Archive
The Advantage - Nov 2007-2008
November 15, 2008 Update
Operating rates for the U.S. Chlor-Alkali Industry registered at 62% for the month of September 08'. This ‘abnormal' operating rate of course reflects the many producers that were impacted by two hurricanes that struck both Louisiana and Texas within 20 days of each other. While normality has essentially returned to the region, the loss of caustic soda 50% production is estimated at close to 400,000/dst as result of every major producer being directly or indirectly impacted.
First and foremost the real focus today is on the vinyl industry as a whole. Demand has truly experienced a significant decline throughout the entire chain; both globally and in North America. PVC demand is witnessing what could be its weakest demand overall in almost forty years as a result of what was already a dramatic decline in housing starts that began approximately 18 months ago. However, credit and financial problems have exacerbated the issue. Although feedstock and energy costs move downward this cannot overcome the very weak economic demand for many goods as a whole.
The Institute of Supply Management (ISM) November report "appears to show that manufacturing is experiencing significant demand destruction as result of multiple items." The index 38.8 is at its lowest level since 1982. It is important to know that "export orders also contracted for the first time following 70 months of growth." Many credit issues are absolutely forcing suppliers to run closer to terms. Very few commodities are still reported up in price. Caustic Soda 50% is one of them.
While this perhaps perplexes some buyers the explanation in the short run is somewhat less complicated. If (GDP) has declined in many regions of the world and specifically in the U.S. then one result will be a fall off in (Cl2) demand. This is exactly what is occurring for PVC, MDI/TDI and TiO2. All in all as chlor-alkali manufacturers decrease production the caustic supply is also decreased. Currently demand may be weakening for caustic but this is still to be fully witnessed.
The conclusion to draw in the end is that if operating rates fall by 10-15% in the U.S. Gulf and report perhaps even in the low 80% range for 4th qtr then less caustic supply will be evident immediately. In the past 10 days all major U.S. Gulf producers have announced a caustic soda 50% increase that ranges from $100/dst to $120/dst and this will be implemented as early as December 1, 2008.
K.A.Steel is monitoring the market daily and expects that supply will tighten in the short run as supply declines. However, as most economic data suggest today the health of the U.S. and global economy looks to be very difficult as 2009 begins and demand growth for all durable goods would appear to be very negative at best.
Thank you!
September 3, 2008 Update
Hurricane Gustav arrived in the state of Louisiana and thankfully did not bring the level of havoc and destruction as was witnessed by Katrina almost exactly three years ago. While the results were certainly not as severe, there are still many issues to overcome during the next few days and weeks as a result of this massive category 3 storm.
Almost every chlor-alkali producer in the U.S. Gulf was forced to shut down production in preparation for the storm. At this time approximately one million people are without power in Louisiana. Five producers report that issues related to power, labor and logistical problems are at the forefront. Several producers are fully idled. The re-start date for these plants could be only a few days or as long as a few weeks. In the end it is estimated that perhaps as much as 12,000-14,000 short tons of chlorine is out of production currently as a result of multiple manufacturing plants being negatively impacted by Gustav in the gulf coast. Realizing that the market is already short in supply of caustic this will only force producer inventories to be utilized immediately once transportation service returns.
During the month of August producers were successful in increasing pricing by an additional $160/dst and also set the stage for a September 1st increase of an additional $130/dst. At this time it has become truly unknown as to exactly how high the price for this commodity will conclude. Demand for caustic soda remains very stable while exports are actually up by 18% in the first half of 2008 versus 2007.
The Midwest region experiences a much higher cost than the coastal markets and this is not news to anyone as this region is supplied for the most part via the U.S. Gulf producer.
The easing of the Natural Gas price into the $8/+ mmbtu range, a 40% drop since July 1st has resulted in surge in ECU profit margins for U.S. chlor-alkali producers across the board. Imports continue into the coastal markets and are priced at a large cost advantage over fob U.S. Gulf offers.
