Next Global Chemical Shortage, Caustic Soda

Source: ResourceWise

The dotted yellow line in the graph above shows plants running at the 90% capacity we can expect, with the red line representing historical consumption and forecast to 2030. The graph demonstrates that if capacity remains at current levels with no new plants coming online, forecasted consumption will exceed capacity between 2024 and 2025.

Chlor-Alkali Market: A Snapshot

US caustic soda demand dropped by around 5% in 2020. The pandemic significantly affected most of the product’s downstream sectors except for the detergents, water treatment, and bleach sectors. The packaging sector was boosted during the pandemic as consumers sought goods via online websites, and those purchases required packaging solutions.

When the US economy began bouncing back in 2021, its 2.5% recovery rate was lower than expected due to unforeseen circumstances, including February’s Deep Freeze, which impacted demand—and predictions—for caustic soda. The sector’s recovery was slow and lingers. Caustic soda supply remains short today, in part because of 2021’s production cuts. Our blog post, Deep Freeze: The Aftermath, includes a detailed analysis of the impact on production and trade flow.

Typically, a high proportion of West European imports come from the US, but that decreased recently due to US production cuts, transportation costs, and long lead times. 

Driving Caustic Soda Demand

As the chart above shows, the chemical sector is a major consumer of caustic soda globally. Traditionally, alumina accounts for 21% of caustic soda consumption. However, it is one of the sectors that has struggled to recover from the pandemic and supply chain issues, including the global semiconductor chip shortage. Just as the chip shortage has started to ease, a deteriorating economy is emerging. This will likely limit the automotive industry’s potential to bounce back in the foreseeable future. 

North American and West European alumina sectors are relatively small compared to the commodity's global consumption rates. Despite this, the aluminum sector is still important, especially for US export demand. For example, the US exports quite a lot of caustic soda to Australia, which is used in the aluminum sector. 

Pulp and Paper

The pandemic triggered a paper boom as demand for tissue products soared, along with feedstock materials for facemasks and corrugated board for e-commerce packaging, due to the explosion of online purchases by locked-down consumers. This is explored in the blog post "COVID supercharged e-commerce and packaging: What’s next?"

Source: ResourceWise

Pulp & Paper in Wartimes

It is estimated that Russia consumed more than 120,000 metric tons of caustic soda for pulp and paper industry purposes in 2021. This usage was between companies including the Ilim Group, Sylvamo, Mondi Group, Karjala Pulp, Kama, Syassky, and Solikamskbumprom. 

Since Putin invaded Ukraine in February, Sylvamo has announced plans to exit the Russian market, and Mondi has highlighted operational constraints around imports of materials vital to its mills.

As a joint venture with the US-headquartered International Paper, Ilim's future remains somewhat uncertain, given the former's commitment to exploring options for the 50/50 venture. Further shifts and adaptations are sure to follow in the coming months, especially given the EU's ban on imports of wood and some paper products from Russia.

Calculating ECU 

Because high electricity costs are having such a great impact on the cost of production of caustic soda, Tecnon OrbiChem consultant Hira Saeed calculated the costs based on three energy megawatt-hour (MWh) scenarios between €55 and €275 per MWh. In the video and presentation, Saeed demonstrates how electricity costs have become the majority of the cost of caustic soda production in Europe.

Source: ResourceWise

The green line in the graph above represents the cost of export prices out of Europe, which have been soaring since 2021. They are higher than 2018 levels when the phasing out of Mercury-based chlor-alkali production reduced European capacity

Looking forward, operating rates in Europe are likely to remain reduced due to weakening demand for some chlorine derivatives. The US is likely to see this too, but perhaps to a lesser degree due to capacity curtailment and ongoing production issues. However, with hurricane season imminent, operating rates may be affected.

These circumstances will probably keep caustic soda balanced over the next couple of months. Q3 or Q4 may see some softening in demand or lengthening of caustic soda supply.

Caustic Conclusion

Caustic soda lost around three years' growth due to the pandemic and capacity currently online is going to be sufficient until around 2025. Without added capacity though, we could see shortages along with the price hikes that necessarily follow. But which companies will be willing to invest in new plants or expansions at such a volatile time?  

This blog post is inspired by Tecnon OrbiChem consultant Saeed's presentation in the video below. 

During the 2020s, chlorine's value has decreased so significantly that Chinese producers have been forced to pay their customers to take the product away. What market fundamentals underpin this? Find out in our blog post Free Chemicals? A Bizarre Business Practice for Unpredictable Times.