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How Plunging PVC Demand is Behind the Recovery in the Caustic Soda Market

May 20, 2020 | Angel Fernandez

As the world battles to control the Covid-19 outbreak, demand in many chemical sectors is tumbling. With automotive and construction industries amongst the most affected downstream segments, demand in PVC and other chlorine derivatives has been badly hit. Chlor-alkali producers had to reduce operating rates to adjust to much lower chlorine demand and therefore caustic soda output has also been substantially reduced. With demand in many caustic soda applications holding much better than those in the other side of the ECU, availability of caustic soda has tightened and prices have rebounded.

However there are some regional differences, in Europe, there has been indeed a steep decline of PVC demand and other chlorine derivatives (such as isocyanates) as one country after another entered in lockdown in the second half of March and introduced restrictions. In April, PVC demand is said to have plunged as much as 50% in some countries, although in others, particularly in the central and eastern part of the region, demand has not decreased as much. Nevertheless , in April, operating rates at PVC plants in the region are estimated to have ranged between 60-70%. Therefore chlor-alkali producers in Northwest Europe had to react quickly reducing operating rates to match plummeting chlorine demand, but in turn this has tightened caustic soda supply. Again, this effect is not seen as much in the Eastern European market where production has not decreased as much in April and the impact of the COVID-19 virus has been less severe.

One of the main drivers supporting caustic soda demand has been the pulp sector. European pulp demand is growing, mainly in the use in tissue and packaging paper. Inventories are balanced and prices are beginning to increase. However, several paper mills in Europe, and North America, are taking downtime during the coming months, in some cases this will last several months, as the sector has not been immune either to the Covid-19 outbreak. Some paper products are seeing a steep downturn in demand, such as newsprint and fine paper, partly due to closed offices during the lockdown while other sectors benefit from soaring demand, but overall demand has increased.

Other end-use sectors that have seen a significant increase are soap, detergents and water treatment. However, overall demand has also been affected by a few industries where demand has been softer.

There is also some concern that the increased demand from end-use sectors such as pulp and food is artificially inflated as it is largely due to panic buying in the early stages of the lockdown and will eventually even out in the coming months. In Eastern Europe, there has also been an increase of caustic soda demand from the alumina sector which again is mostly likely due to panic buying, as alumina prices are at low levels, and demand in the automotive industry has crashed with the additional strain of factories shutting from mid-March due to COVID-19, although a number of car manufacturing sites are expected to restart over the coming weeks.

In the US, the situation is somewhat similar to that in Europe. The caustic soda market changed very quickly, shifting from plenty of supply and high stocks to a much tighter market, which has pushed caustic soda prices upwards. Construction activity has been severely affected amid concerns of the impact that COVID-19 is already having the economy and this is obviously having a significant effect on PVC demand, which according to some market players could have decreased between 25-30% in April. In addition, US PVC export demand, which accounts for more than one third of total production in the country, has collapsed as demand in international markets plunged. Demand in other chlorine applications is not doing much better. The most affected is perhaps demand in hydrochloric acid, particularly the consumption in oil and gas which, as crude oil prices crashed, is now minimal. Demand in isocyanates has also seen sharp decreases, as automobile plants took downtime. Against this backdrop, chlor-alkali producers had no option but to reduce operating rates, which, in turn, has pushed up caustic soda prices, despite a small drop in demand mostly in smaller applications.

The pulp market in North America is performing strongly with demand rising in most sectors. Several pulp producers announced increases in Q1 sales as improved tissue demand helps to offset declines in printing paper which has been affected due to temporary offices closures during the lockdown.

However, the situation is slightly different in Asia, possibly because in some countries the pandemic outbreak is at a different stage. In China, as the COVID-19 outbreak is more controlled, producers have increased operating rates and these were around 80% or so in mid-April and while some producers reduced production in the second half of the month overall rates were ranging between 75-80% in late April, which is still an improvement compared to the previous month. However, demand in the main downstream sectors remains weak. Alumina producers in China cut purchasing prices of caustic soda further as alumina prices drifted lower. Downstream producers in printing, dyeing and viscose fibre industries complained they are receiving less orders than usual for exports, as demand in international markets have weakened due to the pandemic. Pulp producers have revised down purchasing prices of caustic soda as margins are thin.

While liquid caustic soda prices have remained soft in north China, they have firmed up slightly in east China as export demand increased in late April, and prices, increased in international markets.

Elsewhere in the region, Japanese and South Korean producers have reduced operating rates at their chlor-alkali plants in April due to maintenance shutdowns, but also due to weak demand for both caustic soda and vinyls. There is limited availability for spot cargoes.

In Southeast Asia, demand remains weak as several countries in the area, including the largest consumer India, remain in lockdown trying to control the COVID-19 spread. A substantial decrease in imports of PVC into India is expected as result of the restrictions introduced in the country to control the pandemic, and given that the country is the largest importer of PVC globally this is expected to have a major impact in the region and elsewhere. On the other hand, caustic soda demand from Australia, the largest importer in the world, has been better and buyers said their alumina plants have been running at normal rates, as the COVID-19 outbreak is becoming under control in the country and the lockdown is likely be lifted in May, which should support caustic soda demand in the country.

 

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