Houston — Softer US export caustic soda pricing this year should be temporary, given expectations of strong US and global GDP growth, Olin CEO John Fischer said Wednesday.
"We believe the favorable long-term global caustic soda market dynamics that have been experienced over the past two years remain in place," Fischer said during the company's quarterly earnings call.
US spot export caustic soda prices fell more than 8% in the second quarter, according to S&P Global Platts data, as market activity slowed.
Since early May, spot Asian caustic soda prices fell up to 40%, at or near the break even level of $400/mt, Platts data showed, as an influx of cargoes from Japan and the Middle East pumped up supply while environmental inspections of downstream plants siphoned demand. European spot caustic soda prices also have slipped nearly 21% since early May, in part because of slow trade amid the summer holiday season.
In Brazil, Norsk Hydro's 6.3 million mt/year Alunorte alumina refinery, the world's largest, has been operating at half rates since February when heavy rain raised regulatory concerns about contaminated leaks. That cut the plant's intake of US caustic in half to 25,000 mt/month. Norsk Hydro remains in talks with regulators to possibly lift the order limiting output, but the company has no timeline on when that might happen.
Brazil is the top export market for US caustic soda, according to US International Trade Commission data.
And Russia's Rusal, the second-largest global aluminum producer and a major buyer of US caustic soda, was continuing efforts to cut ties with Oleg Deripaska, who controls the company that controls Rusal. In April, the US Treasury Department imposed sanctions on Deripaska and other Russian oligarchs in addition to a string of Russian companies, including Rusal, and then gave Rusal until October 23 to wind down its US business or avoid sanctions by cutting ties with Deripaska. Rusal runs alumina plants in Russia, Ireland, Italy, Jamaica and Guinea.
However, Olin remains confident that US export caustic soda pricing will improve, said James Varilek, the company's vice president.
"From a global standpoint, we have seen some things in Latin America and Asia that have impacted export pricing. We believe those to be temporary," he said. "As capacity comes back on stream in Latin America, we return to the trade growth that we had about a year ago and those were tight."
And in Asia, Varilek said, the company expects some capacity to come offline with pricing at or below break even levels, "but we also expect the demand side to return to the norm there."
US caustic soda margins have been strong since early 2016 after consolidation in the industry tightened capacity while demand has grown, and producers have had little incentive to add capacity. However, Shintech, the US arm of Japan's Shin-Etsu, has begun expanding capacity across the polyvinyl chloride chain at its complex in Louisiana to meet growing PVC demand, including an additional 635,029 mt/year of chlorine, and 725,747 mt/year of caustic soda.
That new capacity will not start up until early 2021, and it is not enough to dent caustic soda strength, said Todd Slater, Olin's chief financial officer.
"If you look at the capacity announcement and the size of it, and you believe that caustic demand is growing at 2% annually, the new capacity represents two months' worth of global growth and may be 10 months of domestic growth. That's really not a lot of capacity," Slater said.
STRONGER EDC PRICING EXPECTED
Olin executives also expressed a more bullish view of ethylene dichloride, a precursor to PVC, when discussing quarterly results on Tuesday. Earlier this year, Fischer had said Olin expected EDC prices to decline this year and be lower in 2018 compared to 2017, but on Wednesday he and other Olin executives said they expect EDC prices to strengthen this year.
Chlorine mixed with ethylene makes EDC, which is used to make vinyl chloride monomer, the direct precursor to PVC. Caustic soda is a by-product of chlorine production, and is a key feedstock in alumina and pulp and paper industries.
Olin is the sole chlor-alkali producer in the US that stops at EDC, and does not make VCM or PVC. The other four -- OxyChem, Shintech, Westlake Chemical and Formosa Plastics -- produce products throughout the PVC chain.
Other producers can keep their EDC production internal to make VCM and PVC, while Olin must export all EDC it produces, Fischer noted.
EDC is among US products targeted for retaliatory tariffs by China, which is the top export market for US EDC.
Olin's executives did not go into detail Wednesday about why their view of EDC pricing has improved, but in recent weeks Olin has been the sole producer with export EDC availability. In July, the company sold a cargo at $300/mt FOB USG to a buyer in Spain after Brazil's Braskem declined in June to accept Olin's offer at that level for 13,000 dmt for mid-July delivery to supplement its own production, according to market sources.
Last month Braskem issued another tender for the same amount of EDC for September delivery, and Olin remained the sole producer with export volume availability, market sources said. A deal had not yet been heard done.
Slater said stronger-than-expected volumes play a part opportunities for higher prices to boost the company's earnings in the second half of this year. "We've got some opportunities around pricing, both caustic soda and EDC, and I would say those are the two biggest," he said.
