From everyone here on the OWI team, we hope this market overview finds you happy and healthy as we wind down what has certainly been a year none of us will forget and look forward to a better 2021! As we always do, we will take step back, examine what’s happened and what we believe will happen in the coming months given the facts and data we have at our disposal.
Here is where the market is currently:
|2020||2019||YOY Change %|
|Caustic Soda Production (CI)||10,668,024||11,717,527||(9.0)%|
|US Caustic Exports (US Census)||2,645,961||3,203,549||(17.4)%|
|US Caustic Imports (US Census)||441, 595||368,472||19.8%|
- Chlorine Institute production numbers through November 2020
- Caustic Import / Export numbers from the US Census Bureau through October 2020
If we look at production, through November, caustic production was down over (1)M DST vs. 2019. Operating rates were severely impacted by Co-Vid 19, reaching a low of 68% utilization in April, as the global economy grounded to a halt. In Q3, as the economy improved, production was constrained again, this time, by multiple hurricanes hitting the gulf coast, causing major plant outages in Louisiana and Alabama. As we head into Q1, it looks as though most Chlor-Alkali plants are running well and we saw operating rates hit 80% in November, the highest level seen since Q1 of this year.
The same forces that caused production to take a step backwards also hit caustic demand. Every industry was affected, be it Pulp/Paper, Oil/Gas, Ethanol, Steel, Aluminum, Chemical Processing etc. Timing of the decline in demand varied based on the industry and specific fundamentals, but nearly every consuming sector took a step backwards. OWI has more than 300 customers from various industries and saw demand decline between (12-14)% from Q1 to Q2 across our customer base. Since then, demand has slowly recovered across most segments, but its’ still not back to where we were pre-Co-Vid. There is no doubt chlorine demand has recovered more quickly than caustic demand as it always seems to do. This is clear when looking at market pricing over the last several months.
If we take a closer look at production, we see the strength behind the chlorine recovery is in PVC. Housing starts in November rose again to an annualized rate of 1.547M, up from the 1.528M pace set in the month of October. The combination of low interest rates and people looking for more space as stay-at-home orders increase, are pushing housing demand / pricing to near record highs. Applications for building permits in December / January, rose to 1.639M which is the highest number reported since 2006. The median price for a home was recently reported at $319K which is a 14% jump YOY and the figure is another record for the US housing market according to CNBC. The National Association of Home Builders, a trade organization, has also reported lumber prices per thousand board feet, more than doubled from less than $400 in January 2020 to more than $900 in September, based on composite data collected by Random Lengths, an industry publication.
Taken together, as builders try to keep up with demand, construction and home prices are both going to continue to rise as we head into 2021. Typically, we see a lull in construction activity over the winter months, but there is so much pent-up demand, most anticipate PVC orders to remain strong which is pushing PVC prices up. PVC pricing is currently above $1200 / ton with an additional increase on the table for January 1st ($0.03/lb.). Export PVC has even been reported above $1,300 / ton. We are also seeing EDC deals concluded above $450 / ton implying very strong imputed chlorine values. What this means, is while Producers will want to constrain production to limit the caustic supply and try to stabilize caustic pricing, the returns in the vinyl chain may be too great to pass up for integrated producers.
We are seeing similar dynamics play out in other markets around the world. In Europe for example, the caustic market has been oversupplied for many months leading to increased shipments from Europe to the US East Coast. Transactions in September / October were concluded around $270 - $290 DMT delivered into US Ports reflecting a price of $210 - $230 DMT fob Europe. Transactions concluded in November / December are being reported at $245 - $260 DMT which is a sizable drop and indicates pricing below $200 DMT fob NW Europe. Taken back to the USGC, you are looking at $140 - $150 DST fob the USGC. We are not reporting US Producers are meeting these numbers, rather illustrating how aggressive the European pricing is.
As 2020 concludes, pricing for Q1 / 2021 is being established. At the start of December, many were asking, “how much lower can this thing go”? The thought was Producers would hold the line at $200 DST fob the USGC and that seemed to be the case early on. However, as the month progressed and despite earnings calls to the contrary, we again saw some Producers in the market being aggressive as they tried to secure market share for 2021; dragging down the rest of the market with them. We can report, because we have first-hand knowledge of, several bids in the river system settling well below $200 DST fob USGC once logistics costs are backed out. Some even as low as $175 DST fob USGC. Many industry followers realize pricing sub-$200 DST fob USGC is not sustainable and caustic demand / pricing is going to turn around at some point in 2021, the question is when. It is also worth nothing in prior instances when caustic pricing was this low, you didn’t see the same strength in the chlorine molecule.
There are multiple chlorine price increases on the table for January 1st, 2021. The total announced price increases beginning in late August through today range from $120-$220 per ton. Based on what we have seen, there is no reason why chlorine prices should not increase by at least $100 / ton. It is warranted. When you have imputed chlorine values above $600 / ton into the vinyl chain, why would a producer instead choose to push tons into the ‘merchant’ market where pricing is below $200 / ton? The answer is, they wouldn’t.
Turning back to look at caustic pricing going forward, we need to look at what really moves the caustic price - Alumina and Exports. Caustic Exports were hammered this year as increased international competition and rising inventories of Alumina and Aluminum depressed demand. However, Aluminum pricing has been steadily rising since May, now over $2000 / metric ton after being below $1500. LME inventories are down 4.6% MOM and Alumina pricing is rebounding and being reported above $285 / ton.
If we look at the most recent data available from the IAI (International Aluminum Institute), they are reporting Global Alumina production in October of 369.4K tons / day which is the highest reported production number going all the way back to July of 2017. The US producer will face international competition, but US Caustic exports will increase in 2021; it is all but given. Domestic caustic demand will continue to improve, and we expect to see caustic pricing rebound off the bottom sometime between Q2 and Q3 2021. Obviously, there are virus-related risks to this outlook that could jeopardize the economic recovery and throw the supply/demand fundamentals off-kilter. The other fact that cannot be quantified as of yet, is how everyday life will change “post-pandemic.” How will buying patterns change? How will consumption patterns change? And what will this do to the Chlor-Alkali market. All questions we do not yet know the answers to. Now more than ever, trying to prognosticate pricing out into 2022 or even 2027, would be next to impossible.
As we head into the new year, we are pleased to announce that Tom Armstrong has taken over as Managing Director for the OWI Chemical Division. Tom has more than 25 years of Chlor-Alkali experience and the rest of the team is excited and eager to support him as he leads the chemical division forward! We will continue to use our collective 100+ years of industry experience to provide you with unparalleled focus on the Chlor-Alkali market and industry leading customer service. We very much appreciative of your business and look forward to the year to come.