OUTLOOK ’14: Asia caustic soda to remain largely stable in Q1

By Jasmine Khoo

SINGAPORE (ICIS)–Asia’s liquid caustic soda spot prices are expected to remain largely stable in the first quarter of 2014 on the back of snug availability of Asia-origin spot cargoes despite persistently lacklustre downstream demand, market players said.

On the supply front, spot cargoes are expected to remain limited because of carefully monitored operating rates at regional chlor-alkali facilities, considering high feedstock ethylene costs and weak chlorine-derivatives prices, especially in the second half of 2013.

Chlorine derivatives include polyvinyl chloride (PVC) and ethylene dichloride (EDC), which are related products to caustic soda in the chlor-alkali process.

Firm upstream ethylene spot prices were brought about by unforeseen technical issues at some regional plants, resulting in heavy cost pressure for regional chlor-alkali makers, especially since PVC and EDC prices have been lacklustre for most of 2013.

Squeezed margins have led market participants to reduce operating rates at their facilities in order to manage their costs more effectively, and this reduction in run rates has resulted in lower output of caustic soda volumes at regional facilities.

With lower volumes of caustic soda spot material available in the Asian market, coupled with increasing pressure on the sellers’ end to raise their export prices along with rising domestic prices in their respective markets, caustic soda offers on an FOB (free on board) basis firmed.

Higher domestic prices, brought about by snug spot availability in the Chinese market during November, and more recently, in Japan, have prompted northeast Asian sellers to adopt firmer selling ideas for export cargoes.

As of 20 December, offers for China-origin spot parcels were largely at $350/dmt (€256/tonne) FOB NE (northeast) Asia, whereas Japanese material was offered at around $330/dmt FOB NE Asia, with some sellers saying that offers for January-lifting lots might firm to $340/dmt FOB NE Asia in the near term.

Meanwhile, South Korea-origin spot lots were also offered at $350/dmt FOB NE Asia on the back of short supply in the market.

South Korea-based chlor-alkali facilities are operating at reduced rates at 60-80% following a government-initiated electricity price hike whereby prices were raised by around 6% in order to manage nationwide power cost consumption more effectively during the winter season.

As a result, caustic soda spot availability from South Korea is also limited.

With the entire northeast Asian region facing a shortage of spot cargoes, steady price increase is logically expected, but lacklustre demand throughout the Asian region continued to cap increases in caustic soda spot prices.

Market participants, including sellers, said that despite very firm and active offers from Chinese sellers at $350/dmt FOB NE Asia and above, fixture prices often found it difficult to cross the $330/dmt FOB NE Asia mark.

The majority of regional importers held tightly on to weaker buying ideas at $320/dmt FOB NE Asia and below, creating a stalemate situation in which neither buyers nor sellers were able to compromise.

A northeast Asia-based major chlor-alkali maker said: “Yes, it is true that offers from China are very high now. However, buying ideas [from importers] are so low that they have no choice but to release cargoes at $320-330/dmt FOB NE Asia or even lower, if buyers are persistent enough.”

Some traders believe that this stalemate situation was going to lead buyers, who have to purchase feedstock material to fulfil their downstream production requirements, to raise buying ideas in order to secure cargoes amid a short-supplied market.

However, expectations of steep increases were also quickly refuted as demand was too lacklustre to support a significant price increase.

In the key southeast Asian import market, tepid demand from downstream industries such as the pulp and paper sector continued to be the main reason for limited spot buying interest.

Some buyers were relying solely on contractual volumes to fulfil their downstream production needs, whereas others were adopting a very cautious wait-and-see approach in their negotiations for spot cargoes.

Considering other factors in southeast Asia such as the recent political turmoil in Thailand and the widespread destruction in the Philippines brought about by Typhoon Haiyan, market players said it was unlikely that any significant improvement in demand can be expected in the near future.

“Unless there is any significant stimulus to this market, caustic soda demand should be stable…stably weak,” said a southeast Asian buyer.

Furthermore, with the upcoming shutdown of an Australia-based alumina refinery, which is also a caustic soda importer, by July 2014, a nameplate demand capacity of 350,000dmt/year is expected to be made redundant.

As a result, the effect of the tight supply situation is expected to be diluted by lukewarm demand, leading market participants to expect limited change in prices for the near term.

($1 = €0.73)

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections