Caustic Soda - Global Outlook for Q4 and 2022
A combination of plant turnarounds and reduced output due to soaring energy costs has tightened the global caustic soda market over the past few weeks. In this piece, we look at the different regional dynamics currently at play and how this will impact deep-sea trade activity into 2022.
Annual global seaborne trade on caustic soda is historically around the 14 million tonne level, with the key importers being Australia and Brazil. The US, West Europe and Northeast Asian countries like Japan and South Korea are the key structural exporters – as such, it can be a healthy market for owners to engage with on a tonne-mile basis. However, a squeeze on global supply that stems from several factors now threatens to upend the usual trade patterns in the near-term.
China has historically been a net exporter of caustic soda into Australia and the rest of Asia, but the drop in local demand seen with the pandemic in early 2020 saw them move volumes further afield into the Middle East and even Europe. However, the problem facing the market into the tail end of 2021 is a growing tightness of material owing to domestic production cuts to help meet emissions targets set out by the government’s dual control policy as well as a shortage of national energy reserves.
Many now expect this to continue through Q4 and into next year. While one chlor-alkali producer in China with an annual caustic soda capacity of 750,000 tonnes has been allowed to boost output following the Golden Week holidays, these are still capped at around 60% on average, and local pricing has responded with a $200/tonne spike over the past month.
As we covered in the last report, the spectre of China’s new approach to growth – especially in the housing market – may see a sharp change in domestic construction activity by 2022 as credit lines tighten up. Combined with the dual control policy, this is something that anyone involved in the petrochemicals and manufacturing industries will need to remain aware of.
Global demand into the alumina sector remains healthy as activity in the construction and automotive sectors continues to recover.
This has seen exporters in Northeast Asia adopt a bullish stance and look further afield, as other buyers Australia and even the US West Coast are scrambling to source more caustic soda volumes. This will potentially create more long-haul opportunities for owners through the fourth quarter.
The current strength on global pricing initially emerged from the impact of Hurricane Ida in the US Gulf, although production has been curtailed through most of the year since the polar storms in February. H1 2021 production of liquid caustic soda saw a decline of nearly 400,000 tonnes compared to the previous year, with around 75% of US production brought offline by the unplanned electrical shutdowns and freeze damage.
Higher production costs are also playing a role, with natural gas pricing in the US jumping to their highest levels since 2008. Spot volumes remain close to non-existent in the market, with domestic contracts settling at steep increases – in some cases almost four times higher than where prices began the year. A slower automotive sector due to the shortage in microchips out of Asia and a seasonal slowdown through Q4 could dull some of the near-term bullishness, but many expect the US to struggle with volumes into 2022.
This is squeezing supply in Latin America, with the region structurally dependent on US imports. As a result, buyers are having to secure volumes from regional sellers like Peru and Argentina.
Prices in Europe are also on a firm upward trend for Q4, with higher electricity costs and the lack of global imports adding to some of the domestic supply issues this year that have already curbed export volumes out of the region. Some sellers in West Europe have now proposed increases of €200/tonne for Q4, with the more recent electricity price spike adding to the wider picture of global tightness. Rising energy costs impact all electrochemical unit products, including chlorine derivatives and caustic soda.
However, higher electricity and gas costs combined with rising inflation may weigh on the European economy by 2022, which will have a domino effect on regional consumption and limit the upside on pricing next year.
In the near-term, a lack of global caustic soda volumes means that buyers across all markets will be scrambling to secure material from wherever they can. This will disrupt the usual cargo flows in Q4, and owners may be able to capitalise on more long-haul business with the structural exporters like the US unlikely to have the capability to supply enough material to meet demand.
For now, it looks as though the early part of 2022 will be a battle between production constraints and the potential for demand erosion as a result. There is some more caustic soda capacity coming online in the US next year, which should help alleviate the squeeze on global supply, but the continued recovery of underlying demand will maintain pressure on volume availability in the global market.