OUTLOOK '18: Latin America caustic soda likely to remain steady but firm

Source: ICIS News

2018/01/09

HOUSTON (ICIS)--The caustic soda market outlook in Latin America points to stable-to-firm pricing in the first quarter of 2018, driven by the trend in other regions.

Caustic soda production has been steady, and availability easily meets regional demand in Latin America. However, supply in the US, Asia and Europe tightened during 2017 for different reasons, driving up global prices of the alkali.

In the US, caustic soda markets tightened after Hurricane Harvey as production and logistics were disrupted amid strong domestic and export demand.

Caustic soda availability in Europe was reduced on plant conversions from mercury cell to membrane technology with a December 2017 deadline, as some plants stopped production temporarily or permanently.

And in Asia, caustic soda supply had been tight for an extended period, while producers had focused on honouring contract commitments, with little availability into the spot market.

Caustic soda supply in Latin America during 2017 had been adequate to meet steady, but moderate requirements from various consuming sectors including paper/pulp, soaps/detergents, alumina and others. Domestic prices of liquid caustic soda in Latin America rose during 2017, but by different amounts and at different rates, depending on the market dynamics in each country.

No production or supply issues were noted in Latin America in the fourth quarter. Caustic soda demand in Latin America remained stable, with no significant fluctuations during 2017.

Demand had been particularly soft in Brazil and Argentina, as the two countries gradually recovered from their recessions in 2016. Demand from paper/pulp in Brazil had been more dynamic, as the sector relied on still-active exports, while other consuming sectors depended on the country’s own still soft economy.

Sources said that caustic soda demand in Mexico remained healthy, particularly from the key soap/detergents key consuming sector.

The supply outlook for caustic soda in Latin America suggests balanced availability in the region, in the face of a generally tight global market. Market participants are not expecting any major supply issues in Latin America, despite the tight markets in Europe, Asia and the US.

However, the firming pricing trend in the US has extended into Latin America, as US product is exported to Mexico, Brazil and other destinations in the region.

Various factors are evolving and are expected to affect Latin American caustic soda markets in the first quarter of 2018:

- Expected low inventories in early January after year-end destocking;

- The strength of the Asia rebound after the Lunar New Year starting 16 February;

- Back to normal availability in the US after Hurricane Harvey;

- High caustic soda prices driving chlor-alkali production rates; and

- GDP growth in each country in Latin America.

 

Additionally, the market outlook in South America depends on the country. While greater optimism was noted in Argentina as the economy recovers from the country’s recession of 2016, projections in Brazil were more cautious in the aftermath of its 2016 recession and the Lava Jato corruption scandal.

Meanwhile, participants in Brazil hope for moderate growth, and that the government and the economy remain stable until President Michel Temer’s term in office ends with the general elections in October 2018.

Private and public construction projects are evident in Argentina and are driving the economy.

In Venezuela, markets in general are depressed, as the population focuses on obtaining scarce food while facing shortages of medicines, personal hygiene and household items, and ignoring the absence of non-essential products.

Caustic soda demand in the near-future should be in line with expectations of GDP growth for each country in Latin America. Most countries in Latin America are growing below trend despite the region's economic recovery, Fitch Ratings said on 11 October.

The following table from the International Monetary Fund (IMF) shows its GDP forecasts for the western hemisphere:

Fitch pointed out some trends that were benefitting Latin America. Commodity prices are recovering, external conditions are improving, inflation has fallen in most countries and borrowing rates are favourable, Fitch said. The ratings agency also noted monetary easing.

Countries such as Brazil, Argentina and Peru have had pro-business governments take office, and these have made some policy adjustments and reforms, Fitch said.

However, challenges still persist such as lower investment rates and lagging productivity, Fitch said. A heavy election calendar is coming up, with both Brazil and Mexico electing new presidents. Fitch said the elections could detract from reforms. Corruption cases are also making it more difficult to enact reforms.

Meanwhile, fiscal consolidation has proven to be difficult. The economic recovery has so far been shallow, countries are making less money from commodities, and governments have made uneven progress on reforms to boost revenues. They continue to face pressure to spend money, and many countries face additional costs from earthquakes and hurricanes.

Major producers of Latin America caustic soda include Mexichem, Braskem and Unipar Indupa.