Archive
The Advantage Newsletter - 08/2007
Operating rates supplied by the chlorine institute show further declines due primarily to the weak housing market. The sub-prime debt industry seems to be in extreme turmoil yet to be determined in it's outcome. Money seems to be getting tight as lenders scrutinize their portfolios. The outlook seems bleak at this point for a rebound in the housing sector. Therefore it is our belief today that operating rates could fall at least by another 2-4% due to the "Bleach season" coming to an end as well as the uncertainty of the "sub-prime" market. We anticipate domestic producers to announce another increase by as little as $30 pdst to $50 pdst. Today we see this increase being sustained through the 1st quarter.
August 1, 2007 Update
The increase slated for June/July is solid as we enter late August with little, if any, games being played. I believe as Bleach season ends late August we will see an opportunity for producers to discount chlorine to continue running full out in order to sell every variable ECU available because they are making very good profits or they will throttle back plants and show discipline due to demand of chlorine being weak and therefore create a shortage of caustic due to already low inventories. The imports of caustic are suppose to keep the market balanced but the Chinese "VAT" tax or subsidy has been eliminated causing Asian caustic to move up 13%. This coupled with continual production problems by Arkema as well as Bayers MDI and TDI issues as well as Norsk Hydro being sold to Ineos has caused a major slow down of European imports to the East coast. I could see the domestic producers throwing an increase at the wall hoping to get something to stick or at least slow down the potential for a drop. Keep in mind Shintech is coming up late and we may not see them produce until the second quarter. When they come on with their 300,000 dst of caustic annual capacity Oxy will shut down their Taft, La. membrane annual caustic production of 214,000 dst. Any questions please call.
As we look at a forecast for caustic soda, we have to concentrate heavily on the chlorine market and its derivatives. Plants on a worldwide basis are built for chlorine value and caustic is applied as a credit towards these plants. Chlorine is a product that cannot be stored easily and on average has a 3 day supply worldwide. Therefore, chlorine must be put in derivative form such as ethylene dichloride (EDC), vinyl chloride monomer (VCM) and other chlorine derivatives such as chlorinated solvents, epichlorohydrin (EPI), etc. The West Coast market is approximately 800,000 dry short tons; whereas this market is supplied heavily by Asian producers such as Taiwan, South Korea, Japan, and now China. These countries supply on average 400,000 dry short tons to the West Coast. When Dow Chemical announced a permanent shutdown of their Fort Saskatchewan chlor-alkali facility in Western Canada, rated at 470,000 dry short tons or 4% of the domestic marketplace, things began to change. Dow maintained their Western Canada market share by purchasing caustic soda from Asia. The caustic soda was readily available, but vessels to supply were inadequate. Dow began to supplement this requirement from their two facilities in the Gulf Cost. This strategy heavily impacted their rail fleet, as well as their barge fleet. Not to mention the negative effect this strategy had on drawing down valuable inventory in the Gulf. As Dow depleted their inventory in the Gulf, Dow began purchasing caustic soda in the open market to supplement their needs. This in itself lessened overall inventories by all producers in the Gulf Coast. At the same time, West European imports to the East Coast dried up as demand in Europe began to pick up. Overall inventories in Europe became critically low. As imports dried up on the East Coast, producers in the US Gulf Coast began supplying the East Coast domestically which drained inventory in the Gulf to critically low levels over a 6 to 9 month period. The lack of inventory and the lack of imports allowed producers to announce and secure an April increase of $40 a dry short ton. Since then the dollar has softened further, allowing producers to export caustic soda from the Gulf to South America and Europe further tightening the caustic soda market. As we enter the summer season, producers are running at abnormally high rates with little to no incremental caustic building up in the Gulf. For the past 6 to 9 months Olin has been working on acquiring Pioneer Chemical. This acquisition will have a profound impact on the economies of the domestic chlor-alkali market.
As you can see by the chart above, the big 5 will now control and produce as much as 88% of all domestic production. What makes matters worse is that the top 4 producers have multiple plants, whereas the bottom 6 producers all represent one production site. K.A. Steel Chemicals has built its foundation to purchase 400,000 dry short tons of caustic utilizing Dow, PPG, and Formosa as its base of suppliers. We purchase from the bottom 6 producers on a minimal basis due to the "one plant syndrome". In the past, whenever Westlake, Georgia Gulf or Bayer has had a problem involving operational issues they have allocated customers less than 100%. It is for this reason that we will continue with the existing strategy where 80% of our overall contracts are with suppliers involving multiple plants. It is my belief, as rationalization continues to occur; caustic soda will continue to be highly volatile. It is my belief to forecast beyond 3-6 months is a crap shoot, at best. We continue to use our 98,000 dry short tons of storage to guarantee 100% supply to our customers. We currently are trying to build incremental inventory but caustic soda is tight and difficult to secure. Barges, railcars, as well as ships are in scarce supply. All of these issues have pointed to a very successful $50/dst increase for July 1. Currently, Dow Chemical has successfully completed a 30 day turnaround of its Plaquemine, LA facility which is one of the largest facilities in the Gulf Coast. Upon completion of this turnaround by Dow, Olin is scheduled for a 10 day turnaround at its McIntosh, AL facility. These turnarounds, high demand, strong exports and rationalization in the market place have severely lessened inventory and tightened up caustic soda prices.
