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Surging caustic prices cause PVC supply to rise, contributing to PVC slump

by Shibu Itty Kuttickal -
by Esra Ersöz -
  • 26/10/2022 (18:41)
Despite the starkly bearish PVC markets, prices of caustic soda, a by-product in the PVC production process, have climbed sharply given high demand for this product. This has pushed chlor-alkali and PVC producers to ramp up production again, adding to the slump in place for months.

“The price of caustic soda has surged by more than four times over the previous year. This has presented a profitable opportunity for chlor-alkali and PVC producers that are already hit by the suppressed demand for PVC,” said an Indian trader based in Mumbai.

PVC prices in China, Southeast Asia and India have slid sharply by about 60% since the historical peaks reached in early to mid-October last year, shows ChemOrbis Price Index. Europe, meanwhile, saw the downturn kick off only back in April, with prices sliding by a whisker of 15% since then in Northwest Europe and Italy spot markets.

Given the production costs - ethylene addition and polymerization process in PVC, caustic soda prices should theoretically stand below PVC under balanced market conditions. However, they have soared notably in recent months, standing almost at par in China and more than €250/ton above the latest spot PVC prices in Europe.

As caustic soda output rises, PVC output follows suit

A major by-product in this process is sodium hydroxide, or caustic soda, which is formed in an electrolytic process that separates chlorine from brine, or salt water. Caustic soda production is often located together with the VCM and PVC plants that use the gaseous chlorine in a consistent production process. Such a process means any increase in caustic soda output would automatically lead to higher production of chlorine, and, in turn, a higher VCM and PVC production.

According to market sources, 30-40% of the chlorine produced in the vinyl plants goes to produce PVC.

A pivotal question: What drives caustic soda demand?

Caustic soda is primarily used for alumina applications. This sector has been first hit by the pandemic, supply chain issues and the global semiconductor chip shortage, and now by the looming recession. However, the loss has been compensated by the pulp and paper industry, a component in packaging manufacturing as well as soap and detergent applications in the midst of pandemic and post-pandemic changes.

Moreover, caustic soda is essential for the food industry, as it is widely used in the meat and drink sectors, which have already been cringed by supply chain disruptions, soaring costs and inflationary pressures.

Caustic soda faces global shortage

As chlor-alkali and PVC producers have been cutting run rates around the world to keep supply under control, caustic soda production has been inevitably lowered as well. Plus, Westlake, a major caustic producer in the US, has declared force majeure in the past few months, while European producers have lowered their production due to soaring utility costs.

Accordingly, as demand for caustic has fared much better than PVC, supplies for this product have tightened globally.

Caustic prices in Asia up almost 40% since July

According to market players, import caustic soda prices in China have recently been around $700/ton CIF and export prices out of Tianjin at $730/ton FOB, standing very close to PVC prices albeit no deals heard. This suggests an increase of more than $200/ton only from three months ago.

Indian, Japanese and Chinese PVC players said, “PVC supplies have stayed ample globally as a result of tight caustic soda supplies and the resultant high demand. Producers have thus kept PVC production rates high,” said a source at a Japanese producer. “When you have higher chlorine output consequent to the high caustic soda demand, it is natural that PVC production will also increase. The excess chlorine has to be used somehow and somewhere,” he added.

“Recent profits in the PVC industry have been derived from booming caustic soda sales. The price of caustic soda has been surging especially since mid-September. This has affected profit margins of PVC, as its production has increased because of the higher chlorine output,” said a source at a Chinese producer. “The caustic soda demand has helped to offset the losses that producers would’ve made on the steep fall in PVC prices,” he added.

Excess European PVC supply, produced in favor of more profitable caustic soda, finds home in Turkey

In Europe, some participants reported that quarterly caustic soda prices reached €1500-1600/ton level on FD basis, implying an increase of more than 35% from the previous quarter. Meanwhile, spot caustic prices hit as high as €2000/ton amid the ongoing tightness, which stands at least €250/ton above the current spot PVC K67 prices in Europe on average.

Regional suppliers were encouraged to produce PVC as the production process also yields caustic soda despite weak consumption of PVC applications. Higher caustic prices feed into producer margins, regional players reported.

A major player in the nearby Turkey PVC market remarked, “We have seen some European PVC offers from Europe after a long hiatus, even though they are still elusive. High caustic soda prices have probably convinced regional suppliers to keep producing. We hope to receive offers from the region so long as caustic prices remain high."

European PVC markets have seen only a limited decrease so far, with prices standing well above the rest of the world as well as the pre-pandemic levels.

Will Q4 see a relief in the caustic market?

However, some Chinese sources expect caustic soda prices to retreat later in the fourth quarter. Domestic prices have already seen some downward corrections, after having peaked by mid-month.

“We expect caustic soda prices to weaken in Q4 as there will be less turnarounds and operating rates will be higher. This will mean lower caustic soda prices, that will certainly help us raise PVC levels,” a Chinese producer said.
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