OUTLOOK '12: Europe chlor-alkali market to rebalance

29 December 2011 10:23  [Source: ICIS news]

By Abache Abreu

LONDON (ICIS)--Despite continuous cuts in chlorine production, the European caustic soda market could lengthen in the first quarter of 2012 if demand from key downstream markets such as aluminium, mining and pulp and paper continues to soften beyond the year-end.

During the second half of 2011, plummeting consumption levels in the polyvinyl chloride (PVC) market led to a drastic reduction in the output of its feedstock, chlorine, shrinking supplies and tightening the market for chlorine's co-product, caustic soda.

Supply shocks and price volatility throughout the chlor-alkali chain are common during economic downturns because chlorine’s main downstream markets, PVC and isocyanates, are strongly connected to the construction and housing sectors, and therefore more exposed to economic cycles and drastic changes in GDP.

More than 60% of chlorine production goes to PVC and isocyonates. Whereas PVC is used in doors and window frames, pipes and flooring, isocyanates' main applications comprise construction, upholstery, insulation and plastics, among others.

Caustic soda applications, on the other hand, are more diverse and less linked to the construction industry. They include pulp, paper and cellulose, car paints, glass and ceramics, food industries, water treatment and aluminium and metal.

Consumption patterns in the chlorine market are therefore more sensitive to abrupt changes in the state of the economy than in the caustic soda market. According to producers, the supply imbalance that emerges in the chlor-alkali market after a collapse in PVC demand tends to rebalance after six months.

During that time, since almost all chlorine and caustic soda are co-produced simultaneously through the electrolysis of salt, manufacturers need to price both chemicals according to market fundamentals, as they need to be sold in the same proportion in which they are produced. Therefore, a downtrend in chlorine prices are usually accompanied by price hikes in caustic soda.

Major European producers such as Dow Chemical have announced increases in caustic soda contract prices for the first quarter of 2012 of €50/dry metric tonne (dmt) ($65/dmt) because of market tightness, which has been exacerbated by production outages at several European manufacturing sites, while others producers are negotiating price hikes of up to €60/dmt.

“I expect strong demand and increases in the first quarter of 2012,” a supplier said. “The tendency of prices is to increase, particularly in the Mediterranean as it is becoming increasingly difficult to find supply sources.”

These announcements have been received with scepticism by buyers, which regard them as excessive, pointing to slowing demand in November. 

However, regardless of the outcome of price negotiations, most market players agree that price hikes in caustic soda will not be sufficient to compensate for the margins producers have given away in the chlor-vinyl chain.

If demand for caustic soda improves in January, supply imbalances in the chlor-alkali market will aggravate, while price hikes in spot and contract prices will be likely. However, demand levels have decreased towards the year-end and this trend could continue amid growing fears of a double-dip recession.

“Demand has decreased from all downstream sectors and regions [in Europe]” a producer said. Indeed, according to industry body Euro Chlor, inventories of caustic soda in Europe increased by 10.6% in November from October 2011, despite a 0.2% reduction in chlorine output.

Another producer said: “Demand from the mining industry is decreasing, whereas the automotive sector is running very well. However, if the Chinese economy continues cooling down, the impact on demand from the automotive industry will be significant. Cars such as the BMW have large quantities of aluminium and Chinese customers seem to buy them regardless of the prices."

Further improvements in availability are expected, as global industrial and specialty chemical company Arkema has already started its electrolysis units in Fos-sur-Mer and Lavera, near Marseille on France's Mediterranean coast, following plant shutdowns.

Logistical constraints have also eased, as the Rhine's water levels have risen following rainfall. The river is an important European shipping route for chemicals and other commodities, including minerals, coal and oil products.

However, availability remains poor, as most producers are out of the spot market and only able to meet their contractual obligations.

In conclusion, since the market outlook points to depressed conditions in the PVC market during the first quarter of 2012, an imbalance correction in the chlor-alkali market will depend on whether demand for caustic soda recovers after the destocking cycle, increasing tightness and supporting price hikes, or continues to slow beyond the year-end on economic uncertainty, correcting the market disparity, forcing reductions in operating rates and further eroding profitability throughout the chain.

($1 = €0.77)

For more on caustic soda visit ICIS chemical intelligence
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By: Abache Abreu
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