The general idea going forward is that PVC demand remains anemic in the U.S. and that if exports begin to slow at all then chlorine-operating rates will decline quickly as large producers are forced to throttle backward. In the end there are not many positive signs for any retreat in caustic soda 50% pricing as the 4th qtr approaches. K.A.Steel will continue to provide up to date market information related to the producer storm production activity and how this impacts supply of material.
July 5, 2008 Update
Over the past 45 days news from the chlor-alkali industry as a whole has been difficult to digest. Currently, four producers have announced force majeure and allocations less than 100%. Dow Chemical currently is on a 90% allocation. Formosa Plastics has implemented 70% for July and 75% for August. Bayer is on an allocation of 85% for a minimum of 60 days. PPG announced an allocation of 90% as well. At least two of the producers have experienced production problems that led to production losses. Operating rates are expected to drop as bleach season reaches its midpoint. Replenishment of the river system has been very difficult due to the flooding of the Midwest. Many of the producer's barges are stranded in the St. Louis area awaiting the river to open up. Barges have been delayed 25+ days in their normal logistical routes. Once barges begin to move it will be an estimated 60 days before we experience normal turns on a barge. One producer has a third of its fleet tied up servicing the flood spectrum.
It has been estimated that perhaps as much as 150,000 to 175,000/dst of ‘lost production' could take place in the 3rd qtr. While this will more than likely not impact the chlorine consumer too adversely (weak demand already exists); quite the opposite is true for caustic soda users. Caustic soda demand is still not really showing any real signs of faltering with what is overall a much slower economy (GDP 1% for 1st qtr 08') versus 12 to 18 months ago. Chlor-alkali producers continue to export material to Central and South America at spot prices reported at $800+/dmt.
It is important to again stress that these plants are built for the chlorine. The multiple derivatives produced from chlorine are for the most part under strain to provide a reasonable profit. Domestically and globally the market conditions for EDC/VCM/PVC remain a challenge. Remember, most of the price increase that are taking place for these derivatives are occurring because a surge in ethylene cost forces a price increase. Vinyl demand in the U.S. of course follows the housing market.
August 1st will again present another price increase of $160/dst from the major U.S. Gulf chlor-alkali producers. At the same time every 45 days when caustic soda arrives into the coastal markets from Asia and Europe the price moves upward. However, soon he coastal markets will have what may be the largest differential in pricing on an fob ex-tank basis versus the river system price ex-tank price offer that we have seen since the hurricane effect in U.S. Gulf in late 2005.
It is more than difficult to provide a truly reliable forecast for caustic soda today. We know for a fact that caustic soda pricing now represents roughly 70%-75% of the (ECU) total selling price. Over the next few months we will learn if caustic soda prices that are at $900-$1,000/dst fob U.S. Gulf can actually be sustained by end-users in the market.
June 1, 2008 Update
The July 1st date will mark the seventh consecutive quarter of price increases as initiated by chlor-alkali producers. In the past eight weeks there has been announced increases totaling between $160-$255/dst depending on the specific manufacturer.
It is important to examine the multitude of variables that have led to the tremendous escalation in caustic prices and the highest (ECU) profit returns historically for many producers. First, caustic 50% supply is limited by (Cl2) production. As the housing construction starts have ‘sunk', the demand for vinyl derivatives has certainly faltered. Operating rates have fallen from a high of 94% in January to its current level of 85% for April. This industry must run at a minimum of 94% capacity to be considered balanced. Each 1% drop in operating rate is equivalent to about 150,000 tons of chlorine annualized. Therefore, a drop of 9% since the beginning of the year is equivalent to 1,350,000 tons of chlorine on an annualized basis being removed from the market. This equates to an estimated 1,500,000/dst of caustic soda annualized extracted from the market. Second, the actual demand for caustic soda both in the U.S. and internationally is strong. The weaker U.S. currency continues to allow U.S. Gulf material to ship "off shore". Any incremental domestic production is not being put into inventory, its being exported primarily to the Alumina industry off shore. Third, North American chlor-alkali producers have no doubt become very disciplined and adept at managing operating rates collectively to balance the caustic/chlorine off take in today's environment.
