Caustic soda inventories rise as aluminium cutbacks begin

Economic growth

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NaOH Apr14An accident waiting to happen is perhaps the best way to describe aluminium markets – the key swing outlet for caustic soda.  Caustic soda is normally a late cycle product, with sales then focused on the mining industry.  Industry leader Alcoa’s results confirm the disappointing trend.  It lost money in Q1, whilst revenue fell 8% due to a decline in aluminium prices.

Even more worrying, as the chart above shows, based on EuroChlor data, Is that European caustic inventory is already at high levels:

  • Inventory jumped 22% in February (red square) versus 2013 (green line)
  • This followed an 18% jump in January, and took stocks to 296kt – equal to 2009/10 levels
  • The driver was an increase in February operating rates to 81%, after an average 75% in 2012

A further problem is that aluminium stocks in warehouses remain at more than 10 million tonnes, despite a 43% fall in prices from the 2008 peak.   As the blog noted in January, this is sufficient to build 2 years’ worth of cars.

Aluminium producers are thus now fighting a war on two fronts:

  • Rusal has forced a postponement in the London Metal Exchange’s plan to cut warehouse delivery times
  • Rusal and Alcoa have also started to cut production at high cost mines

The warehouse position is the most scandalous, with buyers forced to wait up to 570 days to obtain their own stored material – and to add insult to injury, made to pay large premiums to obtain prompt delivery of replacement supplies.

But whilst Western aluminium producers are finally starting to face up to reality, we can be fairly certain that they will do too little, too late.  This is always the problem when markets are unable to operate properly, as wishful thinking rather than reality starts to dominate producer thinking.

They have thus allowed themselves to be lulled into a state of false optimism.  They wanted to believe stimulus programmes would restore pre-Crisis growth levels, and they have ignored the fact that the warehouse delays kept unwanted inventory off the market.

But we all know how this story will end.  Aluminium demand will continue to suffer under the influence of today’s high prices, whilst in the end the inventory will appear on the market.  When this happens, it will be the innocent producers of caustic soda who will suffer just as much as the aluminium market.

Today’s rising inventory are a clear warning that major operating rate reductions are now on the horizon.

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