Chemical Conversations: Chlor-Alkali Outlook

Author Argus

Dhanish Kalayarasu, talks to chlor-alkali experts George Eisenhauer, Stephanie Koenig, and Bernard Law, about the Argus Chlor-Alkali Outlook:

  • Market direction and underlying trends over the next 12 months across the Americas, Europe and Asia
  • Major supply and demand changes on the horizon
  • The impact of high inflation rates on demand for caustic soda and chlorine
  • Insights to help subscribers make better business decisions

This podcast is delivered by Argus’ chlor-alkali experts using data and insight from the Argus Chlor-Alkali Outlook.
Get more information and request a free trial

Transcript

Dhanish: Hi. I'm Dhanish Kalayarasu, Chemicals Market Analyst. And thank you for joining us for this Chemicals Conversation podcast. Joining me today are George Eisenhauer, North America editor, Stephanie Koenig, Head of European Chlor-Alkali, and Bernard Law, Editor in Asia.

So, the first question would be, what do the next 12 months look like for price and trading trends? What are the key factors supporting these trends and how are producers responding to these factors?

George: Here in the Americas, we're looking at changes in the global energy prices. So globally, we're seeing higher energy prices in Europe as well as in the Americas. And this is impacting the cash cost of producing Chlor-Alkali as well as the vinyls. One of the things that we're really looking at is the global slowing demand for GDP. And that's beginning to hit the US. And we're expecting in the US market to begin to see a recession, potentially in 2023. And the implication on that is the slowing housing market beginning to reduce PVC demand, which slows down caustic soda production. So right now, we're looking at the play between chlorine and caustic soda and the demand between the two markets. And at this point in time, we're beginning to see chlorine demand slow in the Americas, and potentially seeing caustic soda demand slow over the next 12 months. But at this point in time, caustic soda supply is getting a little bit tight, and pricing is subsequently responding.

Dhanish: Stephanie, what's your take on Europe?

Stephanie: All eyes are on Europe, which is very unusual. And Europe is seeing an unusually strong link between caustic soda prices and electricity prices. Both have been extremely high. They've reached historical highs continuously over the past year and remain high today. But still, my view is the prices have still not peaked. And that's for two reasons. Number one is absolutely awful chlorine offtake in Europe right now, which might already signal the beginning of a recession. So, the offtake we see cannot be explained purely by seasonal factors. Most producers are already heavily cutting rates since chlorine cannot be moved or stored in great amounts. So, if it's not consumed, it will not be made and it means that caustic soda supplies tighten then quite quickly, because caustic offtake is still holding up better. And the second factor is obviously the energy crisis. So, power prices sometimes, retreat from their latest high. But if the power price or the power supply issues are not resolved, the issue is ongoing. So, Europe remains vulnerable and exposed to potential further significant changes in either direction. And that means that a lot of producers already engage in load shedding. So, they're not running as hard doing power price peak times. And that's obviously reducing caustic soda availability further and the market is now tightening quite quickly. That's very clear.

One could say that the longer the elevated power prices persist, the longer the high caustic soda prices persist, the more caustic soda demand will be eroded. So, that's sort of...it could sort of offset the load shedding we have. It's quite unlikely that caustic soda offtake will drop or collapse in a way that would make the shortage go away. While we're starting to move through the session. When prices peak it's probably going to be during the winter at some point. We have a few difficult months ahead. But there will be a point in time probably within the next year where prices will come down. This could be once chlorine offtake recovers. Once supply normalizes. And perhaps once the energy crisis is resolved, or at least the heating period ends again next year.

Dhanish: Bernard, how is Asia doing?

Bernard: We are looking at Asia. As the Chlor-Alkali industry becomes more and more global and whatever happen in one continent will impact the other continents. So, looking at the current situation, what will happen in Europe and in US will definitely have some link to Asia. Right now, the rising energy costs will have some impact on Asia itself. But I think that the impact will not be as severe as in Europe and in North America. Most of the major producers are coal based. So, we don't expect the impact on coal is as bad as natural gas. So, now there's a lot of talk about the upcoming recessions in 2023. We feel that this time, the impact on Asia is less severe as compared to America and Europe. There with the rising energy costs, the caustic soda prices are expected to move up sharply as well. And we are seeing the repeat of the price surge that happened back in April this year. So, because of the strong price surge, the traders will start taking positions to secure supply, and one by one and help to lift the Northeast Asian export prices very sharply higher this time as compared to the last two months.

So, as long as the export window continues to open up, the traders will continue to secure more cargo, more on their supply position and take advantage of the arbitrage window that’s being created and to bring the cargo to meet the demand in Europe. So, for next four to six months, I expect the Northeast Asian prices to be firm, and even go higher. And again, the rising export prices will help to lift domestic prices in the region.

Dhanish: What are the major supply and demand changes on the horizon with high energy prices in Europe? Will this have a significant impact on other regions?