Imported caustic soda to the U.S. continues to occur but prices have increased dramatically in the past six months. Material imported from China and other Asian producers have increased in supply so far in the first half of 08' but so has the cost structure. The U.S. industry also continues to rationalize production as Oxychem has recently removed over 200,000/dst of membrane volume from the market in a conversion to KoH. Membrane caustic soda remains even tighter than diaphragm grade product. One area that is again become a concern is the Natural Gas cost. The (NG) price spot purchase is now in the low teens ($mmbtu) and all chemical producers are concerned (NG) prices could easily escalate as the summer and fall months unfold.
It is not surprising that operating rates for the PVC industry for the 1st qtr 2008 were 80% and this was the lowest first quarter of production since 1991. The economy is not technically in a recession but overall improvement is not looking very positive. Fuel cost is up 56% for diesel in the past 12 months. Record delivered prices for caustic soda as July approaches will take place in the U.S.
Overall, the chlorine demand in general has weakened and this is forcing the caustic side of the molecule to carry the burden of the (ECU) profitability. All regions of the world are set to achieve record caustic soda prices to the Alumina industry for the second half of 2008!
April 30, 2008 Update
The chlor-alkali market continues to witness much activity as mid-second quarter 08' approaches. Already this year we have witnessed two price increases totaling $155/dst. The third largest domestic producer Olin experienced production outages during the months of March/April that only proved to tighten an already difficult domestic supply position for caustic soda. Supply - demand balances remain tight for all regions of the globe. It is important to examine the fundamentals.
First, vinyl derivatives through PVC remain under constant cost pressure. The vertically integrated U.S. Gulf manufacturers are determined to increase caustic prices once again ($65/dst) in order to compensate for higher production cost (ethylene +natural gas) and lower vinyl returns. While Chlorine prices for the merchant market have declined somewhat they are acceptable in comparison to captive (CL) values into the vinyl derivative chain, which is critically weak.
Secondly, since August 07' natural gas (NG) prices have increased by over 40% on the Nymex. With gas ‘spot' prices above $10/mmbtu the producers ECU cost are creeping upward again. Remember; for every $1/mmbtu increase in cost the ECU cost increases by approximately $30/unit. NG cost however on global basis for the U.S. is still very competitive overall.
While the import market for caustic still remains it is important to realize prices for East and West coast have been rising steadily. Every Ocean parcel delivery for the past six months has witnessed an increase in price. European inventories remain at lower historical levels. More importantly pricing material from the Asia is now up dramatically from late 4th qtr 07' as deep-sea barges have increased steadily to almost $400/dmt fob. Chinese exports for caustic have slowed and prices are increasing also.
Demand for caustic soda has not witnessed a "fall off" as might be expected with a resulting ‘weaker economy' for the past two quarters. Exports of caustic soda remain steady for 2008, while the producers witnessed a 20% increase in 2007 exports. The weaker U.S. dollar allows the U.S. to export multiple goods as well as commodity caustic soda itself.
There has been practically ‘zero spot' caustic soda available from U.S. producers for the past 12-18 months. This is evidenced by the unprecedented seventh price increase initiative for caustic recently announced.
U.S. Gulf manufacturers are now set to begin negotiations for second half pricing for the alumina industry. The expectation is that pricing for caustic soda will increase upward by triple digits on an fob basis from both the U.S. and Far East regions.
The economic news regarding the U.S. economy remains bleak with many experts believing we are currently in a recession. Of course many buyers of caustic soda are anxious to find evidence that this tight situation for caustic soda will come to an end, but this does not appear to be the case for the immediate future at all. Shintech is finally expected to begin production in Louisiana this quarter. K.A. Steel will keep all customers fully updated. Thank You!
