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Is your chemical market three-dimensional?

ICIS, Uncategorised
By Jeremy Pafford on 12-Jun-2020

How can an understanding beyond the linear chemical chain bring value to sourcing teams?

Back in the time when companies visited clients in person at their offices (i.e. the first week of March), I presented on market trends to a sourcing team that purchases a wide assortment of the raw materials ICIS covers. What made this particular engagement notable was a market reality conveyed to the company’s purchaser of caustic soda, and his reaction to it.

The revelation: That he cares more about caustic soda than the companies who produce it. His reaction: His boisterous, gregarious posture slumped as he uttered, “Wow. I didn’t know that,” and he began reassessing his status with suppliers, his role in his company’s success and whether I had shoved him down the purchasing team’s organisational chart.

OK, so there’s a bit of hyperbole in those explanations, but the gist of the message was this: Caustic soda is not produced on purpose but as a byproduct of the chlor-alkali process that is beholden to chlorine and polyvinyl chloride (PVC) demand, with the PVC market about twice the size monetarily as caustic soda. Hence, what dictates a large portion of whether caustic soda is easy or difficult to procure are forces outside of the caustic soda market.

That revelation could be unsettling to a caustic soda buyer, but it actually should be empowering, as it should lead the procurer to ask, “Well, what drives PVC and chlorine demand?” The person at this presentation did just that, and in gaining that answer, he learned that to optimise his market analysis skills he needed to broaden his information horizons to get a fuller picture of caustic soda fundamentals.

Demand for chlorine and derivatives such as PVC, chloromethanes and epichlorohydrin (ECH) is driven by the construction and automotive industries. Construction had been healthy going into March, and while automotive was not going gangbusters, the combination of the two markets added up to good demand for the likes of PVC. That led to higher operating rates for chlor-alkali plants, higher PVC prices, increased production of by-product caustic soda above demand levels, and thus lower caustic soda pricing.

A month later, with the pandemic in full effect, construction projects stalling and automotive production shut in, the situation reversed, with PVC demand plummeting, chlor-alkali plants pulling back on operating rates and caustic soda supply decreasing. However, caustic soda demand does not share demand centres with PVC. Caustic soda buyers come from industries that make soap, treat water, make paper and refine alumina into aluminium, and amid the pandemic, soap demand remained strong and people still required clean drinking water. Thus, caustic soda demand held up during the early spring portion of the pandemic, and amid lower production rates, supply tightened and prices rose while prices for chlorinated-cousin PVC plunged.

As the graph here shows, demand and pricing for US caustic soda remain on the upswing, as supply constraints continue. However, operating rates at chlor-alkali plants are increasing as PVC demand from restarted automotive plants and a return to construction activity is awakening. Should economies continue to recover, that should lead to additional caustic soda supply in the coming months and help mitigate the upward price trend.

Many chemical markets are linear: Upstream costs and supply/demand colour the prices of derivatives, as does downstream demand for those derivatives. But some such as caustic soda are three-dimensional and require views of ancillary or adjacent markets to get the full picture. In analysing any chemical market, procurers need to ask the question, “What other markets should I be looking at?” and have the value explained with each offered up.

That procurer back in March basically asked that, and many others have in the months since via virtual conference calls with us as they (and we) work to make sense of coronavirus-plagued markets and find opportunities to survive and perhaps thrive. If you have concerns that you are not getting a holistic picture of your key markets, drop us a line at askicis@icis.com and we will get to work in mapping out all the dimensions vital to the success of your procurement strategy.

Disclaimer: The views in this blogpost should in no shape or form be taken as actual forecasts and are my personal views only.

Below: A diagram of the chlor-alkali process, with outputs of chlorine gas (top left) and caustic soda (bottom right).