OUTLOOK '19: Global sulphuric acid supply to remain tight in H1 2019 before easing

Source: ICIS News

2019/01/09

LONDON (ICIS)--The global sulphuric acid spot market is expected to remain tight throughout at least the first half of 2019, particularly in Asia.

With a large amount of carry-over volumes once again in Japan, and with heavy quantities of South Korean and Chinese material already tendered for 2019, free spot volumes are expected to remain scarce this year.

Coupled with this, 2019 will mark a heavy-maintenance schedule in Japan/South Korea, in line with the typical two-year cycle.

Large-scale smelter maintenance already confirmed for 2019 can be seen in the table below:

Sulphuric acid export values were in negative territory – signalling producers were offering money for the removal of product rather than pay storage cost – as recently as 2016, due to it being considered by many manufacturers as a waste product.

Sulphuric acid export prices in Japan and South Korea at their highest level on record, and Europe and China spot export prices at their highest level since December 2011. Many producers have been attempting to maximise contract volumes and lock-in material values at their current high levels, leaving lower tonnage available to spot markets in 2019.

Two Lions, for example, has entered into an agreement to provide OCP with  around 400,000 tonnes of sulphuric acid in 2019, the company confirmed.

This is the largest such agreement that Two Lions has entered into. As a result of this spot deal and the OCP agreement, Two Lions is now sold out of spot material until March 2019.

Factoring in Two Lions' typical domestic commitments, the company is not expected to be a significant spot exporter in 2019 outside of the volumes it will ship to OCP.

Along with this, multiple sellers in Asia have committed spot volumes tender, leaving little free tonnage available in 2019.

Buyers – particularly in Chile – have been purchasing volume to be distributed throughout 2019 to avoid a repeat of what occurred in 2018.

Tight supply had only been expected to last through the first half of 2018, and Chilean buyers purchased a large volume of material under swap agreements in the first quarter to last them through until the second half when constraints eased.

When availability remained tight in the second half, there was a run on material and prices spiked.

A significant driver of ongoing supply tightness in 2018 was the unexpected closure of Vedanta owned Sterlite Copper’s Tuticorin, India, smelter in May 2018.

The smelter – which is India’s largest and has the capability to produce 1.2m tonnes/year of sulphuric acid – was forced to close by the Tamil Nadu Government for pollution breaches, and the plant was sealed.

The Tuticorin smelter predominantly serves local markets, and the closure meant that the southeast Asia sector became reliant on imports. This led to a run on product amid already tight global supply and significant spike in prices.

Nevertheless, in the interim, many of Tuticorin’s buyers are understood to have turned to end-use products rather than increasing their sulphuric acid consumption, with only an estimated 200,000 tonnes of increased sulphuric acid demand resulting from the closure.

On Saturday 15 December, the National Green Tribunal (NGT) found in favour of Sterlite's appeal against the closure. The NGT declared that decision "unjustified" and "non-sustainable".

The decision does not signal the end of Sterlite’s legal woes, as the Tamil Nadu state government has appealed the decision, with the case expected to be heard in India's Supreme Court this week.

Because the plant has been sealed since May, the condition of the unit – and therefore how long it will take to restart – is currently unknown.

Several sources said that it is unlikely that the plant will be fully operational until at least the second quarter of 2019.

Fresh tonnage from Tuticorin would help relieve supply pressure in the market, although this is not expected to become apparent until the second half of 2019.

The impact is expected to be significant enough across the year that India buyers delayed contract discussions while they were awaiting the outcome of the appeal.

Global demand, meanwhile, remains strong – predominantly driven by Chile.

New sulphur dioxide (SO2) emissions restrictions, which came into force in Chile on 13 December, have curtailed production at a number of domestic producers – including Codelco and Anglo American.

Chile is one of the largest importers of sulphuric acid and the expectation of lower domestic production has already seen a flurry of demand for overseas cargoes from Chilean buyers during the fourth quarter of 2018, coming as it did at a time of already tight global availability.

This directly led to a spike in Chile import prices, with values increasing as much as 25% week on week at the end of October, when the extent of the compliance problem became clear, as can be seen in the below interactive graph.

Domestic availability is expected to remain low throughout the entire first quarter. How long tight domestic supply continues beyond that is likely to depend on how quickly plants are able to become compliant with the restrictions.

Conversely, several players – both on the buy and sell side – noted increased buyer resistance to price rises in the final part of 2018, and argued that spot values have now reached the limit of what buyers are able to pay before operating rates are attenuated.

There was already talk of reduced operating rates in Brazil because of this.

Prices in Chile tend to increase to above average levels around October as buyers look to secure material for arrival in the peak January import month.

The trend is clearly shown in the price seasonality graph below, which shows an averaged weekly index of Chile sulphuric acid import price strength since 2007 to demonstrate typical price movement patterns, using yearly price averages as a baseline.

Anything above 1.0 means prices are typically above the yearly average that week, while anything below means that prices are typically below.

Nevertheless, low domestic availability could see 2019 buck this trend with continued strong demand during the typically quieter first half of the year.

Interactive Focus article by Mark Victory