US caustic soda arbitrage window opens

Source: ECN

2018/06/29

Low-cost production for US chlor-alkali is an advantage that tends to keep the US market immune to competitive imports of caustic soda. But with US spot export business for liquid caustic soda holding near $600/dry metric tonne (dmt) FOB (free on board) US Gulf, and with export prices in Northwest Europe at $500/dmt FOB and in the Mediterannean at $470/dmt FOB, parcels from Europe began heading to the US east coast.

“This is the first time we’ve seen spot activity from Europe in two years,” said a US distributor who concluded one of the shipments.

A 2,500 dmt parcel was expected to land on the lower US east coast on this week, and another 8,250 dmt parcel was scheduled to load at Antwerp, Belgium on 20 June bound for the US Atlantic coast. Yet another parcel was heard but could not be confirmed.

The arbitrage window is not likely to stay open for long. Shipments from Europe are said to be so limited in availability that it will not likely have a direct impact on US prices.

Caustic

But European material is being offered at competitive prices into Latin America, home to the bulk of US exports. Most US exports of caustic soda are sold into Latin America or the Caribbean basin – ready markets with several soap makers, alumina and oil refineries and chemical plants.

But US caustic soda exporters have broadened their reach since China began reducing production and exports in recent years. The US is now a supplier of large volumes to alumina refiners in Australia.

While US material enjoys a production cost advantage, global market factors have pushed prices for caustic soda higher as Europe and China reduced capacity and exports over the past year or more. That has given the US a greater role as a global supplier.

That became even more apparent when Hurricane Harvey knocked out several plants along the US Gulf coast last year. US prices shot up fast, and those in Europe rose at the same rate and to the same degree.

European prices held stubbornly to that level through most of Q4 as the deadline to shutter mercury cell production practices in Europe arrived in early December along with a number of plant closures.

But prices drifted lower in April after it became apparent that European producers would be able to maintain domestic supply, even after the closure of about 1m dmt/year of capacity during 2017.

Prices in Europe eased lower through May and have ridden at a discount to US prices through June, as traders and others moved to capitalise on the spread.

The underlying dynamics of tighter global supply is pushing US production capacity to its limit. The US has increased export volumes in four of the past five years including the past three years straight.

Imports, though, have eased with fewer shipments from Europe to the US East coast, and from China, South Korea and Japan to the US west coast markets, according to the US International Trade Commission (ITC).

The cost of freight from the US Gulf to markets on either US coast adds significant amounts to the delivered price, giving producers at ports in Europe and Asia slivers of opportunity. Contracted material from both regions also make regular sales.

While it is unlikely to last very long as either US prices will soften or European prices will firm, the arbitrage from Europe does give buyers a glimmer of hope that prices might soften somewhat. That is more likely if the window stays open into Q3, giving more buyers and sellers a chance to conclude business before the window closes.

A trader said it had concluded business from the US Gulf to Latin America in mid-June at a lower price than it would have gotten had it not been for competitive offers from Europe.

“That is why we are now seeing producers in the USG lower offer prices,” the trader said.

Major US producers of caustic soda include Olin, Occidental Chemical, Westlake Chemical, Shintech and Formosa Plastics.