KA Steel Chemicals

MARKET ANALYSIS UPDATE OCTOBER 4, 2002

As we enter October, the caustic soda increase of $50 per dry short ton looks solid. Dow Chemical will take 50% of their Freeport facility down the week of October 7th for a thirty day turnaround. This tonnage represents 10% of total production in the United States. If all goes well, Dow should be up and running approximately the 2nd week of November. At this time, they are slated to idle one of their three plants in Plaquemine, LA, rated at approximately 375,000 tons of chlorine. Towards the end of December, they will idle 150,000 tons of chlorine capacity in Canada. This, coupled with the intense hurricanes, which have created logistics issues, as well as temporary reduced rates, suggest few games, if any, being played on this past October increase. My main concern is Dow coming off this turnaround on time. Operating rates have been as high as 97% in June and July, which today, even at 95% is running at capacity since producers have put little to no capital in these facilities over the last four years. A concern for next year at this time is pretty obvious. If demand is flat in 2003, we will see operating rates at or above capacity limits due to Dow’s capacity drop in the fourth quarter, representing an estimated 550,000 dry short tons of caustic, or roughly 3-3.5% of capacity. No matter how you look at the market, next year the odds of a significant increase on caustic is highly likely. Scenarios to look at: Dow has problems with their turnaround and come out late. This could be significant enough for an increase January 1, 2003. This is 10% of total production. Market takes a typical downturn in the fourth quarter, further tightening up caustic due to reduced rates on the CL2 side. PVC is softening on the demand side. Once again, providing another opportunity to have an increase January 1, 2003. Dow comes out of their turnaround on time and the market experiences a drop in CL2 demand, softening CL2 prices and tightening caustic prices. Producers realize that we may be looking at a repeat of last year whereas we experienced a downturn in demand in the fourth quarter, but a surge of 6% GDP in the first quarter, yet the producers missed the opportunity for an increase on CL2 January 1st, and instead implemented the increase a quarter late. Without a January 1, 2003 increase, we could see a slight rollback in caustic prices of $10-$15 per dry short ton before an implementation of an April increase as demand begins to pick up for the summer months. Any rollback of chlorine in the fourth quarter of 2002, due to softening in the chlorine market, would more than likely be re-implemented April 1, 2003. K.A. Steel Chemicals feels caustic could fluctuate on average between $180-$230 per dry short ton fob gulf coast for 2003 with a heavy emphasis on the market tightening severely the second half of 2003 thru 2004. Keep in mind; only Dow Chemical has a planned expansion of 550,000 dry short tons on the books slated for 2005-2006 time period in Plaquemine, LA. The chlorine increase slated for October 1, 2002 seems to be holding, but seems suspect due to the softening demand of PVC on a global basis. Typically, this has an effect on everyone, but as time goes on and less producers are involved in the merchant market, I see a scenario where large pipeline customers may fluctuate with the market up or down, but the merchant consumer purchasing railcars of material lag the market in relief because there’s only 5-6 players servicing the domestic merchant market. Therefore, you would think the merchant market for chlorine would be fairly consistent in price volatility compared to pipeline accounts with many barometers controlling their price. Not all of these merchant producers want to sell to all customers. An example of this is in the chlorine repack industry or bleach manufacturers where producers pick and choose the environmentally and safety conscious players they elect to deal with. Therefore, the merchant market to these players are not five to six producers to choose from, but more than likely two to three producers to choose from. This is a long winded way of saying despite chlorine derivatives softening, it does not necessarily suggest merchant producers of chlorine will necessarily pass on relief to the rail car customer for the simple fact there is less merchant producers to choose from. To wrap things up, both increases of caustic soda and chlorine are currently holding up with the emphasis and strength on the caustic side. Few games on caustic have developed short of distributors using their inventory for potential market share gain, but the fact is, as of today, the odds are all of these distributors took the full increase of $50 per dry short ton.

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The Advantage Newsletter — 10/4/2002