FocusEurope caustic soda producers target hikes for Q4

21 September 2012 11:53  [Source: ICIS news]

By Abache Abreu

LONDON (ICIS)--Producers in the European caustic soda market have announced target increases of €55-75/dmt for fourth-quarter contract prices on limited availability and low margins, industry sources said on Friday.

INEOS ChlorVinyls has announced a target increase of €55/dmt ($71/dry metric tonne) with immediate effect or as contracts allow, Vinnolit has announced a target rise of €65/dmt for fourth-quarter contracts, and Dow Chemical has announced a target increase of €75/dmt with immediate effect or as contracts allow.

Another three producers said they were targeting price hikes, with one pointing to at least €50/dmt, while others are still discussing prices. Most European caustic soda contracts settle on a quarterly basis.

The reasons behind the target increases are limited availability and low margins in the wider chlor-alkali and vinyls markets.

Caustic soda availability has shrunk, partly driven by low offtake of co-product chlorine due to weak demand in the downstream polyvinyl chloride (PVC) and construction sectors. Demand for other chlorine derivatives such as isocyanates and polycarbonates is better than for PVC, producers said, but these market also remain on the long side.

Average European daily chlorine production in August was 1.1% lower than in the previous month and 1.9% lower than in August 2011, according to industry body Euro Chlor. Chlorine capacity utilisation in August stood at 76.3%, down from 77.1% in the previous month and 78.9% in August 2011.

Tightness in the caustic soda market has been exacerbated by production constraints at several manufacturing sites, with three producers restricting supply to the merchant market, two other producers down for maintenance and another one out of operations.

Availability is particularly limited in the Baltic, central and eastern European markets because of supply constraints. In these regions, there is talk of material swaps among producers and free delivered prices far above those in the Mediterranean and northwest Europe.

Furthermore, margins in the chlor-alkali and vinyls market are low, producers said. Profitability has been affected by the high cost of upstream ethylene – the September contract price increased by €125/tonne - and falling chlorine values, driven by weak demand for derivatives.

"Producers have been fools," a manufacturer said. "They missed their chance to improve margins in the third quarter and now they need to compensate". Most European caustic soda third-quarter contract prices settled with anything from rollovers to increases of up to €20/dmt, as the €50-60/dmt target increase announced by producers met strong resistance from buyers.

This time around, producers' fourth-quarter contract price announcements have also met some resistance, with buyers pointing to slowing end-user demand in Europe, limited opportunities for exports, and intense competition among suppliers.

“Prices will probably increase in the fourth quarter, as the PVC and construction season come to an end and chlorine operating rates go down,” a buyer said. “However, when you look at the economics of pulp, paper and alumina, you realise customers are suffering a lot and decreasing their consumption of caustic soda,” it added.

Another buyer said: “We expect an increase because demand for chlorine tends to weaken in the fourth quarter, but demand for caustic is also decreasing from the detergents, additives and automotive industries”.

Secondly, rising freight costs and a strengthening euro against the dollar are eroding the competitiveness of European material in the global markets, and limiting producers’ ability to offset low domestic demand, buyers said. “The exchange rate is affecting trade to the US northeast coast,” a buyer said.

Finally, buyers say that pressure to increase market share and improve sales volumes are likely to frustrate producers’ efforts to achieve their price targets. “Smaller customers might face big increases, but medium and big customers are unlikely to see increases greater than €20/dmt,” a buyer said. “Some producers want market share”.

Most negotiations are continuing.

($1 = €0.77)

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By: Abache Abreu
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