Asia ample caustic soda supply may lessen as producers’ margins narrow

Asia's spot caustic soda ample supply since June on  higher production run rates may get curtailed in the near term on narrowing of producers’ electro-chemical unit (ECU) margins.

Caustic soda supply initially went long in June after production cuts in China’s domestic downstream sectors amid a slowing Chinese economy caused producers in the country to turn to the spot market.

Regional supply continued to remain ample in July as integrated chlor-alkali producers in Asia increased their run rates on healthy netbacks for co-product chlorine’s main derivative polyvinyl chloride (PVC), according to market sources.

In the week ended 2 August, spot prices for FOB (free on board) NE (northeast) Asia fell by $5/dry metric tonne (dmt) to $295/dmt FOB NE Asia this week, or $5/dmt above the lowest level since January this year.

Caustic soda and chlorine are co-products of the electrolysis of brine, producing about 1.1 tonnes of caustic soda for every tonne of chlorine produced. When combined, this ratio is known as an electrochemical unit, or ECU.

Integrated chlor-alkali producers mainly balance their run rates in order to maintain overall optimal ECU margins.

Both products see different end-uses. Caustic soda is used in the manufacture of pulp and paper products, alumina, soap, water treatment and textiles.

Chlorine and ethylene are feedstocks for PVC, which sees usage in applications including pipes and profiles, in the automobile industry and for medical devices.

Average spot ethylene prices in northeast Asia fell to around decade-lows in June, caused by sluggish downstream markets in the key China market.

The competitive ethylene prices during this time could have stimulated Asian producers’ chlor-alkali run rates higher to feed more chlorine production into PVC.

The subsequently increased supply of co-product caustic soda offset regional demand, leading to a downward trend since June.

But the ethylene market seems to have bottomed out since then, and chlor-alkali producers may readjust run rates as margins on the chlorine side continue to tighten.