OUTLOOK ’19: Latin America caustic soda continues to face downward pressure

Luly Stephens

03-Jan-2019

HOUSTON (ICIS)–The caustic soda market in Latin America, as well as in North America and other regions, will continue to face downward pricing pressure in the first quarter of 2019 as a result of ongoing production curtailment at Brazil’s alumina refiner Alunorte, which is critical to the caustic soda supply-demand balance.

Economic and political issues in several countries in the region will additionally contribute to a cautious outlook for the first quarter of 2019 in Latin America caustic soda markets.

Norsk Hydro’s Alunorte in Barcarena, Para state in northern Brazil, is the world’s largest alumina refinery, and the single largest consumer of US liquid caustic soda. Under full operation, it consumes more than 600,000 dry metric tonnes (dmt) of caustic soda annually from US producers exclusively, but it is currently operating at a 50% rate. Alunorte has around 2,000 direct employees and nameplate capacity of 6.3m tonnes/year. Hydro owns 92.1% of Alunorte, the company said.

On 16-17 February 2018, an extreme rainfall caused flooding in Barcarena, including the Alunorte alumina refinery. A rift with regulators began in February after the heavy rains were suspected to have caused an overflow of retainment ponds at the Alunorte site that was thought to have contaminated nearby water supplies. Internal and external reviews confirmed that there was no overflow from the bauxite residue deposits or harmful spills from the February rain event, Alunorte said.

Alunorte continues to produce alumina at a 50% production rate under instructions from regional and state authorities. According to a 7 November statement from Alunorte, a federal court in Belem, Para, declared its competence and ratified a previous decision from the Para state court.

No timeline has been set for Alunorte’s return to full production.

GDP growth projections are likely to reflect activity in different countries. Particularly strong growth is projected for Bolivia, Chile, Paraguay and Peru. Critical conditions are expected to continue in Venezuela, while Argentina’s recovery is expected to remain slow.

The International Monetary Fund (IMF) has published GDP growth projections by country in its World Economic Outlook of October 2018. The following table shows GDP forecasts for the western hemisphere.

GDP Growth in Latin America

 

For December, caustic soda prices in Latin America are not likely to rise, because of decreasing demand in line with seasonality, fewer working days on the holidays, and inventory shaving to reduce tax exposure.

Demand in Latin America from major consuming industries such as alumina and soaps/detergents is gauged as stable to soft, although pulp/paper has been performing well.

Furthermore, general demand usually remains soft in South America after the new year until the Carnival holidays in early March. During this period, vacations tend to dampen business activity.

Demand in other regions is also expected to slow in December for the same reasons.

Business in Argentina and Brazil has remained below expectations for the past couple of years, as the two countries gradually recover from their respective recessions of 2016. Participants in both countries had initially anticipated speedier economic improvement.

This year, dampening the recovery in Argentina, the country experienced a major currency devaluation. Argentina’s currency market has recently shown more stability following the agreement on a $50bn credit line from the IMF. However, domestic prices for services and fuel have continued to rise, while the population’s purchasing power decreased, deepening the country’s recession.

In Argentina, low activity in general is expected in the next quarter, and possibly even the next two quarters, as a result of high interest rates, which are discouraging investment and consumption.

Demand in Venezuela is minimal. Imports are difficult, as foreign currency to pay for imports is not readily available. Some businesses started year-end vacations as early as mid-November, for the lack of activity.

Business usually slows in anticipation of an election, or until a president-elect takes office and new policies are established. Andres Manuel Lopez Obrador (AMLO) took office in Mexico on 1 December 2018, while Jair Bolsonaro will take office in Brazil on 1 January 2019. The policies the new presidents might follow once in office remain unclear. In Mexico, the announced cancellation of Mexico City’s airport construction has dampened market sentiment and driven the peso to weaken against the US dollar. Business participants protested AMLO’s decision to discontinue the already started construction of the airport.

Although the Latin America caustic soda market is expected to remain soft through the first quarter of 2019, projections are mixed depending on economic and political conditions in each country.

Argentina will be slow to heal from the economic vulnerabilities that surfaced in mid-2018. Brazil appears on a faster track to recovery after its recession of 2016. Brazil’s president Bolsonaro is considered business friendly, but industry participants have noted uncertainty about his intended policies. Venezuela’s economy remains in distress. The outlook for Colombia is stable, as is that for Mexico, although participants noted caution on the direction in which the populist president AMLO will lead Mexico.

Caustic soda producers in Latin America are Braskem, Mexichem, Quimpac and Unipar.

Latin America caustic soda prices

 

Focus article by Luly Stephens
Additional reporting by Ron Coifman

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