Inorganics: US caustic soda hikes continue on tight supply

05 September 2011 00:00  [Source: ICB]

US chlor-alkali producers propose more caustic soda price hikes in 2011, citing tight supply amid buyer skepticism

Amid buyer skepticism and resistance, US caustic soda producers OxyChem, Formosa Plastics USA, Shintech, Olin and PPG Industries all recently announced price increases of $65/dry short ton (dst) (€49/dry metric tonne), effective immediately - or as contracts allow - citing low inventories, tight supply and healthy market demand.

Olin and US producer Dow Chemical also issued temporary voluntary allowances (TVAs) on price increase announcements of $25-35/dst made in early July. A TVA typically implements part of an announced increase if market conditions change.

The recent price announcements followed this year's second round of price nominations from several producers - between $50-60/dst, effective July. Producers also implemented a $60/dst increase in April.

US producers are confident at least part of the $65/dst caustic soda increase will take hold by October. During Olin's second quarter earnings call on July 22, chairman and CEO Joseph Rupp noted that the tightness in the market - particularly for membrane-grade material - was a supporting factor for the recent increases, which would likely be seen later in the third and fourth quarters.

Nearly all caustic soda is made by the electrolysis of sodium chloride solution using either mercury, diaphragm or membrane cells. This process produces 2.25 tonnes of 50% caustic soda for each tonne of chlorine. The main production route in the USA is via the ­diaphragm cell.

"Membrane caustic is still very tight, and that's why we feel like the caustic price increases are still positive opportunities for us," said Rupp. "We expect chlor-alkali pricing to continue to improve. While we have concerns for demand, we believe the business is in position for a strong 2011."

Another producer also cited healthy demand in the hurricane season, as the market increases caustic soda inventories.

"We're going into the hurricane season and that has already brought up concerns on the producers' side and customer's side to stock up," the producer said.

However, US Gulf caustic soda producers added on August 26 that Hurricane Irene's landfall on the US East Coast, on August 28, would not have any impact on supply, despite expected shipment delays that would likely last a few days. One distributor said several shipments bound for the East Coast were expected to be delayed, particularly those expected in Savannah, Georgia; Philadelphia, Pennsylvania and Bayonne, New Jersey.

Market feedback was mixed on whether caustic soda prices should go up or remain stable.

ICIS assessed the US liquid caustic soda July contract at $440-510/dst FOB (free on board) compared to $440-480/dst for the May contract. Prices are up sharply from $330-350/dst in August 2010. One buyer was skeptical on whether the tightness reflects realistic inventory levels, given that no issue was noted in obtaining materials. Another saw the price increases as speculative moves, given the recent volatility in the financial markets.

"With all the volatility in the market and economy, things are uncertain," the buyer said. "This usually drives a drop-off in chlorine derivatives demand."

Industry analysts also doubted the successful implementation of the recently announced July-­August price hikes, unless polyvinyl chloride (PVC) export volumes further decline. This would then affect chlorine demand and thereby further lower chlor-alkali ­operating rates and co-product caustic production.

US-based trading firm Susquehanna International Group analyst Don Carson said: "There are increasing signs that the additional price initiatives are unlikely to gain traction in the market.

"Chlorine prices have largely been unchanged in recent weeks, despite continued demand weakness from the vinyls sector."

Bank of America Merrill Lynch analyst Aleksey Yefremov added: "We believe caustic soda prices are likely to pause in the second half of 2011. However, we would not rule out strengthening caustic soda prices towards the end of 2011, if polyvinyl chloride export volumes decline, thereby restricting chlor-alkali operating rates and caustic soda supply."

Historically, the fourth quarter is typically the weakest quarter for chlor-alkali manufacturers because of seasonal demand factors and turnarounds, noted OxyChem during its second quarter earnings call on July 26.

Chlorine demand is expected to wane later this year and bring down operating rates further.

Olin said it is bracing for softer chlorine demand in the third quarter because of anticipated chlorine customer outages and weakened exports for PVC - chlorine's largest market application.

ICIS assessed US chlorine third quarter contracts at $325-355/short ton compared to the $295-325/short ton level seen in the first half of 2011. Olin announced a chlorine price hike by $60/short ton in March.

"If there is any validity to some softening on vinyls demand that's only going to tighten up the caustic side, which might facilitate implementation of their price increases sooner," Olin's Rupp said.

Two planned, multi-month outages by Olin's two chlorine customers, beginning in July and September, are expected to lower chlorine demand and Olin's chlor-alkali operating rates by the end of the third quarter.

Rupp said one of the customers is shifting a planned outage from the fourth quarter to the third quarter, and the other outage is related to a capital investment.

Olin's operating rate has been in excess of 90% in the first half of July, and Rupp expects the rates to continue in August.

According to US trade group The Chlorine Institute, the US chlor-alkali operating rate for July was 85%, compared with 92% seen in June. The drop was attributed to sporadic operating problems across the market, as well as a two-week turnaround by PPG Industries at its Lake Charles, Louisiana, site at the end of July.

An upcoming olefins turnaround at Formosa Plastics USA's plant in Point Comfort, Texas, from September 1 to October 10 is also expected to affect the company's chlor-alkali production, company spokesman Steve Rice said.

Industry analysts expect new chlor-alkali capacity already trickling in this year - adding 6% to current US capacity - will balance the market or even weaken producer pricing initiatives for the rest of 2011.

Shintech already started its new 580,000 dmt/year caustic soda unit in Plaquemine, Louisiana, in July, although most of the output is intended for contractual customers, according to sources.

Formosa Plastics USA was scheduled to initially start its expanded chlor-alkali unit in Point Comfort, Texas, on July 15, which will have an additional 25% - or 230,000 dst/year - of caustic soda capacity. The additional capacity did not come on line until early August, market sources said.

Some producers noted that most of the new output will be consumed internally, and will not have a significant effect on the current tight supply situation. Long-term capacity increases could result in a different scenario.

On July 21, OxyChem said it will build a new chlor-alkali plant in New Johnsonville, Tennessee, to support US-based firm DuPont's titanium dioxide prodction. The facility will have a capacity of 182,500 short ton/year of chlorine and 200,000 dst/year of membrane-grade caustic soda. The new facility is expected to add 1.3% to US supply in 2013. On July 25, US rare earths mining company Molycorp also announced its intent to build a chlor-alkali plant as part of its mine expansion in Mountain Pass, California. Details on how much chlorine and caustic soda will be produced were not disclosed. The mine is expected to produce 20,000 tonnes of rare earth oxides by mid-2012, and the output will double to 40,000 tonnes by mid-2013.

Molycorp said it will use all of the caustic soda and chlorine in the leaching and extraction process of rare earths mining.

The projects are in addition to US capacity expansions announced early this year by Dow Chemical and another US chlor-alkali producer, Westlake Chemical. Both companies expect their new chlor-alkali plants to start up production by 2013 (see related ICIS Chemical Business story ­published on 6/20/11).

Author: Doris de Guzman and Ruth Liao

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