US caustic soda sales to Australia will lower in 2019

HOUSTON (ICIS)–Over the past five years, alumina refiners in Australia have tripled their buying of US liquid caustic soda to become the second-largest consumer of US exports, after Brazil.

That change gave US chlor-alkali producers flexibility in their run rates for production of caustic soda, and its co-product, chlorine, and sent production of ethylene dichloride (EDC) higher. Higher EDC output had the added benefit of increasing spot export sales for that intermediate chemical to the production of polyvinyl chloride (PVC) as producers sought to rid themselves of the extra chlorine.

But that virtuous cycle, for US producers, at least, may be near an end and will likely play a role in US caustic soda spot export prices during the year.

The alumina industry caustic buyers in Australia have changed their supply plans for 2019, or at least some of those buyers have, and are switching sourcing to chlor-alkali production in Asia and the Middle East.

Estimates are that alumina producers Queensland Alumina, Rio Tinto and South32 will reduce their US caustic soda purchases of by 200,000 dmt or more in 2019, a sharp downturn that will likely add to US supply. Other estimates say that the moves could cut 350,000 dmt in US exports for the year.

That would be a 10% decrease of the total 3.3m dmt of caustic shipped in 2017, according to data from the US International Trade Commission (ITC).

“It’s going to reverse that recent trend,” a representative of a major US chlor-alkali producer said.

That trend began in 2014, when US sales of export caustic to Australia stood at about 165,000 dry metric tonnes (dmt).

But US caustic soda prices were atypically low across 2014 and 2015 and the buyers in Australia began to secure supply through  contracts. Sellers in Asia typically avoid entering supply contracts in favour of spot sales, according to market sources.

So the US became a larger supplier to the region, finishing 2017 with just under 600,000 dmt in caustic sales to buyers in Australia, much of it through contracted transactions, but with some spot business – at very high prices after Hurricane Harvey passed through in August of 2017.

Some of the buyers are said to have been unhappy with the higher prices during 2017 and most of 2018 and are seeking more affordable and ready supply.

But an improvement in bauxite supply, a grade of the mineral in the region that requires less processing to refine it into alumina, has also reduced the volume of caustic soda needed to process them same amount of alumina.

Additionally, the supply of caustic soda from Asia and the Middle East is expected to show more consistent availability than in the past couple of years, as well.

Caustic is used to separate alumina from the reddish dirt-like bauxite mineral. The alumina, a white powder, is then smelted to make aluminium, a lightweight metal used in autos, finer machinery, aircraft and other high-value products.

Alumina processing is one of the top three demand sectors for caustic soda and global aluminium demand is growing as “light-weighting,” the process of getting rid of weight to improve fuel efficiency, becomes a goal of auto and aircraft manufacturers.

The growing demand for alumina is one reason US caustic exports have risen consistently in recent years, along with improved demand from pulp and paper refiners and for chemical processing and refining in the US Gulf.

But such a large demand sector can also create problems. Alumina complications have played havoc with US producers plans in 2018.

Alunorte in northern Brazil is the largest alumina refiner outside of China and the largest single buyer of US caustic soda, was forced to reduce production by half in March of 2018. That cut US exports by 25,000 dmt/month for the year and helped push US spot export prices down by almost $200/dmt.

So the situation in Australia is prompting US producers and traders to re-evaluate their 2019 plans for possible adjustments.

Global supply and demand for caustic soda will not change, producers hasten to point out. They say that whoever supplies Australia will have to bypass other buyers, which US producers will pick up.

But some of the new supply is likely to come from China, where domestic product may be freed up to meet new export demand, adding caustic to global markets rather than just redirecting it.

If US caustic soda producers have constrained sales, operating rates could lower and reduce the amount of EDC produced. EDC production gets a boost when producers have high margins for caustic because caustic production also produces chlorine.

Chlorine is dangerous and not easily stored. So the chlorine must be used. EDC has been the outlet of choice because it is safe to transport and ready demand awaits in both Asia and Europe.

“EDC business really picked up with high caustic prices,” one producer said. “But it will likely be quite different this year.”

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

Focus article by Bill Bowen