11 June 2012 00:00 [Source: ICB]
Consumption trends in the global caustic soda market suggest weakening conditions for the rest of the year, with major buyers having announced production cutbacks across the globe because of weak demand.
Since January 2012, softening demand from the downstream alumina and pulp and paper sectors have produced a growing global surplus and increased competition among suppliers, which have had to seek alternative markets to sustain sales volumes.
The trend is likely to continue into the second half of 2012, with major caustic soda buyers expecting low downstream consumption, and key producers anticipating oversupplied fundamentals for the next few months.
The outlook looks brighter for producers in the US and Middle East, as they benefit from a low production - feedstock and energy - cost position, which allows them to decrease export offers with a lower impact on margins.
In Asia and Europe, high energy and raw material costs tend to amplify the impact of declining export values on profitability, therefore undermining producers' ability to stay competitive during a global price downtrend.
The Asian caustic soda market is balanced to tight at the moment, with production cutbacks limiting availability and sustaining firm prices. However, in Europe, supply has outstripped domestic demand, forcing producers to export at the expense of margins.
MIDDLE EAST OVERSUPPLIED IN Q3
As demand from the alumina sector in Asia and Australia - the world's largest caustic soda importer - has shrunk, Middle Eastern producers have been left with additional quantities of caustic soda and forced to search for alternative export outlets.
So far in 2012, they have sold large quantities of lower-priced caustic soda into southern Europe and the northern and southern African markets, altering regional supply and demand balances, and forcing local producers to decrease their export offers.
In response, northern African producers have been decreasing their export prices since January in order to remain competitive in the Mediterranean, Egypt's main export market.
As of 24 May, ICIS assessed northern African spot prices for liquid caustic soda at $380-400/dry metric tonne (dmt) FOB (free on board), down by $90-120/dmt from January. Latest bids were reported at $350-360/dmt FOB North Africa, but no business was concluded at this level.
EUROPE GLOBALLY UNCOMPETITVE
Figures from industry body Euro Chlor show that caustic soda stocks for the region comprising the EU27, Norway and Switzerland were at 278,994 tonnes in April, 11.6% higher than the March level of 250,098 tonnes, and 18,319 tonnes above the April 2011 level of 260,675 tonnes.
Some producers say stocks below 300,000 tonnes are an indication of limited supply and that product availability for spot and export business is limited after weather-related outages in the first quarter, but buyers agree that there is plenty of material available, with some reducing intake ahead of the traditionally slow months of July and August.
Producers Dow Chemical and INEOSChlorVinyls announced a €40/dmt ($50/dmt) target increase for second-quarter contract prices, while other producers were hopeful that at least modest increases would be possible, pointing to poor margins and availability.
Buyers, on the other hand, pushed for decreases, in line with improving supply towards the end of the first quarter and the poor economic outlook.
Most second-quarter contract price negotiations concluded with decreases of €10-30/dmt, on downstream weakness and more competitive offers.
The Mediterranean market has been particularly sensitive to import pressure. While supply has gradually improved after outage-related tightness in the first quarter, demand has remained sluggish for most of 2012, driven by the worsening eurozone debt crisis.
Low-priced imports from the Middle East have further lengthened the key net importing markets of Turkey and Italy, accelerating the downward trend in domestic and export pricing. A deal was concluded in late May at $340/dmt FOB Spain for delivery in the Mediterranean, while price ideas from other southern European producers were assessed at $350-370/dmt FOB.
As of 25 May, ICIS assessed the Mediterranean spot price for liquid caustic soda at $340-360/dmt FOB MED (Mediterranean), down by $135-155/dmt from January.
The Northwest European market is largely balanced, with stable to soft demand being offset by low operating rates. While some producers say they have reduced production to meet softer demand, others say that demand is satisfactory and that poor chlorine offtake is behind production cuts.
Despite balanced domestic fundamentals, export offers have experienced a steady decline, as producers with higher inventories are faced with falling prices in their traditional export outlets: the Mediterranean and the US East Coast.
According to industry players, US producers have reduced caustic soda domestic prices in an attempt to take market share from European importers and sustain sales volumes in a weakening market. "When US suppliers are long they want market share," one alumina producer said.
An export deal to the US east coast was confirmed at $360/dmt FOB NWE (Northwest Europe) in late May, while price ideas from other Northwest European players were assessed at $370-380/dmt FOB. Freight costs to the US East Coast are estimated at $80/dmt, according to a European producer.
As of 25 May, ICIS assessed the Northwest European spot price for liquid caustic soda at $360-380/dmt FOB NWE, down by $80/dmt from January.
Some players say that if export values and volumes remain low in the third quarter, producers could be forced to concentrate on the European market, lengthening supply and depressing domestic prices.
Others were confident that depressed demand for chlorine derivatives was likely to reduce chlor-alkali production and shrink supply for caustic soda in the third quarter, allowing for higher caustic soda prices.
US COST ADVANTAGE BOOST
In the US, producers have been bullish in their price increase announcements, pointing to a tightening scenario caused by dampened demand for polyvinyl chloride (PVC), which is a co-derivative of the electrolysis process.
However, these targets have met strong resistance, as buyers have adopted a wait-and-see stance, noting their own decreased demand, and forecasting that weakening fundamentals will ultimately lead to lower prices.
Looking ahead, although caustic soda production is likely to grow at a greater rate than domestic demand, this is probably going to be offset by increasing export activity, driven by the advantageous US production cost position.
With the price of US ethylene, a precursor to PVC, dropping precipitously during the second quarter of 2012, chlor-alkali producers have found more room for caustic soda export pricing strategies.
As of 25 May, ICIS assessed US Gulf spot price for liquid caustic soda at $370-390/dmt export FOB USG (US Gulf), down by $75-80/dmt from January on adequate supply and softening demand.
Asia's caustic soda prices are expected to remain robust in the near term, supported by restricted supply and persistently low by-product chlorine prices.
ASIA TIGHTNESS LIMITS EXPORTS
As of 25 May, ICIS assessed Asia Pacific spot prices for liquid caustic soda at $470-475/dmt FOB Northeast Asia, up by $25-30/dmt from January.
Several chlor-alkali producers in China - the world's biggest caustic soda producer - are operating their plants at reduced rates to balance chlorine production in the midst of low chlorine prices and the dismal condition of the chlorine-derivatives market, leading to tight availability of caustic soda cargoes for the spot market.
"We have very limited cargo to export because of our low operating rate of around 50%," a chlor-alkali producer in China says.
The average operating rate of Chinese caustic soda plants is estimated to be 60-70% at the moment, according to a trader based in the country.
China's chlor-alkali producers are expected to maintain their production at lower levels, as there is no anticipated uptick in the chlorine derivatives segment, market sources say.
As a result, chlor-alkali producers raised their caustic soda offers to fetch higher prices to protect their margins, market sources say.
"We cannot see any chance of caustic soda prices going down, as the chlorine price is still low and supply is limited because of low operating rates," another trader says.
In addition to the reduced supply from China, caustic soda producers in Taiwan and South Korea are unlikely to actively participate in the spot market in the near future, as they are focusing on supplies to their respective domestic markets as well as contractual commitments.
In Japan, producers are currently not in a position to offer spot materials amid ongoing and upcoming plant turnarounds at several chlor-alkali facilities that will last until mid-June.
Despite the bullish sentiment among suppliers, most buyers believe high caustic soda prices are not sustainable, as fundamentals do not support them.
One Southeast Asian buyer says soda prices will go down once buyers start cutting back on their own production because they cannot afford to buy caustic at such high prices.
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