The Advantage Newsletter — 12/9/2002

MARKET ANALYSIS UPDATE DECEMBER 9, 2002

As the holiday season approaches there seems to be considerable concern on the economy strength. Although some of the most recent market indictors are encouraging, the largest concern for our industry today seems to be the lack luster demand for export chlorine derivatives, primarily for the vinyl industry. EDC continues to fall and most recent quotes reflect numbers less than 10 cents per lb. The chlorine equivalent price is estimated less than $100 per ton, which seems to be putting pressure on chlorine pricing in the merchant market here in the states. The operating rates for chlorine dipped below 90% in most recent weeks and spot chlorine into the merchant market seems to be having an effect on what were once stable chlorine prices. It is important to note fourth quarter demand in 2001 was quite soft, similar to fourth quarter demand this year. As the first quarter of 2002 developed, we saw an estimated 6% GDP and a strong market for chlorine, propped up rates and a chlorine increase in April followed. K.A. Steel Chemicals feels during the first quarter of 2003, we may see a similar situation in growth, prop up rates and potentially the pressure on chlorine will force chlorine numbers up around April 1st. Caustic demand typically lags chlorine by a quarter or two and therefore we may see a minor dip in caustic prices late first quarter until demand catches up to supply. Caustic prices would then move up considerably due to the lack of domestic capacity today versus two years ago. Once again, I would like to remind our customers that we have seen this past year operating rates peak at 97% in June, July and August time frame and since then lost an estimated 3% of capacity. Dow Chemical shut down 385,000 tons of chlorine at their Louisiana facility as well as an estimated 150,000 tons of chlorine scheduled for elimination at their Canadian operation. Even with little to no growth in GDP next year, we would experience operating rates pushing 100% by summer. A lot of attention has been given to the export market for alumina as of late. The most recent negotiations reflect little comparison to domestic market prices for caustic soda. How much impact if any will this have on the domestic market’s $70 per dry short ton increase scheduled for January 1st? If you look at the most recent data on the effect of alumina negotiations on domestic prices, there seems to be a total disconnect. In 2000, alumina settled out lower than the existing domestic marketplace only to see a major increase in domestic pricing days later. That period of six months saw alumina go down as the domestic market took $220 per dry short ton in increases over the same six months. This increase included all segments inclusive of the paper industry. 2002 second half prices for alumina are expected to see a sizeable increase over first half prices and yet fall short of January 1, 2003 domestic market conditions. K.A. Steel Chemicals anticipates a January 1st upward trend for all segments of the caustic market. I feel its important that customers understand the disconnect in pricing for alumina versus the other segments of the industry so that as the $70 per dry short ton takes hold in part or in full, there will be no surprises. As one producer puts it, if you have a customer purchasing a million dry short tons of product with all the releases being a magnitude of 25,000 dry short tons (ships), one would have to process forty separates orders and invoices. On the other hand, a large account in the paper industry purchasing 200,000-300,000 dry short tons in rail cars and tank trucks, one would have to process a minimum of 6,000 orders and invoices, not to mention the assets and people needed to service these accounts. Good, bad or indifferent, Alumina negotiations are less and less of a barometer for the domestic consumer. Although today K.A. Steel Chemicals feels the January increase of $70 is holding strong, one cannot discount the possibility of a partial increase. Whether or not K.A. Steel is right or wrong, I think we all can agree that the fundamentals of caustic show a northern trend. We may see minor lapses of softness and relief, but in general so much capacity has been taken out of the market, one can’t help but forecast continued upward pressures. Any potential operating problems on an unexpected basis will be felt immediately in the marketplace. Fortunately, these plans run smoother in the winter months than in the heat of the summer. K.A. Steel added a new caustic fob gulf price indicator chart in recent weeks to its web page, reflecting the past couple years, which shows two full cycles of a long and short market. This indicator is a compilation of three major chemical news wires combined to illustrate the low, average and highs in the market. You can find this indicator by clicking on the “Industry Resources” tab at the bottom of this page. Then click the “Market Indexes and Indicators” button on the right side of the page. The caustic pricing report is the first link, “Caustic Soda Price History” on that page.

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