Europe chlor-alkali market drop reflects rebalancing

The European chlor-alkali market has had many surprises since 2013, but one of the most unexpected is something which didn’t happen – the permanent tightness of the market following mercury cell capacity closures.

European caustic soda prices have fallen in the first half of 2018 after being high in late 2017, as a result of, among other factors, higher utilisation rates at existing plants counteracting lower nameplate capacity in the market.

European FOB (free on board) caustic soda prices dropped from unprecedented heights in late 2017, when they rose due to the closure of large amounts of mercury cell production capacity, to much closer to historically normal levels in Q3 2018. Mediterranean prices have fallen by more than a third after peaking in the fourth quarter of 2017.

Monthly and quarterly contract prices have also decreased steadily in 2018, albeit at a slower rate. Chlorine/caustic soda production figures and caustic soda stock assessments additionally show similar or higher figures compared to the previous year.

STARK CONTRAST

The fast normalisation of prices stands in stark contrast to the predictions of some market players at last year’s European Petrochemical Association (EPCA) meeting, who anticipated Iberian caustic soda prices as high as €1,000/dmt (dry metric tonne) FD over the first few months of 2018 on the back of reduced nameplate production capacity and structurally greater tightness.

Imports, particularly in the Mediterranean, have certainly contributed to the decrease in European price levels.

“The Med is structurally short. That is why traders 
consider it to be a dumping yard whenever one of their suppliers is long,” a European producer noted.

However, possibly the most significant factor has been increased utilisation of existing caustic soda capacity.

UTILISATION RATES

Average chlor-alkali utilisation rates have reached almost 86% in the first half of 2018, compared to a 2006-2017 average of less than 80%. As a result, average chlorine production in the first half of 2018 has actually been higher than the five-year average in Europe, with similar production levels for co-product caustic soda.

“I do not believe that [additional co-product] caustic capacity is relevant. The interesting element is that in 2018 the [chlor-alkali] operating rate was 85.7%, whilst it was 81.8% last year. [The] remaining cell rooms run at a higher rate than last year,” one European producer said. In 2016 an ICIS white paper anticipated that the European caustic soda market would become roughly balanced in terms of supply and demand at between 82-86% utilisation rates, even with the closure of the remaining mercury cell capacity in 2017.

“Maybe [the] tightness is not as much as perceived and disruption not as great as expected,” one trader source said.

“Caustic [has] peaked and fallen off since [Q1],” the trader also noted, adding that the outlook for the market is also longer if the capacity expansions announced by producers in 2016-2017 are completed as expected.

Despite falling prices in the first half of the year, the long-term outlook for the caustic soda market is more uncertain. Market sources noted that chlorine/caustic soda capacity utilisation fell in Q2 2018 compared to Q1, due partially to the less attractive caustic soda price which has not given producers the same incentive to run at the highest possible rates.

“The [high caustic soda] production is due to plants running harder on the back of good demand and attractive caustic prices,” one producer noted.

NEW CAPACITY EXPANSIONS

However, several major European companies including INOVYN and VYNOVA have 
announced new capacity expansions to be completed before 2021. Egyptian producer TCI Sanmar will also expand its caustic soda capacity at Port Said in Q3 2018.

“[In the short term] it will be volatile from time to time – all of the announcements suggest [the market] will be not as long in 3-5 years, if all of those plants are built,” one source said.

“[We] won’t ever see price levels of two years ago…[It will] not be in the €700s/dmt or the €500s/dmt, but in the middle,” one contract buyer predicted.

The lower nameplate capacity, but potentially higher utilisation rate of existing plants, points to the possibility that supply could remain at roughly the same level under most circumstances, but would become more vulnerable to accidents and production problems if key plants were forced to shut down.

TURNAROUNDS

Market players also noted that there will be many planned maintenance turnarounds in 2019 and that the first half of that year could see increased tightness.

Net European caustic soda capacity fell by almost 800,000 dmt/year in 2017 with several major plants closing as a result of mercury cell production being declared outside Best Available Techniques (BAT) in 2013.

The largest impact was in Spain, which saw a net capacity loss of more than 400,000 dmt/year.