €30-40/tonne.

This left average European domestic prices pegged around €1,095-1,130/tonne FD (free delivered) NWE (northwest Europe), according to ICIS. The prices are subject to discounts and rebates.

The loss of €10-20/tonne in production costs in January, coupled with the €30/tonne lost in the last few months of 2010 – when it had proved impossible to raise PVC prices – meant that PVC margins still had at least some €40-50/tonne to recover, even before rising energy costs were factored in, producers said.

As such, many producers had been optimistic that the tighter caustic soda market would enable them to offset losses in the PVC market and firm up overall chlor-alkali margins.

However, despite low output, sellers were also disappointed by settlements of just plus €10-30/dmt, which were far below the targets of plus €50-75/dmt announced late in the fourth quarter of 2010, when caustic soda availability was more limited due to production constraints. 

A number of integrated chlor-alkali producers conceded that ample supply and low demand had been the major factor exerting downward pressure on prices, and this showed no signs of abating in the short term, as demand in the PVC market stubbornly remained some 15-25% below pre-2008 financial crisis levels.

Meanwhile, February ethylene prices look set to increase again due to cracker constraints and high crude costs, providing no relief for chlor-alkali producers which traditionally prefer to source the main share of their margins from the more cost-intensive PVC market.

As such, chlor-alkali average utilisation rates were not expected to top 80% in the coming year, one manufacturer said, which could create tension and price volatility in both the PVC and caustic soda market should any production issues arise.

This combination of low demand and high production costs made it extremely difficult for producers to return margins to healthy levels.

“Chlor-alkali is not giving any profit and the [recent] settlements eat further into margins,” said one German chlor-alkali producer. “We do not see any glimmer of recovery from the construction industry before the second quarter and there is ample availability to meet demand in both markets.”

This sentiment was echoed by many manufacturers. One said: “It cannot go on like this, we are always running behind. The margins just do not exist anymore.”

PVC converters were also feeling the pressure, as they were forced to take on board some increase, but were struggling to pass the hike down to their consumers given the lacklustre demand for pipes and profiles.

A large pipe converter said that “demand for PVC is not enough to absorb total European capacity, even with producers operating at low rates. Some consolidation could be necessary, both among producers and converters".

They added: “It is a constant battle for market share between the pipe suppliers. We are absorbing most of the [€175/tonne total] increase [over 2010] as we have not been able to pass it on to our own buyers. There is always one supplier who is willing to undercut to get more market share."

The notion of consolidation also received some support from one manufacturer, which said that European demand had fallen by some 1.3m tonnes/year since 2008, and although capacity in Europe had fallen by some 600,000 tonnes/year from 2008-2011, 700,000 tonnes/year was still looking for buyers.

“We basically have a 700,000 tonne/year problem,” said the producer. 

($1 = €0.73)

For more on PVC and caustic soda visit ICIS chemical intelligence
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By: Stephanie Wilson
+44 20 8652 3214

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