Stephanie: Yeah. Europe normally does not have a big impact on the international market, but that has changed completely. It has really become the focal point for the time being for the global Chlor-Alkali sector because of the escalating market crisis. And as Bernard already spoke about this shift in trade patterns. One layer is to look at the European domestic trade with all the production losses and weak chlorine offtake we've got. It means that Northwest European export activity has almost come to a stop for the time being. So, that's taking away product from the international markets. As producers are cutting rates and are uncertain of future supplies because of the uncertainty of power prices, so they don't know when it makes sense to run properly. And let's not forget that the Ukraine war is still going on. So, the Med is still missing those volumes from Ukraine. So, what has happened is that this has become like a global phenomenon. And we, for a second time now this year, the arbitrage has opened from Asia to Europe. So, we've seen shipments from China, South Korea, India and other sources coming to Europe, which is only possible because of the high European prices. So, even if we consider the exorbitant freight rates, it still makes sense. And we have very strong indications that this is about to repeat. That there is product about to be placed again in Europe from various Asian origins. And my view at the moment is that because of the tightening market, this product is going to fill supply gaps. It's probably not going to be enough to completely ease the tightness. And it certainly won't be triggering reversal of the price trend in Europe at this stage.

Dhanish: George, how are high inflation rates affecting the demand for caustic soda and chlorine currently?

George: The high inflation is taking impact on derivative demand for caustic and chlorine. So, people are looking at buying more products that they have to consume. So, the durable goods are beginning to see a little bit of weakness. So, you're beginning to see slowdowns in PVC demand, you're beginning to see slowdowns in epichlorohydrin demand, various different products up and down the chain. The interesting thing about the slowdown right now is that we're actually seeing pulp and paper demand holding up. So, the first couple of products that we talked about, PVC, epichlorohydrin, for example, those are chlorine derivatives, while the pulp and paper consumes more caustic. So, we are seeing a widening spread between chlorine demand and caustic demand. And again, playing back into the global GDP slowdown, global slowdown of growth and the dynamic between the chlorine cycle and the caustic soda cycle. And this is going to play out over the next several months, and as we see chlorine demand slowing, caustic soda demand will eventually slow. Not necessarily today but maybe in another couple of months, and this is going to start to slow down operating rates not only in the Americas but also globally. And this will start to impact caustic soda. It's already impacting caustic soda pricing. And the expectation is pricing is going to continue to move higher not only on energy costs going up, freight rates going up, but also slowing chlorine demand, limiting caustic soda supply. Ultimately, this will change when the GDP slowdown takes effect or matures, more precisely. And that's going to start to slow down caustic soda demand, not today, but again, in the next period of time, you know, six months, three months kind of timeframe. So, we do anticipate operating rates to slow down.

Dhanish: What other key insights can readers take away from the Outlook to help make better commercial decisions?

Bernard: Looking at the Northeast Asian or the Asian supply, because Northeast Asia is one of the largest exporting region for caustic. Looking at supply chain first, as the producers, I think in order to maximize their margin it's better to divert more volume into exports as compared to the domestic market. Based on the current situation, the overall demand for caustic in the domestic market is relatively weak at this moment. So, in order to optimize the kind of margin we're looking at, and to take advantage of the arbitrage, and the export window to Europe, and producers can actually divert more volume to take advantage of the rising prices. Now, of course, this export window has opened up, the traders are the one that benefited most. They are ones moving the cargo from Northeast Asia for India or for Middle East to the region they are short, predominantly Europe and some of it to the US. So, looking at it as a buyer in the region, and as prices is surging so fast and due to the volatility itself, the buyer actually can just secure their supply based on their needs and to avoid any form of speculation or any form of stock raising the inventory. So, at this moment, because of the rising prices that we expect this price is gonna go higher and higher. So, as a buyer, it is better for them to only secure or to buy what they need in this moment.

Dhanish: That’s all we have time for today's Chemicals Conversation podcast. Thank you all for listening. For more information, please visit us at www.argusmedia.com/chemicals.

This podcast is delivered by Argus’ chlor-alkali experts using data and insight from the Argus Chlor-Alkali Outlook.
Get more information and request a free trial

Related blog posts

07 September 2022

Chemical Conversations: Olefins Outlook

Cassidy Staggers, talks to leading olefins experts Sarah Rae, Ron Baughman, plus senior reporter T.S. Lee about the Argus Olefins Outlook:

Filter:

Chemicals English Global

05 September 2022

From the Economist's Chair: Are we nearing a dollar inflection point?

As the US dollar index breaches 20-year highs, many foresee an imminent cyclical devaluation, although rumours of the demise of the dollar as the de-facto global currency look premature.

Filter:

English Global Crude oil

21 July 2022

Global Steam Cracker Economics: 2022 Trends in Focus

This year demonstrates a variety of factors impacting global steam cracker economics with greater clarity. In the aftermath of the onset of the pandemic, incredible shifts have occurred, from economic activity restrictions and supply chain exacerbations to far-reaching ...

Filter:

Chemicals Crude oil Natural gas/LNG North America Europe Asia-Pacific English