Archive
The Advantage Newsletter — 10/7/2004
| Chlorine: | Effective Operating Rates Estimated Average Wellhead Prices |
| 2003 | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sept | Oct | Nov | Dec |
| CL2EOR | 95%-- | 92%-- | 91%-- | 93%-- | 91%-- | 89%-- | 88%-- | 89%-- | 94%-- | 91%-- | 92%-- | 95%-- |
| Prices Per MMBtu | $4.36-- | $5.31-- | $6.52-- | $4.59-- | $4.84-- | $5.21-- | $4.79-- | $4.60-- | $4.46-- | $4.32-- | $4.23-- | $4.95-- |
| 2004 | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sept | Oct | Nov | Dec |
| CL2EOR | 96%-- | 97%-- | 100%-- | 101%-- | 100%-- | 102%-- | 99%-- | 100%-- | 102%-- | 97%-- | 100%-- | -- |
| Prices Per MMBtu | $5.38-- | $5.01-- | $4.83-- | $5.06-- | $5.48-- | $5.69-- | $5.45-- | $5.21-- | $4.73-- | $5.30-- | $5.91-- | -- |
MARKET ANALYSIS UPDATE October 7, 2004
Demand for caustic and chlorine continue to outstrip supply. The following is an overview of producer announcements based on plant problems, hurricane effects, as well as product dislocation. The overall effect is extreme low inventories throughout the system. Prior to this overview is a quick reference to terms involving rationing of material from K.A. Steel Chemicals perspective:
Order Control – Term used initially when an increase is announced on a given prospect to keep distribution as well as the consumer from topping their inventories. This term is managed by the producer and typically gives the producer “Wiggle Room” on who they want to supply incremental material to, based on net-back, position gain, etc.
Force Majeure – Legal term used when a producer is hit by mechanical failure or weather related disasters effecting production. Typically this is an “Act of God” concept; which is out of the producer’s control. This term gives the producer “Wiggle Room” to control who they want to supply and whom they don’t. Under Force Majeure Producers are not obligated to supply. This protects them from consumers suing the producer for lack of performance.
Allocation – This term is the most feared, but also the most fair as far as supply is concerned. Producers announcing “Formal Allocation” are bound by law to treat all customers the same; the federal government supposedly audits this. This term typically forces distribution as well as consumers to maintain agreed upon draws as well as establish relationships with other suppliers in the industry. Despite popular belief even consumers purchasing 100% supply from a given source is effected by the same terms of allocation as everyone else. This typically is the producers’ last resort.
The overview of events is as follows:
- Dow announced Force Majeure in September for all West Coast customers. They also formally allocated the West Coast 50% of supply positions, as well as issued 100% Allocation for the rest of the country. Since October 1st they have raised the Allocation from 50% to 70%.
- PPG announced Force Majeure on the West Coast only. Delayed ships have caused product dislocation for up to ten days.
- Vulcan Chemicals announced Force Majeure in September due to Chlorine compressor problems in Wichita as well as Geismar. Their quick response to finding and installing a new compressor in Geismar was met with difficulty in firing up Geismar up to sustainable levels over five days. They experienced severe inventory loss forcing a Force Majeure declaration. At the time of this update they are considering eliminating their Force Majeure declaration.
- Olin announced Force Majeure due to a loss of their chlorine compressor in Macintosh, Alabama. Both Diaphragm and Membrane plants were affected. They were rumored to be running at a 40% level for two to three weeks, while finding and installing a new compressor. During this period Hurricane Ivan forced a total shut down further reducing valuable inventory in the Olin system. To make matters worse Olin has a planned outage at Niagara Falls over a nine-day period in October. At the time of this update the Macintosh facility is once again 100% operational.
- Georgia Gulf experienced mechanical problems with VCM production in September, which was rumored to affect their rate of production for chlorine.
- Oxy shut down their Taft, Louisiana facility due to Hurricane Ivan for an estimated two to three days.
- Formosa experienced mechanical problems at their VCM plant curtailing chlorine and caustic production by as much as 40%.
- Pioneer’s Becancour facility at the time of this writing is undergoing a two-week planned outage.
Other producers are experiencing minor outages and it is K.A. Steel Chemicals belief that further plant problems or product dislocation is inevitable. Very little capital has been rationed for plant upkeep over the past few years as producers all were in the red. We will experience further fourth quarter outages.
It is rumored that PPG will vacate the West Coast at year-end as their contract with the terminal expires. It is very difficult to ship Gulf Coast caustic to the West Coast and compete competitively with Asian freight rates. Producers experience $75 to $100 to and through from the Gulf versus $40 to $75 from Asia. It is estimated that the West Coast market is to be an estimated 800,000 dry short tons with imports from Asia supplying an estimated 250,000 dry short tons. Europe is extremely tight and low on inventory therefore it has reduced East Coast shipments considerably. Prices leaving Europe destined for the northeast seem to be minimally $300 DMT FOB Europe with freight accounting as much as $70 to $80 DMT. The East Coast will continue to be supplemented by the Gulf Coast as well as Canada.
It is K.A. Steel Chemicals belief that we will continue to see upward pressure on chlorine and caustic through the summer of 2005. It is difficult to imagine a scenario where caustic goes long. Chlorine will remain snug and I’m quite confident that the devastation of Florida from the four hurricanes will add or be a significant portion of GDP in 2005, similar to Hurricane Andrew adding points to GDP during that time frame. Even an improbable domestic slowdown would initially tighten caustic. Today we once again have an edge on a global basis of product cost based on natural gas versus Naptha from $50 oil whereas Europe as well as Asia is heavily tied to Naptha as their feedstock.
Producers as well as distributors are battling over portfolio change where as non-relationship business’s such as bids, dot coms, and reverse auctions as well as accounts tied to pricing mechanisms seem to be the low priority going into contract season. Producers seem to be targeting accounts where they have “Wiggle Room” on maneuverability up or down on price.
As 2005 approaches balanced inventories will be the key to weathering production problems and further product dislocations. K.A. Steel Chemicals vast network of terminals will be key to supplying our customer’s needs.
The K.A. Steel ADVANTAGE offers insight into current trends and essential market analysis allowing you to make insightful, well-timed purchasing decisions. With K. A. Steel, customers have the benefit of knowing what K. A. Steel knows. Our customers receive timely coverage of trends in the industry as quickly as the information emerges.
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