OWI Caustic Market Overview – 1H 2022

The Chlorine / Caustic markets have been in a state of turmoil dating back to the freeze of 2021 and every time market participants believed the market was “returning to normal,” and pricing was stabilizing, there would be another unplanned outage / event which would push pricing even higher.  The combination of unplanned outages, capacity rationalization, unprecedented amounts of stimulus pumped into the economy and what we would call “extreme market discipline”, has allowed US Producers to raise prices aggressively of both products:

 

January 2021 IHS Global Chlor-Alkali Monthly Report:

• Contract Liquid Index – 50% Caustic Soda fob USGC = $635 DST
• Chlorine Contract Price fob USGC AVG = $227 / ton 

May 2022 IHS Global Chlor-Alkali Monthly Report:

• Contract Liquid Index – 50% Caustic Soda fob USGC = $1065 DST (Up 68%)
• Chlorine Contract Price fob USGC AVG = $799 / ton (Up 252%)

ECU Margin Improvement:

• Chlorine = + $572 / ton
• Caustic Soda = + $430 / DST
• ECU Margin Improvement = $572 + ($430 x 1.1) = $1,042 / ECU, up 113% in 16 months.

As expected, we’ve seen each of the 3 major Chlor-Alkali Producer post record profits in Q1 of 2022: 

 

	Westlake	Olin	OxyChem
Q1 2022	$756M	$393M	$671M
Q4 2021	$644M	$307M	$574M
Q3 2021	$607M	$391M	$407M
Q2 2021	$522M	$356M	$312M
Total/Last 12 Months	$2,529M	$1,447M	$1,964M

** All numbers above taken from publicly disclosed financial statements / dollar amounts reflect Net Income.

 

What is giving the Producers such immense pricing power at this moment in time? A few factors:

Coming into this year, we can assume most, if not all producers had near record low inventories due to multiple operational issues (IHS screenshot below).  Increasing demand being pulled forward by fiscal stimulus, coupled with supply disruptions here and abroad, meant producer inventories stayed extremely low all last year and Producers needed to replenish stocks which could allow them to be very disciplined on price.

 

Unplanned issues:

• Based on the chart below, detailing the issues seen at Producer sites in 2021, you can see there was roughly 2.2M DST of production lost due to both planned and unplanned outages.  Certainly, the freeze affected things in Q1 but the effects of other issues were felt throughout the year. 

We have seen these issues continue into this year with Olin having 2 separate FM announcements for Plaquemine (April) and Freeport (February). 

 

Along with the operational issues, we’ve seen a change in behavior and marketing strategy by the producers as to how they react to one of these unplanned events. We all remember when outages, allocations and FM announcements were bad things for manufacturers / producers.  While dealing with a force majeure / allocation event, Producers historically would not raise prices and allocations would be applied equitably.  What we’ve seen over the last couple years since Covid shocked the system, is the opposite.  As the saying goes, “never let a good crisis go to waste…”  Allocation and FM announcements became commonplace, as did monthly and sometime bi-monthly, price increases.  Once Producers realized they could allocate customers at their discretion and raise prices while operating under a FM, there was no need or rush to lift the FM.  What would the upside be to lifting it? 

 

All of these production issues have coincided with a management change at Olin (largest global producer).  They’ve been vocal on their intent to exert more control over the market and remove the cyclicality in pricing we’ve historically seen.  Coincidentally enough, they’ve had a chlorine allocation in place for 15+ months while pricing continues to surge higher and they rationalize capacity.  We would encourage everyone to read the earnings call transcripts for the last few quarters and you’ll get a taste for how Olin is pushing to change things.  In essence, trying to move chlorine and caustic from the commodity to the specialty category.  Other Producers have been content to remain silent on the matter and follow Olin’s lead.  Production rates will be managed to keep supply at a level the producers deem “manageable.”  North American Caustic buyers need to rethink strategy going forward as the market evolves because it is difficult to envision an environment where we go back to how things used to be done. 

 

All of that said, let’s turn back to market fundamentals / data when it comes to production and international trade.  We no longer get production statistics from the Chlorine Institute due to every Producer pulling out (another example of producers controlling information flow), so the only option buyer’s have for data is IHS.  IHS estimates YTD production as follows:

 

	2022	2021
Production through April (IHS)	4,300M DST	4,000M DST
US Imports (US Census Bureau)	205K DST	178K DST
US Exports (US Census Bureau)	968K DST	1,110K DST
Net Apparent Demand	3,537K DST	3,068K DST

 

At first glance, these numbers would not seem to support the narrative product is unbelievably tight and further price increases are necessary and warranted.  Through April, the numbers tell us there is an additional 469K DST of material available for sale in the US.  Certainly, demand is / could be increasing but given what we are seeing in the markets today, the periods of the strongest demand have come and gone, with a tremendous amount of stimulus in the economy, pulling demand forward.  Caustic demand is typically tied to general manufacturing and while still strong by historical standards, manufacturing is slowing to the lowest level in 12+ months:

We’re seeing this across a number of sectors from housing to metals, with Aluminum prices falling more than 25% in recent weeks.  The following is an excerpt from a Bloomberg article, “Aluminum Deals on Hold Show Growing Concerns Over Price Outlook” dated June 13^th.  

