The Advantage Newsletter — 2/2/2004

MARKET ANALYSIS UPDATE February 2, 2004

The general economy continues to strengthen off its strong performance of 2003, with the construction sector leading the way. As with any strong economy, the chlorine side of the molecule will see signs of increase demand and the potential for price increases far sooner than the caustic side of the molecule. Caustic soda typically lags in demand by six to nine months. In the meantime, it is K.A. Steel Chemicals' belief that chlorine demand will continue to out pace caustic through the first six months of 2004. Some producers have announced a $75 per ton price increase for chlorine, effective immediately, or as contracts permit. It is our belief that this increase will firmly take effect April 1st. It is important to note that despite the magnitude of chlorine producers, not all have the ability to supply chlorine to the merchant market. Of the eleven chlorine producers supplying the US market on a consistent basis, only six supply chlorine to the merchant market. Chlorine, unlike caustic soda, in many ways has been decommoditized, due to regional production and freight restrictions and more consumers become supplied via pipeline in the gulf. The opportunity to purchase spot chlorine is far more risky than purchasing spot caustic. The availability of suppliers storage and equipment is far greater with caustic soda. The time and effort in assessing and evaluating a customer’s site for safety is also a critical issue. Little chlorine, if any, is moved or sold through distribution, on a third party basis. All these issues are primary reasons K.A. Steel Chemicals purchases solely under contract from a select few producers. The opportunity to negotiate on chlorine is far less then the opportunity to negotiate on caustic soda. It is for these reasons that K.A. Steel Chemicals believes the April increase is firm, with little, if any, room for softness. With chlorine operating rates in the low 90’s, it is hard for us to imagine anything but maximum operating rates of 95% by mid-summer. As the economy continues to strengthen and bleach season nears, anything less than 95% would be a surprise. The above forecast for chlorine will likely put continued downward pressure on the price of caustic soda through the first half of 2004. With this thought in mind, distribution, brokers and consumers are keeping minimal inventories throughout their systems. Producer’s inventories are on the rise due to the lack of caustic demand and the strong chlorine performance. It is K.A. Steel Chemicals' belief and forecast that the first opportunity to raise caustic soda prices would be the beginning of the third quarter. It is conceivably possible that, as an industry, we are looking at a replay of conditions that existed in the year 2000. In 2000, caustic soda bottomed out around the $60 dry short ton range FOB the gulf before demand caught up to supply and increases totaling $230 dry short ton took place within six months. Energy prices continue to climb through January and February, ranging in the $6 - $7 MMBTU range. Crude oil prices also continue to rise at an average of $31 to $32 BBL. At this rate, domestic producers will be hard pressed to turn a profit in the first quarter. For the first ten months of 2003 caustic soda exports were up over 32% on the same period 2002. Imports into the US were up 20% over the same period 2002. Total exports will once again be in excess of 1.6 million dry short ton and imports will be in excess 600,000 dry short ton. A couple of important issue to watch is for the US to supply caustic soda exports to Europe in the very near future as caustic pricing continues to fall and the dollar continues to weaken. For this reason, we may see less imports to the US East Coast. Another item of interest is the potential for soda ash conversions to caustic soda. It is estimated that approximately 550,000 dry short of current demand has the potential to switch from soda ash to caustic soda. Realistically, about 350,000 dry short ton can and may switch. This in itself is equivalent to a world scaled plant.

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