Today both molecules in the Chlor Alkali Chain are delivering phenomenal returns. What is the reason for this un precedented situation and where do we go from here!! Price drivers for Chlor Alkali Industry
Energy Cost
By far the single largest cost for a Chlor Alkali plant is energy. Energy costs have been galloping to say the least starting from early 2021.
Indonesian Coal 4200 GAR was going a begging at USD 22 per MT FOB 6 months ago. Mines were closing down. Today you can’t get this grade at USD 132 per MT FOB. 5400 GAR Indonesia Coal Index peaked at 180 $ per MT FOB this week up from 100 $ per MT FOB a month ago. And there is no dearth of buyers.
GC Newcastle Coal Quotes at USD 240 per MT FOB today.
Europe fares no better on Gas and Energy costs which have gone up by nearly 300 % in last few quarters. Power from windmills did not materialize due to low wind velocities. Gas consumption has gone up depleting stocks. Power distribution companies unhedged going bust. Utilities with unhedged gas facing huge cost push.
Coal power plants in China have to pay market price of coal, but cannot pass fluctuations in the coal price to consumers through electricity prices. Power plants curtail generation since they are losing money due to surge in Coal prices. This creates further shortfall in electricity generation. This leads to production loss in manufacturing units with high consumption industries being hard hit.
All this gives a huge cost push to Chlor Alkali Chain.
China Dual Control
What is China Dual Control that we hear almost at every forum today?
Simply put, there is a national target to reduce energy consumption per unit of GDP by 13.5% and carbon emissions per unit of GDP by 18% in the current China five-year plan, which runs from 2021-2025. Part of the larger environmental goal for 2030 and 2050.
Carbide PVC and Caustic both use Coal in huge quantities. As an input for carbide and for power generation. No prize for guessing the outcomes here.
Weather Disruptions
From October 2020 when hurricanes lashed Louisiana to Winter freeze in US Gulf Coasts to floods and hurricanes in 2021 season there have been big disruptions to US production.
Europe has had its fair share of floods in Germany.
The industry never got a chance to restock and recover from setbacks. Which mean supply chains and inventories are low to dry.
Robust demand from end user segments
Despite ups and downs from COVID related lockdowns and restarts almost all industry segments are seeing robust demand. Most of them never visualized the dramatic surge in energy and tight supply chains. They contract monthly on spot! Imagine what happens in such a situation. They just get squeezed.
As a matter of strategy even contracted buyers keep 10 or 20 % of their annual budgeted demand for Spot purchases. Now when they enter to buy this open volumes it creates further pressure.
Supply Chain
Big Delay at Chinese ports due to Covid protocols have pushed up freight and delayed delivery schedules sending buyers scrambling to cover from alternative origins to keep plants running. In an already tight and stretched market this pushes up prices further.