Asia caustic soda prices are soaring on the back of tight supply and robust demand, a trend that is expected to continue in the near term as downstream demand in northeast Asia grows, market sources said on Wednesday.
Spot prices were last assessed at $440-455/dry metric tonne (dmt) (€299-309/dmt) on a free on board (FOB) northeast Asia basis on 22 April 2011, according to ICIS data. The figure is an increase of almost 50% from $290-310/dmt at the start of this year, and is more than double the $210-220/dmt seen at the end of April last year.
Global caustic soda demand in 2010 stood at 61.1m dmt and is set to rise this year, fuelled by growth in key consumption sectors for caustic soda such as alumina, detergents and textiles as well as pulp and paper production, market sources said.
A global average growth of 4% across all end-user segments is expected from 2010-2015, which will support prices, an industry source said.
Alumina production and the manufacture of detergents and textiles are the fastest growing segments, at 5.9% and 5.5%, respectively. Pulp and paper production, another important downstream sector for caustic soda, is forecast to grow by 2.2%, the source added.
“Demand in northeast Asia is expected to increase by 5.1% to 26m dmt this year,” a trader said.
Domestic demand in northeast Asia is robust and countries such as Korea, Japan and Taiwan are currently out of the spot market as they are consuming their own production, leaving China to be the sole provider for spot parcels, market sources said.
About 20% of production capacity in Japan was shut down as a result of the 11 March earthquake that hit the country’s northeast, according to industry sources.
Asahi Glass Chemical (AGC) restarted its 200,000 dmt/year Chiba plant, which was shut following the earthquake, at the end of March and is running the plant at 70% capacity.
Similarly, its 350,000 dmt/year Kashima plant resumed production in the middle of April, but operating rates are still low at 20-30%, a company source said.
Ramping up operating rates to optimal levels could be a challenge because of unstable supply of electricity in the eastern part of Japan, industry sources said. Electricity is crucial for the manufacture of caustic soda as it is produced via electrolysis of the sodium chloride solution.
In the meantime, the restart date of Kashima Chlorine and Alkali’s 400,000 dmt/year caustic soda plant, which is a subsidiary of AGC, has yet to be determined as it was extensively damaged during the recent earthquake.
Hence, Japanese caustic soda producers can only cater to the domestic market and have no spot volumes, market sources said.
In South Korea, producers are making the domestic market their priority, besides their contractual commitments to Australia and the US, a source said.
“Local producers are focusing on better netbacks from the domestic market and there is healthy demand in the petrochemicals and chemical processing industries,” a regional producer said.
Meanwhile in Taiwan, the domestic chemical processing and electronics segments are experiencing robust demand, the producer added.
Northeast Asia is a major exporter of caustic soda and has an estimated capacity of 38.5m dmt, almost half of global capacity, industry sources said.
China is the largest caustic soda producer globally, with a capacity of 30m dmt out of 80m dmt of global capacity, a market source said.
“Some traders might be taking positions in view of the current scenario” of strong demand and tight supply, a major buyer said.
Caustic soda prices have more than tripled since its lowest point at $135/dmt FOB northeast (NE) Asia in July 2009, but prices are still below pre-recession levels, which hit $600/dmt FOB NE Asia at its peak, according to ICIS data. (Please see graph below)
Producers are likely to keep offers firm as rising crude oil, salt and energy prices increase production costs, market sources said.
“Tight lending conditions [by China] to curb the housing price bubble may impact the polyvinyl chloride (PVC) industry, leading to further tightness of caustic soda supply in the regions,” an industry source said.
In addition, energy saving and emission control policies in China may result in producers scaling back their operations, which will exacerbate the tight supply situation, market sources said. Plants in China are running at 70-80% at the moment.
Furthermore, the weakening of the US dollar against Asian currencies, in particular, the gradual strengthening of the yuan, “will push up export prices in dollar terms”, an industry source said. Asian buyers will likely face higher import prices as a result.
However, market participants were divided over the outlook for caustic soda prices. Some were confident that limited supply, coupled with healthy demand, will result in a bullish outlook for caustic soda in the near future.
In contrast, others were questioning the sustainability of caustic soda prices at the current level in light of the new capacity additions in China this year, some of which are slated to come on stream in the middle of this year.
China is expected to have an additional 3.8m dmt of capacity this year, which will make up a large portion of the 5.2m dmt of additional global capacity coming on stream this year, the source added.
China’s SP Chemicals is scheduled to complete the expansion of its 450,000 dmt/year caustic soda plant at Jiangsu province in China to 750,000 dmt/year by July 2011, a company source said.
“We may see an oversupply this year, which will exert downward pressure on prices,” a market source said.