The Advantage Newsletter — 11/5/2002

MARKET ANALYSIS UPDATE NOVEMBER 5, 2002

As November begins, K.A. Steel Chemicals views the caustic soda increase of October 1st as highly successful as the market continues to tighten. Confusion continues in the pricing sector in certain regions of the country, primarily centered on the East Coast, as large full line distributors elect to share their inventory at pre-October 1st prices. All too often this appears in the market place as a reflection of a weak attempt, or partial success, at a price increase, but clearly the producers inventories are low and the increase quite successful. This increase will take time to work its way through the coastal markets due to the pre-buying and large storage tanks involved. It is reported that Dow, Oxy and Olin have implemented some form of order control. Recently, Oxy has led another round of increases that seems to be slated for January 1st, 2003. Other producers, such as Dow, PPG, Pioneer, Olin, and Formosa, have all followed with the remainders of the producers expected to follow this week. It is K.A. Steel’s opinion that the increase, as of today, is solid, with little to no opposition. Dow Chemical is still in its planned outage of their Freeport facility, which has taken down the equivalent of 10% of US production. This, coupled with their planned permanent shutdown of 375,000 tons of chlorine at their Louisiana Facility slated for this month, as well as their permanent closure of 150,000 tons of chlorine at their Canadian facility, adds to an increasingly tight market. Over the last two weeks, we have seen a weakening of the chlorine derivative export market in which producers, such as Oxy and Formosa who participated heavily, have had to adjust production rates significantly downward. According to industry sources, most chlorine producers involved in the vinyl chain are faced with the same unexpected issues. Operating rates for June and July peaked at 97% and currently the Chlorine Institute reports August rates at 93%, with a downturn for September of 90%. Chlorine remains healthy in the domestic market, but the export market continues to show weakness. This may have a bearing on the strength and longevity of the October chlorine increase of $40 per short ton. Most industry sources expect that increase to eventually be rolled back all together. K.A. Steel feels that although the export market for chlorine derivatives has always been a good indicator of the direction and strength of chlorine, we would caution that over time less and less producers will continue to play in the merchant chlorine market and small participants like Dow are expected to withdraw totally in the near future. Therefore, it is possible the few merchant producers left will realize that chlorine in the merchant market is not the commodity they see it as today and therefore, export derivatives will have less of an effect, or at least the lag time of relief in the export market to the domestic end user may increase. Out of 12 domestic producers or players, you only have about five committed contractual producers seeking long-term consumer chlorine business. Consumers, in our opinion, will have less of an opportunity to purchase spot chlorine as the economy strengthens and domestic producers use their chlorine internally for derivative production. Once again, as stated in the October analysis, K.A. Steel Chemicals is concerned about the supply situation as mid year 2003 develops. With minimal growth in 2003, we expect operating rates peaking beyond capacity in June and July of next year. We will continue to keep higher than normal inventories to prepare for any product dislocation in 2003. As a side note, consumers utilizing industry indicators as a barometer of how successful an increase is or what pricing is available in the Gulf, will continue to be at odds with real time reality, and potentially lag reality as a sort through distributor inventory games. As long as distributors elect to pre-purchase and sell at these levels until inventory depletes itself, we will have price indicators lagging successful producer increases by as much as two months throughout a short cycle. This side note is not intended to be critical of what distributors do with their inventory, but is necessary to establish credibility with customers when reporting the strength and success levels of any price increase. Customers should understand that chemical newsletters typically report bare minimum information with little supporting documentation. As an example, some newsletters report pricing f.o.b. Texas and Louisiana, yet the west coast is primarily affected by Asian imports. There is generally no mention of freight equalization. We can only speculate the numbers reflect the overall average in pricing has been considered as including these imports.

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