The Advantage Newsletter — 2/2/2005

The January increase of $50 per dry short ton seems solid as January slips away.  January was an uneventful month with most producers seemingly on the same page.  Distribution jockeyed for position but at months end, they seemed to understand that producers are reluctant to give ground on any support situations.  It is K.A. Steel Chemicals belief that it is more likely that more capacity will withdrawn from the market than new capacity will be added.  The Oxy/ Vulcan acquisition should conclude sometime towards the end of the first quarter, which leaves many to speculate on how Oxy will manage and potentially change their existing infrastructure and game plan.  Some of the following questions seem to be the most common:

·        Does Oxy really need three Louisiana plants?

·        Does one of the plants get spun off to Shin Tech or possibly Georgia Gulf?

·        Does diminishing demand for northern chlorine as well as hauling chlorine long distances make Niagara Falls vulnerable to a shut down despite low energy costs?

·        Does the transport of merchant chlorine effect Oxy’s decision to shrink capacity or reduce merchant sales to the end user?

·        Does Oxy run all facilities at full rates taking advantage of high ECU’s until other incremental capacity is added, forcing the ECU values down before they decide to close a plant or two?

Chlorine operating rates continue to be strong with November and December reporting 100% levels, with no slow down in sight.  Forecast for 2005 indicate quite strong demand for both chlorine and caustic soda.  It is K.A. Steel Chemicals belief that there is nothing in the foreseeable future that would point to any potential price relief for either side of the molecule.  With only four merchant US chlorine producers left, it wouldn’t surprise us to see further pressure on the chlorine molecule as we approach the summer bleach season.  It is also our belief with operating rates maxed out, and producer announced plant outages for the first quarter, that caustic soda pricing has not yet peaked.  Imports of caustic soda through October remain down by 11% compared to 2003 levels.  The Europeans and Middle Eastern producers are supplying the Eastern seaboard minimally at best.  Caustic soda from Europe in general is snug, with freight costs exceptionally high.  Most of the Eastern seaboard is being supplied domestically, further reducing domestic inventories. 

The only new capacity so far of substance announced is Shin Techs facility slated for production in Louisiana, somewhere between late 2006 and early 2008, if all things go according as planned.  Shintech seems to have multiple options, one of which is to build and use the chlorine for their internal consumptions for vinyl production and sell the caustic themselves.  Option two is to have the caustic sold third party via a willing producer on an exclusive basis.  Option three is rumored that Shintech could utilize a distributor to move 100% of the caustic requirement, or build incremental capacity on another producers site.  Another producer looking to create incremental capacity is rumored to be Georgia Gulf.  Georgia Gulf consumes hundreds of thousands of tons of chlorine for vinyl production in addition to their existing production in Plaquemine, Louisiana.  This expansion, if developed, would be of Membrane capacity.  This rumor comes on the heels of the Oxy acquisition of Vulcan Chemicals, where Georgia Gulf was in the running to acquire Vulcan.  With US production being limited to nine producers of caustic soda, with well over 80% of production from the big five; Dow, Oxy, PPG, Olin, and Formosa.   K.A. Steel Chemicals feel there will be less volatility in years 2005 and 2006 until further world scale production is added.  With demand for oil being strong in other sectors of the world such as China, it wouldn’t surprise us to see incremental Chlor-Alkali production added to the gulf coast, because natural gas prices have a slight edge over oil based naptha for feedstock. 

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