Looking back…
For instance, during the 2008 financial crisis when, in 2009, many of us bought Caustic almost free from USG.
Or the massive run-up of prices in Q4 2017 on fears of shortage due to mercury change over in Europe.
Or in Q3 2022; who would have imagined the stratospheric heights caustic prices would reach in Q4 2022 in EU? In my 30 years in this industry, I have not witnessed this price and volatility and I can vouch that no other market participants have either.
In December last year, many industry buyers were doing their mandatory budgeting exercise for 2023 and asked my opinion for a forecast of caustic prices. I gave no numbers, but only price drivers that were visible at the time. Most of their budgetary estimates for caustic pricing have turned on their head, albeit in their favour.
Seeing the latest pricing today, many of them reached out to me reminiscing that conversation not too long ago.
Today, the question asked is “where is the bottom?”
And my answer is still the same – God knows!!
Let us stand at these crossroads and review what is driving the caustic-chlorine markets today.
Standard Cycle: Chlor Alkali
The Classic Model does not change. In my observations over the last few decades, a clear cycle emerges. In any economic change, the 1st molecule to be impacted is chlorine. Chlorine demand drops, leading to lower operating rates and caustic shortfall, leading to its price rise. A few quarters later, it reverses, and chlorine demand picks up and caustic demand and price drop. This is evident for all who follow caustic-chlorine pricing in the last 12 months.
This cycle has certainly stood the test of time.
Dropping Energy Costs – Gas, Coal
The Classic Model does not change. In my observations over the last few decades, a clear cycle emerges. In any economic change, the 1st molecule to be impacted is chlorine. Chlorine demand drops, leading to lower operating rates and caustic shortfall, leading to its price rise. A few quarters later, it reverses, and chlorine demand picks up and caustic demand and price drop. This is evident for all who follow caustic-chlorine pricing in the last 12 months.
This cycle has certainly stood the test of time.
Higher Chlorine Demand
Chlorine demand and netbacks have been improving continuously in the last few months as per the Classic Model.
Ethylene, another major driver for this product pair, has been benign and helped chlorine retain all the gain in the downstream price rise.
Operating rates have remained high through this time leading to a continuous drop in caustic prices..
Alumina
Another driver for caustic prices is Alumina / Aluminium. It’s another high-energy intensity commodity. Alumina has remained under pressure due to higher energy and caustic prices which has led to many curtailments in the Alumina sector, especially in Europe. Caustic consumption in Alumina has taken some good hits.
In addition to curtailments in Alumina sector, the price was under pressure due to the Russia – Ukraine war as Australian alumina export to Russia is banned. However, this quarter from January 2023, the price has increased by about 20 % gradually to USD 370/MT FOB from USD 310/MT FOB. This is also due to the temporary production curtailment in Australia on account of low gas supply to alumina refineries. In falling energy and caustic prices and increasing Alumina price this industry is in a sweet spot today.
Dropping Freight rates
There has been a dramatic drop in container and dry bulk freights in preceding quarters. Tanker freights are also off highs and dropping but they are still nowhere near pre-war levels. This helps arbitrage to level aberrations in different geographical markets.
Price action by EU producers in the beginning of Q3, peaking in Q4 2022 led to huge movement of caustic from Asia (I conservatively estimate 4 – 500,000 DMT rushing to the EU).
This huge flow is still arriving and floating in N W Europe waters, incurring huge demurrage totalling upwards of €100,000 per day collectively. Furthermore, new product has also been coming in at lower and lower prices every fortnight to compete with this high-priced floating cargo..
The uncertainty in China
China accounts for more than 50 % of global caustic capacity.
COVID lockdowns, real estate and housing woes, economic challenges and the enigma that is China, make things unpredictable at a macro as well as micro level. China will always be able to unpredictably swing and influence prices and supply, moving markets in both directions.
China and N E Asia have been selling caustic all through 2022 and 2023 to keep the short markets of the West fully supplied. Today’s price drops are also driven by supplies from these origins.
The Emergence of India as a global caustic supplier
India emerged as a strong source for caustic for the world. After China, India is the only other country adding significant caustic capacity YoY.
Despite no significant chlorine sink into vinyls, it continues to manage chlorine well enough to keep operating rates healthy.
Caustic and chlorine growth in India is robust. However, caustic capacity growth is faster than the rate of consumption growth.
Another significant driving factor is the Indian government’s “Make in India” initiative. Domestic PVC production is one of the pillars of this initiative. At least 3 massive projects are already in various stages of implementation, which total around 3 million MT PA.