Caustic Soda Update
Updated December 12, 2018
Supply: Over the past few years, several factors have led to a global tightening of supply for Caustic Soda. In China, lackluster margins for co-product chlorine and new environmental regulations resulted in steady decline of availability, particularly for US imports. In Europe, the chlor-alkali sector committed in 2001 to phase out mercury-cell technology by 2020. This became legally binding when Mercury-cell production was declared outside of Best Available Techniques (BAT) in 2013, resulting in a mandate to close these facilities or convert to Membrane technology by December 2017.
For the latter part of 2018, supply has been stable to strong, with only a few scheduled plant turnarounds and short-term disruptions, such as terminal flooding in Wilmington, NC during Hurricane Florence in September. Operating rates, however, have dropped from the 90’s to the mid-80’s as seasonal demand for Chlorine decreases.
Although no new ground-up plants are currently planned for construction, there has been recent uptick in Asian production, as well as a plant expansion in the USA, see Shintech Announces New Integrated PVC Plant Investment of $1.49 Billion to Bolster PVC Business. Availability has also increased in the Asian and Middle Eastern markets.
Demand: On the demand side, there have been several changes recently. With the aforementioned issues in China and Europe, the USA has become a more viable and competitive global source for large consumers such as Alumina producers in South America and Australia. This has led to a steady increase in U.S. exports, to the point that the U.S. has become reliant on the export market. According to a recent ICIS report, the U.S. exports approximately 28% of current output. Latin America accounts for over half of U.S. Caustic Soda exports.
This new export market was drastically interrupted in October, when Hydro’s alumina refinery AluNorte in Brazil announced a full curtailment of operations to meet the demands of environmental authorities. This lead to an almost immediate backup in the U.S., as Alunorte accounted for a large percentage of exports. Alunorte was able to restart operations at 50% capacity, but in the meantime many Caustic Soda shipments were forced to be diverted elsewhere. AluNorte is expected to be back at 100% capacity sometime in early 2019, which is expected to balance out the current reserves.
Shift from Diaphragm Grade to Membrane Grade: An interesting twist to the market has been the steady shift in demand away from Diaphragm Grade and towards Membrane Grade product. This preference is due to the fact that Membrane contains less of the starting material, sodium chloride. The lower sodium chloride level reduces the rate of corrosion to costly equipment, particularly in paper mills, which accounts for one of the largest end-use markets. This shift has resulted in an increased availability of Diaphragm Grade, and a persistent tightness in availability of Caustic Soda Membrane Grade.
Pricing: While pricing steadily increased up until the middle of 2018, the market appears to have leveled off and starting softening in the fourth quarter of 2018. In addition, there is a growing disparity in the pricing of Membrane Grade vs. Diaphragm Grade, due to the shift in demand towards Membrane.
In spite of the recent softening, all of the major U.S. producers recently announced a $40/DST increase for all grades, citing lower operating rates and the anticipation of increased demand as AluNorte and other major consumers come back online. This increase is intended to go into effect in January 2019.