The Advantage Newsletter — 9/4/2003

MARKET ANALYSIS UPDATE September 4, 2003

The January and April caustic soda price increases were partially successful, while the July increase never got off the ground. All this being said, producers have announced a $40 per dry short ton increase slated for October 1, 2003. K.A. Steel Chemicals’ believes that the October price increase has a much higher probability for success in comparison to the last two increase initiatives in 2003. For the first time this year, there are multiple events that have taken place that inevitably point towards a potentially tighter caustic market. · A lack of chlorine demand. Vinyl derivative demand in Far East stalled in months of May, June and July 03. · The Chlorine Institute reports decreasing chlor-alkali operating rates over the past 90 days with a few signs of potential improvement as we approach the typical slow season of November / December. · Natural gas prices are forecasted to remain in a range of $4.50- $5.00/mmbtu for the remainder of 2003. Note; typically natural gas pricing historically shows a low $2.00/mmbtu price. · Formosa Plastics has shut down 285,000 dry short tons of capacity at their Baton Rouge facility. · Reduced imports from Western Europe due to balanced inventories stemming from a heat wave, which allowed some producers to sell power versus produce caustic. A large price increase initiative from Western Europe chlor-alkali producers is expected for October 1st. · Recent production outages have reduced U.S. inventories, such as Hurricane Claudette affecting the Texas coastline, as well as the unexplained northeast power outage. Although neither outage caused serious damage, production capacity was curtailed. On top of this, Vulcan Chemical had lengthy major maintenance performed at their Wichita facility eliminating production by as much as 40%. · Exports from the U.S. have increased by double digits this year compared to last year at this time. A very positive fundamental that is currently unfolding is in the manufacturing sector. The (ISM) Institute for Supply Management reports in its August survey that manufacturing conditions rose to 54.7 from 51.8 in July. A result above 50 generally indicates expansion. This is the second consecutive month of “further evidence that the economy’s hardest-hit sector may finally be on the rebound.” WSJ 9-3-03 While more proof is warranted, there are more signs of positive economic activity today versus three months ago. It is KA Steel Chemicals’ forecast that the October increase will be sustained minimally through November, and then potentially and slowly stair-step-down as we enter the new year and operating rates pick up due to an increase in chlorine demand. As we enter the new year and chlorine strengthens, we may see caustic soda weaken until demand for caustic catches up to demand for chlorine. While some distributors may still have heavy inventories of product there is perhaps evidence that producer inventories are becoming more manageable as the 4th qtr approaches. If the domestic producer is to be successful with a 4th qtr price increase the market will need to finally show some sign of up-tick in demand coupled with less supply. Supply and demand will again dictate the ultimate success of the $40/dst increase for October 2003 and several variables exist today to allow.

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