March 4, 2008 Update
All producers have announced increases totalling $80 pdst for the March 08 April 08 time frame. Oxy announced $50 pdst for all grades of caustic with an effective date of March 5th. They later followed with a $30 pdst increase slated for March 23rd. Oxy as well as Olin announced an increase for chlorine as well. Chlorine by railcar will see a $50 pdst increase effective March 20th and pipeline accounts will see an increase of $35 pdst.
At the time of this update, Olin has declared a 70% allocation on sales of caustic soda. Mechanical issues as well as a strong market have plagued Olin. Univar remains on 75% allocation in the Canadian market.
February 29, 2008 Update
February 15, 2008 Update
Please take time to read the article below. This article is extremely important in the future of the PVC industry. It is pivotal in forecasting the short term future of China's PVC industry and it's two processes, Carbide VS. Ethylene.
PVC - How to Play China's Coal Price Hike?
The $75 pdst increase for January was successful with some confusion over temporary TVA's announced by a couple producers. Most chemical rags have identified a $50 - $75 range as the successful increase. During the 4th qtr and well into January alumina negotiations were well on their way. Asian product was $270 dmt and increased to $300 dmt. US Gulf Coast product was supplied for the past 6 months at an estimated $337 dmt and successfully increased to $410 dmt. This was a successful increase of $73 dmt. Domestic operating rates, according to the "Chlorine Institute", in October were 88% and jumped to 91%. Since then, December rates have fallen back to an 87% level with little hope in site for a quick rebound. On a full year basis CL2 production was 3.1% greater in 2007 compared to 2006. This equates to an estimated 388,000 tons of incremental CL2 year to year. Furthermore this equates to about 415,000 dst of incremental caustic soda in 2007 over 2006. With this incremental caustic we still have not been able to keep up with demand, hence six price increases in a row. As of February 4th, Oxy has announced another round of increases followed by Dow, Olin, PPG, Formosa, Bayer and soon to be all others. This increase will range between $50 - $80 pdst and be effective between March 4th and April 1st. I will do my best to clarify developments leading to this.
Housing continues to be a drag on the economy. We have seen in past years at least 17 different price hikes in interest rates which have finally come to haunt us. Keeping in mind it is estimated for every 1/4 pt increase or decrease, an estimated 64,000 homes will or will not be built depending on rate direction. CL2 represents 2/3 of GDP growth and we have seen unprecedented growth over the past 5 or so years. Most economists are showing flat to 1% GDP for 2008. With operating rates falling and capacity taken out of the market, this will be the driving force behind record low inventories of caustic soda. Any disruption or burp in the system affects everyone.
Operating Rates have fallen from 91 - 87 % for December, most forecast a bleak 2008. For years we watched large integrated vinyl producers sell on the fact "Economy is strong", "Vinyl is strong therefore we are the source for caustic soda". Now these integrated producers struggle as PVC takes a major downturn domestically and abroad. As the housing industry is shaken by "tightening mortgage/credit" issues we will see more foreclosures. As PVC demand declines, by default, we will see at least 40% of the CL2 pie chart affected in a negative way.
As CL2 demand becomes an issue caustic soda demand will typically lag by 6 - 9 months before we soften in the demand sector. Exports of caustic soda continue to boom due to a weak US dollar making US product competitive in deep sea markets typically driven by high alumina demand. 90% of the deep sea market is alumina. Exports of caustic soda are especially strong to South America for alumina and pulp sales.
