The Advantage Newsletter — 6/1/2003

MARKET ANALYSIS UPDATE JUNE 1, 2003

PERCEPTION VERSUS REALITY From a consumer standpoint, caustic soda seems plentiful, tanks seem full, import pressures continue to persist and demand is lackluster at best. All this being said, a major producer announced a $50 per dry short ton increase for caustic soda effective July 1, 2003. Most majors quickly followed and all domestic producers seem willing to support this increase. Although supply and demand, as well as perception to market conditions seems to be the traditional driving force behind the pricing, reality is the U.S. chlor-alkali producer is no longer competitive in the world market. As natural gas continues to spike ($6 mmbtu) here in the U.S., other producers of chlorine derivatives such as the Middle East, Asia, as well as Europe, currently have a significant advantage over the U.S. producer. As we elect not to play in the export market for chlorine derivatives, and domestic markets for vinyl, as well as MDI and TDI, continue showing lower demand, U.S. producers have been forced to throttle back capacity below 90% operating rates. Typically as we enter bleaching season, we experience operating rates in the mid-90’s range, but today operating rates barely flirt with 90%. The producers’ theory is that as operating rates dwindle and high inventories of caustic soda today exhaust themselves, we may see a much different or more balanced market in the second half of 2003. Part of the concern some have on the July 1st price increase is the potential effect of further import parcels finding a home in the U.S. Total imports of caustic soda to the west coast, as well as the east, seem to hover around the 600,000 dmt mark, but could rise to as much as an incremental 25,000-30,000 dmt due to the high netback for caustic soda in the States versus elsewhere in the deep sea market. Although imports from the Middle East (Saudi Arabia) are running on an annual basis similar to last year’s annual volumes, the U.S. did see a surge of activity in the first quarter estimated around 25,000 dmt versus the norm of about 6,000 dmt. It is a potential concern that similar quarterly surges will appear as the netback increases. In related news, Dow Chemical’s Freeport, Texas chlor-alkali facility voted to end their nine-day-old strike. Production of the Freeport facility continued at normal operating rates as management operated the facility. Credible sources have stated that Oxy has idled their caustic soda production estimated at 88,000 dry short tons per year effective June 1, 2003. The Chlorine Institute reported March caustic production at 1.098 million dry short tons with an operating rate of 88%.

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