Caustic soda sources said they were bullish going into the fourth quarter despite a deteriorating macroeconomic backdrop and falling prices in many commodities because tighter supplies are supporting contract prices in Europe and the US.
Sluggish demand for polyvinyl chloride as well as slower demand for other other chlorine applications such as polycarbonates and toluene diisocyanate /diphenylmethane diisocyanate (TDI/MDI) used in the manufacture of polyurethanes, is causing chlorine production to be scaled back, sources said.
European chlorine utilization rates fell from 82.1% in July to 77.3% in August, according to figures from Euro Chlor.
"Margins are being affected by poor chlorine demand and the increase [in the price of caustic] is needed to obtain reasonable electrochemical unit returns," a producer said.
Caustic and chlorine, used in the manufacture of PVC and other petrochemicals, are co-products.
While demand on the caustic soda side of the chlor-alkali chain is not booming, falling chlorine output is causing the caustic soda market to tighten.
Production issues or planned turnarounds have also caused a reduction in caustic soda stocks in recent weeks.
European caustic soda export prices were heard increasing this week to $385-400/mt FOB NWE and $400-410/mt FOB the Mediterranean, while export volumes continued to be limited, sources said.
"We are still receiving inquiries, some from the Nordics, the UK, US East Coast and in an instance South Africa," a producer said Tuesday, adding: "However, we are tight and since we don't have any additional volume we don't even bother discussing numbers."
The supply shortage is also supporting contract price increases going into Q4. During ongoing negotiations Ineos and Dow Chemical revised their target increases to Eur100/mt ($136/mt) last week, while Netherlands-based AkzoNobel announced Tuesday that it would also be pursuing an Eur100/mt. increase in Q4. The contract price for Q3 was assessed at Eur400/mt in July.
"Many suppliers are decreasing production, and as a result contracts are also being set with a maximum consumption level," another producer said.
The US caustic soda market was also in a bullish mood. In the contractual market some producers said that the $65/mt price hike posted last August has been fully implemented due to low inventory levels. In the spot markets, one trader reported selling an October cargo to Latin America $50/mt higher than in August.
Sources attributed the bullish sentiment to recent unplanned outages from US chlor-alkali manufacturers Olin and Oxy, and lower operating rates in the chlorine production for inventory control purposes because downstream PVC demand is still weak.
A recent report from the Chlorine Institute said US chlor-alkali operating rates reached 85% in July, a seven-percentage-point fall from the previous month, and was expected to continue falling in the coming months.
Despite the fact that this year Shintech and Formosa Plastic Corporation USA started additional chlor-alkali capacities, caustic soda prices remained stable as the new production was for captive consumption and both manufacturers have their vinyl chain production fully integrated, sources said.
The increase is supported by firm demand from the pulp and paper, automotive, textile and soap and detergent production in Latin America, sources said. Caustic soda export prices were talked this week at around $440-450/mt FOB USG, while the contract value was heard close to $500-510/mt.
In Asia too, caustic soda prices have been increasing, especially in China, as producers have cut operations due an extremely weak chlorine market. Caustic soda prices went up despite Q4 contract prices between Northeast Asian producers and customers in Australia being heard concluded at $350-370/mt FOB NE Asia, down $95/mt, or around 21% from settlements for Q3 of $450-460/mt FOB, industry sources said.
Alumina producers, who are a major end-user for contractual caustic soda supplies from Asia, have been facing downward pressure on prices, with FOB Australia alumina prices closing at $363/mt FOB as of Tuesday, down $2/mt from $365/mt from September 1 and down $15.50/mt from August 1.
However, despite the lower contract prices for Q4 and falling alumina prices, caustic soda spot prices have rebounded, as exports from China have been drying up due to tight supplies. Since August 23, caustic soda prices have rebounded by $30 to around $375/mt CFR Northeast Asia as of Tuesday.
Domestic prices in eastern China jumped Yuan 300/mt week on week to Yuan 3,200/mt, equating to $502/mt.
Caustic soda prices are rising as producers in China cut rates due to low prices for the co-product chlorine.
Part of the problem in China is structural, with new capacity coming on line for the purpose of producing caustic soda, but no demand for the chlorine co-product, with not many producers having built integrated downstream plants.
Nevertheless, some producers in Europe have expressed concerns about existing tightness. At least one source said that negotiations for October were being done agreeing on a maximum volume.
Some sources expressed concern that if the situation prevailed the availability of caustic stocks could be restricted going forward, potentially affecting ability to meet demand. "If chlorine demand continues slowing down, thus further limiting production in the chlor-alkali chain, it could come down to putting contractual customers on allocation," a source said.