Imports of caustic soda have slowed for many reasons. Asian markets are moving from balanced to tight due to disruptions in ethylene supply needed for production of "PVC". China was hit with a major winter storm impacting rail movement and supply of coal to their facilities to run their plant. Asia has seen major raw material cost in salt as well as coal/electricity which equates to $70 - $100 dmt. Coal alone has seen increases of 30%. Whether domestic or international escalating freight costs have been impacted by high crude oil prices, there seems to be about a 300,000 dmt deficit export versus import of caustic soda. A major full line distributor, Univar, announced 75% allocation to customers in northwest Canada. These customers are scrambling to find alternative sources. Again one burp in the system impacts everyone. China has had many big issues to deal with. One that seems to be taking center stage is "electricity limitations". As China produces gargantuan quantities of caustic soda and has become a major exporter, the question becomes "Are they exporting caustic or energy?" The government has cracked down on exports of caustic as energy must be supplied domestically first. European caustic soda to the East Coast was primarily supplied by Solvay, Bayer, Ineos, and NorskHydro. As of late NorskHydro was purchased by Ineos. We are down to 3-4 producers in Europe even interested in the East Coast. Although Chlor-Alkali capacity utilization rates have gone from 83% in 2006 to 85% in 2007, there is less material for export as they experience very low caustic inventories. Most shortfalls in European supply have been replaced by Asian material. Ships arriving to the East Coast today range from $460 dmt to as high as $500 dmt.
There is little doubt caustic soda domestically is quite scarce. We have tried, with limited success, to build inventory. As soon as you have success in one location an unscheduled turnaround develops limiting availability elsewhere. Dow, Olin and Formosa have major outages in March and at least 4 producers are scrambling to buy caustic on the open market. It is our belief with caustic soda imports rapidly increasing in price the domestic $50 pdst will be fully implemented.
Effective August 24, 2007 DOW, OXY and PPG have all announced a $30 / DST increase on all grades of caustic soda.
DOW, OXY and PPG have all announced a $30 / DST increase on all grades of caustic soda.
November 1, 2007 Update
As we all have experience by now, the $30 pdst increase slated for October has solidified throughout the marketplace. As we approach November, another price initiative has been nominated by the largest U.S. merchant caustic soda manufacturer, OxyChem. This $75 pdst increase, slated to take effect within the next 30 days, has already been followed by Dow, PPG, and Formosa.
This increase is the 5th increase in a row; thus moving caustic soda on fob basis from the U.S. Gulf to near historical pricing. Multiple dynamics and variables are the reason for the continued "upward" movement in pricing:
1.) The East coast has not witnessed any aggressive pricing in relation to imports in 2007. European producers have experienced historically lower inventories for the past 12 months. Overall, imports for the U.S. are down 21% YTD. This volume is about 135,000/dst for both coastal markets in total.
2.) The ‘weak' US dollar has stimulated a 10% increase in Exports from the U.S. Gulf so far this year! This amounts to approximately 130,000/dst that has shipped off-shore in 2007 versus 2006. Essentially, this means much less "Spot" caustic for the distribution infrastructure in the U.S. this year. As you can see the net effect (import-export differential) is over 250,000/dst not selling in the states so far this year.
3.) Vinyl derivatives are under tremendous pressure from a cost position. In the past 25 days the ethylene cost has risen by almost 10/cents #. This forces PVC cost upward by (6) cents while at the same time the ability to raise PVC prices to a dramatically weak housing is not an option. PVC suffers a large loss in demand due to the weak housing market. OVERALL this will result in a ‘cut back' in chlorine demand and results in LESS caustic soda for supply domestically.
4.) Demand for caustic remains healthy in many sectors specifically Alumina, Pulp and Paper and Oil Refinery consumption. With a weak U.S. currency, the U.S. manufacturing sectors enjoy a very competitive global platform and increasing export opportunities.
5.) A difficult transportation issue is present domestically and globally for all liquid cargo. River barge and Ocean vessels are not readily available and costs have jumped higher on a delivered basis.
6.) Even with higher (operating rates) for the chlor-alkali industry for the past 90 days, the ability to build inventory is not possible. All producers are currently executing order control for customers.