• “Consumers of metal are worried about softening demand in the future -- they’re starting to get worried and are becoming more conservative in their actions,” said Jorge Vazquez, managing director at researcher Harbor Intelligence, in an interview last week on the sidelines of North America’s biggest annual aluminum conference in Chicago. They will start their talks “in September and then end up closing their deals in probably November or December.”……….Aluminum prices have stalled this year after a surge of more than 40% in 2021, the biggest rally in more than a decade. The metal’s weakness has coincided with slowing demand amid China’s Covid-19 restrictions and expectations of more aggressive measures by the Federal Reserve to cool inflation that’s at the highest in 40 years, which could ultimately stymie growth.
• The mood was much more bearish at this year’s conference, where Harbor Intelligence warned the audience of producers, traders and buyers that the value of the metal would fall almost 20% by December.

So what is keeping caustic prices up?

 

One issue not to be ignored is the war in Ukraine which has pushed energy prices in Europe to record high, well above $30 mm/btu.  This has pushed European ECU economics to record highs constraining production and making them uncompetitive for shipments to the US East Coast or other regions around the world.  US Producers can see the prices being attained by European producers and believe that gives them room to push their price a bit more.  But given the lack of product available out of Europe and with Chinese covid lockdowns, you would expect US exports to be higher and yet they are not. 

 

Olin’s push to buy up all of the excess global liquidity in the market is also pushing prices higher, boxing out domestic distribution with import tanks who try to leverage multiple supply points for the benefit of the consumer.  US East coast pricing is currently one of the most expensive regions in the world for caustic and it has also been an outlet for some of the US inventory build.   

 

Going forward, what can we expect?  One would think that chlorine / caustic will not be immune to the global slowdown we all see happening before our eyes, but the last few years have shown us that accurate forecasting has been difficult if not outright impossible.  What is clear, Producers have more power / ability to maintain pricing than in past cycles.  Industry consolidation coupled with capacity rationalization has allowed Producers to keep the supply / demand balanced on a knifes edge.  When all capacity is running, the market is balanced (not long) and all it takes is one production issue for the market to go “tight” and for producers to immediately announce increases.  Case in point would be the recent Plaquemine FM announcement which has had zero impact on supply to the market given the lack of spot inquiries, and yet pricing has moved up in May and June as a result. 

 

The chlorine market is even worse as CL2 RC buyers can attest.  There is little if anything chlorine buyers can do except accept a new pricing reality, where prices will be 100-200% higher than they’ve been historically.  There are even fewer options for US chlorine consumers and new marketing strategies (rachet pricing philosophy / Olin’s earnings call) coupled with increasing freight rates are presenting a “new normal” for chlorine buyers with a new floor believed to be $500 - $600 / ton fob USGC.

 

Specific to caustic, rising natural gas prices along with everything else described thus far would point to a new normal there as well but it’s difficult to say where it will be at present.  We are still dealing with the effects of pumping $5T in stimulus into the economy and no one knows the lasting effect that will have on the economy as a whole as that money works it’s way through the system.  The Europeans and the Asians will run strongly again which will affect pricing on the coasts and hopefully affect pricing here, reintroducing true market fundamentals.   

 

One last item to keep an eye on is the new EPA rulings on the use of asbestos diaphragms for the manufacture of chlorine and caustic. Most likely, the EPA is going to ban the use of these diaphragms and the plants using them will be forced to shut down or convert to newer / membrane technology. From the EPA’s website:

• “Chlor-alkali chemicals are used in sectors important to the national economy and in operations that can help protect human health such as drinking water treatment, which uses chlorine manufactured through the chlor-alkali process. While chlorine is a commonly used disinfectant in water treatment, there are only 10 chlor-alkali plants in the U.S. that still use asbestos diaphragms to produce chlorine and sodium hydroxide. One plant is expected to close this year. The nine remaining chlor-alkali plants using asbestos diaphragms range in age from 40 to 123 years old and none have increased use of asbestos diaphragms in approximately 17 years. The use of asbestos diaphragms has been declining and these remaining plants only account for about one-third of the chlor-alkali production in the country. Alternatives to asbestos-containing diaphragms for chlor-alkali plants exist, and the use of alternatives, specifically membrane cells, accounts for almost half of the country’s chlor-alkali production.” *Source: www.epa.gov

What we should expect as market participants is a number of announcements from Olin / Oxy about rolling outages as the plants undergo conversions.  Westlake employs a different technology and will not be affected by this new rule.  We would expect the Producers to hold off on the announcements until the market starts to turn south, with Producers hoping the news of plant closures will keep pricing elevated and stave off any prolonged downturn.  Shocking… 

 

So going forward, we can expect the markets to correct as the market always does.  However, we feel it is fair to say that new “floors” for pricing have been established due to rising natural gas prices here at home and more control at the supply point by a small number of producers.  We take our role as an advocate for the consumer seriously and we will continue to strive to provide value to our customers in any way we can.  Be it through market intel, exceptional customer service and security of supply, we are here to serve.  If you or anyone on your team has any questions or concerns about the market or if you would like to discuss things in greater detail, please don’t hesitate to reach out to your appropriate OWI representative and we are happy to assist.

 

We appreciate your business!

OWI Specialty Chem Team 

 

 

Postscript: We finished putting together this market write up on June 13^th.  Negotiations have been ongoing for Q3 pricing with increases Quarter over Quarter indicating a $40 - $60 DST increase which was below what was expected given the announcements in March / April as supply improves and more information on the global economy cooling.  And on schedule, we have new Westlake FM announcement, coupled with an Olin announcement of further capacity reduction due to “poor demand.”  Mind you, they are on a chlorine allocation for the merchant market. 

2022-06-14 | NYSE:OLN | Press Release | Olin Corporation (stockhouse.com)