INSIGHT: European ECU values fall to the lowest level since 2016

LONDON (ICIS)–Plunging caustic soda prices in March have brought the European electrochemical unit (ECU) value to its lowest level since late 2016, leading to consternation among chloralkali producers across Europe.

The ECU as calculated through the sum of caustic soda and chlorine values (see methodology at foot of story) has fallen to the lowest relative level since 30 September 2016 as of 15 March 2019.

The ECU unit index is calculated using values relative to the base value of chloralkali as of January 2012.

Chlorine has been relatively stable in 2018 and early 2019, with estimated chlorine values calculated via ethylene dichloride (EDC) falling by only $13.2/tonne in absolute terms from February to March. Downstream products such as polyvinyl chloride (PVC) have also seen flat or somewhat higher prices against feedstocks in Europe for Q1.

Despite this, plunging caustic soda prices of below $300/dmt FOB (free on board) in some markets have caused a significant drop in the unit value of chloralkali production in February and March.

Crashing caustic soda prices have also prompted shifts in strategy for combined caustic soda/chlorine producers in Europe, as they have attempted to avoid losing margins.

CAUSTIC SODA PRICE TRENDS
After performing well in 2018 and early 2019, average northwest Europe (NWE) caustic soda FOB (free on board) prices have now reached their lowest level since September 2010 as a result of ample availability in European import markets.

“Prices keep going down…because of the plenty of material pumped into Mediterranean,” one trader said, also noting that prices have fallen to below $300/dmt FOB for the majority of buyers.

The wave of imported material in the Mediterranean and European markets such as Italy has also had a significant knock on effect on European contract prices, with monthly price levels in Iberia falling by more than 12% in the first quarter of the year.

NWE quarterly contract prices were slower to react and have remained at a relatively high level, as well as rolling over in Q1.

The decrease in value per unit is relatively recent. Average values were healthy earlier in Q1, with the overall ECU index one and a half times higher than the base value for January 2019.

The ECU overall index takes into account the total volume of caustic soda and chlorine produced in the month to calculate the overall relative value produced

Strategy changes

The diminution of caustic soda prices has encouraged producers to push for contract price increases for PVC, which is a derivative of chlorine and ethylene, in order to avoid losing margins on production as a whole.

“Our price increase announcement is at +€30/tonne for March contract business….[The] ECU is under pressure, as the caustic spot price is under pressure from oversupply in overseas markets, raising the burden for the chlor alkali industry,” a European PVC producer said in the first half of March.

“[The] market is balanced and [caustic] soda trend is down, so we need to improve PVC margins,” another producer said.

In addition, some caustic soda producers suggested that upcoming planned turnarounds in the European chloralkali market might lead to tighter availability, which might reverse the decline in caustic soda prices.

“We see a much more balanced month of April. The situation may change radically with the massive turnarounds in Europe and less imported product,” one producer said.

Planned turnarounds for Europe in Q2 2019, totalling nearly 3m dmt/year nameplate capacity.

THE EUROPEAN MARKET POST-2016
The ECU index jumped in value post-2016 following consolidation and capacity closures in the market, and again in 2017 following the phasing out of mercury cell capacities in Europe at the end of the year, which briefly drove European caustic soda spot prices to almost $700/dmt FOB.

The total chlorine capacity in the European market is negatively correlated with the average value of the overall ECU index in Europe since 2010.

However, the strong performance for caustic soda in Europe was not sustainable in the face of falling global prices for caustic soda and larger volumes exported to the Mediterranean in particular, with prices falling to around the $300s/dmt FOB in late Q1 this year.

While higher utilisation rates kept the overall index level relatively healthy through 2018, average unit values fell more rapidly through the year as the caustic soda price trended downwards.

The value of the overall ECU index is also correlated with utilisation rates, which suggests that higher value is likely to encourage additional production of caustic soda and chlorine.

BACKGROUND
Caustic soda and chlorine are co-products which are produced through electrolysis of brine at a ratio of 1:1.12. Costs are driven by a variety of factors including electricity prices, while demand is driven by both chlorine and caustic soda applications.

Many major European companies, such as INOVYN and KEM ONE, are among the largest producers of both caustic soda and chlorine.

The base value used to calculate the relative value of chloralkali production is the estimated caustic/chlorine unit value in January 2012.

– The ECU index (unit) calculates the combined value of every tonne/dmt of caustic soda and chlorine produced, whilst the ECU index (overall) calculates the total relative value of all caustic soda and chlorine produced in the market for that month.

Contributing analyst: Ciaran Healy

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