Since the COVID-19 virus hit Europe in January, infection cases have been rising and while initially there was no immediate impact on the market, there were concerns and speculations of knock-on effects from China. However, in the past month, the situation in Europe, particularly South Europe has been deteriorating leading to the EU closing borders and several countries going on lockdown. Though Italy went on lockdown on March 9, there have been no production issues or cuts reported due to the virus. At the time of writing, in Europe there are 14 countries on different degrees of lockdown including the United Kingdom, Italy, France, Denmark, Ireland, Spain, Portugal, Germany, Slovenia, Czech Republic, France, Belgium, Norway and Poland. This list is expected to lengthen as many countries continue to tighten restrictions. Should the outbreak worsen, it is likely that the main negative effect on caustic soda is the disruption in logistics.
In the short term, there has been a rise in demand for caustic soda in water treatment which has seen a huge rise in demand already. The effect on pulp & paper and soaps & hygiene products is showing a slower effect. Caustic soda in SAPs should also see an increase. Demand could be increased in these sectors for weeks or several months, depending on how long the outbreak lasts. With current planned maintenance outages, caustic soda is already tightening up in the US and West Europe and with the increased demand in some applications while the economic slowdown is leading to reduced demand for chlorine and derivatives, caustic soda output would be affected and supply could become tighter very quickly.
The reduced product availability for spot deals will help to rebalance the European market, following the increasing spot import product from the US throughout 2019.
While the US is also showing increases in demand in the pulp and paper industry and soaps amid the growing concerns, however, in the long term; this may not have a significant effect on the overall market depending on how long the virus outbreak lasts. There is some panic caused by the COVID-19 virus and uncertainty in the market as the country could head towards recession. Following the failure of OPEC and Russia to come to an agreement on oil production cuts, there has been further uncertainty about chlorine and caustic soda demand.
The pulp & paper industry has seen a sudden surge following a slow few months and softened prices though the sudden increase in demand for products such as tissues and nappies is temporary and the market is expected to return to normal after this uptick. The CEO of International Paper, the largest pulp & paper in the US said, ‘I do think it’s a little bit of dislocated demand that should settle out over time.’
In China, due to the improving COVID-19 situation, the caustic soda market is returning normal. Overall, operating rates of chlor-alkali producers have recovered to 75-80% in mid-March, with highway transportation returning to normal.
Demand has also been gradually recovering in the past month. However, some downstream producers in chemicals, printing and dyeing and viscose fibre industries are still running at reduced rates, and smaller ones particularly face the problems of funds shortage, and fewer orders and epidemic prevention materials.
The market has not been performing as well as expected and Alcoa has lowered its global demand forecast further reflecting the lack of optimism in the industry. Additionally South32 is avoiding refinery investments as the chief executive of the company reportedly commented that it is not the right time to commit large amounts of money to expanding alumina refineries following the return of Brazilian alumina giant, Alunorte and the subsequent falling prices of alumina. South32 reported a 25% drop in annual profits which was larger than expected due to this.
Global trade tensions have had a significant impact on buyer confidence which in turn has affected the aluminium and alumina market, and in turn the caustic soda market. In particular, the yearlong US-China trade war has caused some uncertainty and the Chinese alumina market has not been very profitable as of late. In August, Shanxi alumina producers which had entirely not restarted yet, reported that they were not anxious to restart their units due to poor margins as alumina prices were below the average production costs.