The Advantage Newsletter — 8/7/2003

MARKET ANALYSIS UPDATE AUGUST 7, 2003

As requested by many of our customers, K.A. Steel Chemicals will post, in the above chart, effective operating rates as posted by the chlorine institute, as well as monthly natural gas prices as reported by the energy information administration. The above figures play an important role in supply demand balances of chlor-alkali. As a reminder to our customers, natural gas prices historically have been based on an estimated $2 per MMBtu. For the foreseeable future, most producers will forecast cost based on a minimum $4 per MMBtu. For every one dollar change in natural gas prices, this reflects an estimated $30 per ton on an ECU basis. Therefore, production costs going forward are at a minimum of $60 per ton on an ECU basis. As long as inventories of natural gas continue to be replenished, we will continue to see prices on a MMBtu basis similar to the above chart. If for whatever reason we experience a harsh winter or an above average hot summer, we may see numbers exceed the above listed natural gas prices putting further strain on production costs and therefore price increases announced in the market place despite normal supply demand issues relating to market conditions. Despite operating rates falling substantially since April, pricing for caustic soda continues to soften pushed primarily by the visibility of significantly low priced import product. With the reduced operating rates it is K.A. Steel Chemical’s beliefs that inventories have been lessened and imports primarily from Europe have dried up for the foreseeable future. Some European producers have stated that they would not be exporting to the US for the remainder of 2003. The balanced scenario in Europe coupled with the drawing down of caustic soda inventories as well as the potential for increased demand of caustic soda has set the stage for a possible October price increase. Customers must keep in mind that Oxy idled an estimated 88,000 dry short tons of capacity in Delaware City, Delaware in June and Formosa Plastics plans on shutting down their 285,000 dry short tons of caustic capacity in Baton Rouge, Louisiana on September 1, 2003. On top of this, Vulcan Chemical has a significant outage at their Wichita, KS facility and Georgia Gulf is experiencing production problems at their Plaquemine, LA plant. As US producers continue to rationalize capacity, estimated to be 2.4 million tons since 1999, it will take very little of an up-tick in demand as economic activity increases on a global basis to make caustic soda in the US in short supply. Many customers feel the US will import their way out of a shortage, but realistically, the US historically has imported on average between 300,000 - 500,000 DST, and since the US has become less competitive on a global basis due to our natural gas dilemma, we have seen imports increase to a mere 620,000 DST on an annual basis for 2003. This increase in imports is fairly insignificant compared to the rationalization we have seen since 1999.

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