INSIGHT: European chloralkali markets remain divided as high PVC crushes caustic soda

LONDON (ICIS)–The European chloralkali markets remain starkly divided, as some polyvinyl chloride (PVC) prices are at record highs whilst caustic soda is historically low.

While to a degree the opposing trends balance each other out in the overall electrochemical unit (ECU), the trends have persisted for an unusually long time with no immediate sign that things will change in the first half of 2021.

“At the moment [the market] is still mainly influenced by PVC producers; caustic soda is still long, with too much material in the market,” one producer noted.

PVC PRICES REACH NEAR RECORD LEVELS
PVC is a derivative of chlorine and ethylene, and chlorine is produced via electrolysis with a 1:1.1 ratio with caustic soda. This means that strong chlorine demand tends to drive higher production of both products, since chlorine prices are more influential on margins in the electrochemical unit (ECU).

European PVC contract prices rose in 2020, with producers gaining around €243.5/tonne in cost against ethylene in northwest Europe as a result.

Domestic spot prices for PVC have also reached the highest level ever recorded by ICIS (from June 2003), at an average of nearly €1,100/tonne FD (free delivered) in the week of 8 February.

However, the real record-breaking prices have come in the export market, with average CFR (cost and freight) levels in Turkey reaching almost $1,600/tonne at their peak on 29 January.

PVC export prices in January and February averaged $1,524.17/tonne FOB (free on board), almost 69% higher than the average between 2015-2020 of $902.42/tonne FOB.

High prices came because of force majeure declarations in both Europe and the US, combined with a recovery in construction demand globally, with the US defying expectations by seeing a growth in construction activity for 2020 overall despite a contraction in the second quarter.

“[We have] tight allocations for a lot of plasticizers, [because there is] such a high demand in the market,” one plastizer buyer noted about the US.

Almost three million tonnes of European PVC capacity was affected by production issues in the fourth quarter of 2020, with US producers Westlake and Formosa also on force majeure during that time period.

Company	Dates	Location	PVC cap. (KT)	Cause
INOVYN	29-30 August-December	Northern PVC production	642	Production increased mid-October
Vynova	Late October-week 47	Beek, Netherlands	225	Production reduced, VCM issues
Vynova	Late October-week 47	Mazingarbe, France	250	Production reduced, VCM issues
Shin Etsu	13 October- December	Pernis, Netherlands	450	Force majeure
KEM ONE	13 October- ongoing	Balan, France	300	Force majeure, no update
KEM ONE	13 October- ongoing	St Fons, France	210	Force majeure, no update
Anwil	December	Wloclawek, Poland	340	Production issue, unconfirmed
Vestolit	Early December-early January	Marl, Germany	450	Production reduced, ethylene issue

HIGH PVC PRICES CRUSH CAUSTIC SODA
Eurochlor figures show that chlorine and caustic soda output rose year-on-year in October, November and December despite extremely low pricing, encouraged by near-record global prices for PVC.

With production increasing despite somewhat lower demand, which has taken a hit due to the knock-on effects of the coronavirus pandemic, caustic soda prices have reached their lowest level for many years.

Northwest European caustic soda export prices averaged under $180/dmt (dry metric tonne) FOB in 2021, less than half their average between 2015-2020 of $369.6/dmt FOB. Prices reached their lowest level since October 2009 in late January with an average of $175/dmt FOB.

In addition, prices have rarely been at a consistently low level for a long period of time in Europe, which has added additional pressure to margins for producers that are not integrated to produce PVC from their chlorine production.

“The caustic margins are half of last year…for a smaller company of course these low caustic prices are very unpleasant,” one caustic soda producer noted.

Average quarterly contract prices for northwest Europe have fallen into the mid-€300s/dmt FD, their lowest level since 2014-2015 according to market sources.

However, low caustic soda prices are counterbalanced in the ECU for producers who use chlorine to create PVC and isocyanates, meaning that producers which are integrated on PVC have improved their margin positions according to sources.

“The PVC and MDI/TDI prices have risen quite sharply over last quarter, in that sense the margin generation has turned to chlorine instead of caustic,” one caustic soda producer noted.

CAN THE CURRENT PRICE TRENDS CONTINUE?
PVC export prices are not only high; they have remained high throughout Q4 2020 and Q1 2021 when previous spikes lasted a matter of weeks. Prices became stickier in January and February 2021, as the market initially seemed to be tilting in a longer direction, but new force majeure declarations at KEM ONE, Vynova and INOVYN, along with other producers suffering production issues, prevented this from happening.

PVC demand has also rebounded and is expected to return to growth for Europe in 2021, particularly in view of a push for higher environmental and energy efficiency standards in the EU which is likely to boost consumption of window profiles.

“Demand in construction is +3-4% compared to 2020. No one goes on holiday or to the restaurant or whatever, people [are] investing in houses,” one buyer noted.

Caustic soda spot prices have been low for an unusually long time, with northwest European prices never rising to $200/dmt FOB or above since early November 2020.

Typically prices below $200/dmt FOB are not healthy for producers, with Egyptian producer TCI Sanmar lowering its chloralkali production rates since September 2020 for commercial reasons and in the face of the slump in Mediterranean prices.

The question of whether there is any prospect of the market returning to normal is an open one, with PVC market players generally expecting the first half of the year to remain tight. Whilst PVC export prices have come off slightly, they averaged $1,480/tonne FOB in the week beginning 8 February, putting them well above average. Contract and spot prices have also settled with increases for February for Europe.

Caustic soda is expected to be strongly influenced by PVC trends, but there are other factors which could come into play in the second quarter as well.

“[The] market seems to be ongoing well supplied but producers are in preparation of the coming maintenance season. Furthermore the current weather conditions impact the productions in Europe partly,” one caustic soda producer noted.

“All over all the market seems to be oversupplied but it will change due to the huge maintenance activities. Due to that I expect significant price increases for the coming quarter,” it added.

Analytics view – by Analyst Rob Searle and Analyst Valentina Cherubim  

• Chlor-alkali producers’ margins continue to be strong in Europe and the US as a result of the ongoing tight availability of material, and resultant record PVC prices.
• On caustic soda, while prices remain dampened by long supply and sluggish downstream demand fundamentals, the strength of co-product EDC (ethylene dichkloride) prices has supported margins.
• Chlor-alkali producers profits are currently being completely driven by the chlorine side of the equation.
• Demand from PVC has been strong so far this year with restocking and healthy order books. This is expected to continue into the second quarter as construction activity picks up further. The outlook for European construction in 2021 is optimistic with a major recovery expected. Despite this we expect some price softening in Q2 as the regional and global markets begin to rebalance following six extremely constrained months.
• On the caustic side, demand remains slow. We expect improved consumption from key industries such as alumina for the automotive industry and textiles to improve as the year goes on. There is the possibility of an uptick in demand from the hospitality sector in the second half of  2021 as vaccination rollouts continue and people begin to travel once more.
• In the US, several caustic soda producers have pushed for contract price increases this month. While this seems slightly hopeful, it could be signifying that the tide is turning for caustic demand.

Insight article by Chris Barker

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(Thumbnail picture: Diners inside vinyl enclosures in Chicago, Illinois, in October 2020. Source: Xinhua/Shutterstock)