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Caustic soda capacity growth makes Spain new battleground in Europe
The Spanish caustic soda market has become a market share battleground for European producers as the country's capacity has recovered from its nadir in 2017 and contract prices have plummeted.
The decline in Spanish caustic soda prices and the overall recovery of the country’s production capability also has significant implications for the now well-supplied European market.
Spain’s chloralkali capacity loss on the back of the phasing out of mercury cell technology was the largest of any country in Europe, with over 400,000 dry metric tonnes (dmt)/year of caustic soda capacity closed in 2017.
There has however been a significant recovery in Spanish output levels this year.
Producer Ercros has expanded its nameplate caustic soda and chlorine production capabilities back to its pre-2017 level and with newer, more energy efficient membrane-cell plants, which can in theory maintain a higher utilisation rate than mercury capacity.
Bondalti has also re-activated a previously shut down plant at Torrelavega, which will add an additional 76,000 dmt/year in caustic soda capability by 2020.
In total, more than 150,000 dmt/year of caustic soda capacity will be activated in Spain in 2019.
Covestro also building new chloralkali capacity in order to provide chlorine backing for its isocyanates production.
“Provided the necessary official permits are obtained, the main construction will begin in the next months. We expect the start up by the end of 2021,” a Covestro spokesperson told ICIS in October.
Net imports of caustic soda to Spain also increased by over 300,000 dmt in 2018, which went a long way to filling the gap in availability left by the drop in capacity.
Not all players saw the changing market balance in Spain as significant, with some pointing out that capacity at Bondalti is not likely to activate fully until 2020.
“Talking about capacity expansion in Spain – I don’t see any impact… Contract prices have fallen everywhere in South Europe irrespective of developments with [the plant previously owned by Solvay],” one buyer noted.
However, 2019 was a poor year for caustic soda demand in Iberia, which raises the question of what gap in supply, exactly, the new caustic soda capacity is meant to address.
“October and November were a disaster, the situation in the market is getting worse and worse because demand is falling and decreasing in practically all the industries," a Portuguese distributor said.
"Pulp paper, textiles and all other major areas are declining in their demand,” it added.
OLIVE OIL, ALUMINA EFFECTS
The distributor also noted that it was a very poor year for olive growth in Spain, with olive oil production expected to fall by 44% as a result of storms and drought affecting large areas of Spain and Portugal.
Caustic soda is used extensively in curing olives, where it is generally referred to as lye.
Alumina demand has also seen significant declines on a worldwide scale in 2019, although Spain’s alumina output is mostly supplied via imported caustic soda and is insulated somewhat from trends in the local market.
The overall effect of the long market on Spanish caustic soda prices has been precipitous. Prices dropped by 47% between their peak in February 2018 and October 2019.
Spot prices in the Mediterranean, which represent exports from sellers such as France, northwest Europe (NWE) and Egypt, have also tracked downwards from near-record highs in 2018 to being close to their lowest point for 9 years.
Prices even below €400/dmt FD (free delivered) were also available for larger buyers in the pulp and paper industry in the second half of 2019.
“Even in the last two quarters we have seen prices FD below €400/dmt,” one caustic soda buyer from Portugal said.
The overall picture suggests that Iberia will no longer be an attractive target for caustic exports from 2020 onwards, and this is likely to free up additional volumes in the European caustic soda market, which will then need to find a home elsewhere.
“I think the increased capacity in Spain will affect the market in two ways. First, the Russian product from Kalush was being exported via trader to Ercros as well as the Egyptian product, so that will most probably look to Turkey," one trader said.
"Also KEM ONE was exporting to Spain, they should have more product now also."
Another trader noted how Spain has posted increases on capacities this year, with imports decreasing as a consequence.
However, in a lengthening global market, with spot prices already closing in on their lowest levels since 2010 and margins crashing for producers, it remains to be seen if Europe is now full to bursting with caustic soda.
European free on board (FOB) export prices for the Mediterranean have fallen by 16% since the beginning of the fourth quarter, as availability for the market as a whole has risen and demand has fallen.
NWE spot and contract prices have also dropped significantly in the fourth quarter, reflecting crowded supply in import and export markets and a shift in export patterns into Europe from the rest of the world.
“Demand is flat, so each tonne of caustic soda not purchased from NWE producers [but purchased from alternative suppliers] had to exported by NWE producers,” one buyer noted.
It pointed to a significant increase in non-European exports to the Nordic countries as contributing to the longer market.
In contrast to 2017, when players scrambled to secure drops of caustic soda, Europe may soon be drowning in a lake of lye.
After mercury-based plants were shut down, without being totally replaced in all cases, Spanish chloralkali capacity fell by about 400,000 electrochemical units (ECU).
This was largely, but not exclusively, associated with ethylene dichloride (EDC) production.
With caustic soda demand remaining relatively flat in 2018, this reduction in output meant a significant increase in Spain’s caustic soda trade deficit.
Spanish imports increased markedly in 2018 compared to 2017, with the increase coming largely from the US and western European countries, especially France.
At the same time, exports fell to about a quarter for the same period, having previously exported to various Mediterranean countries and Portugal.
FROM CHEMICALS TO HOUSEHOLD GOODS
Caustic demand in Spain goes into diverse applications. ICIS analysis indicates that about one third is used in the chemicals industry, and about a quarter is used in the Alcoa alumina refinery at San Ciprian.
About one sixth is used in the production of wood pulp and another sixth in the purification of oil refinery outputs.
The remainder is consumed in various applications, including water treatment and the production of household goods.
ICIS margins analysis indicates that the loss of capacity was associated with a slight strengthening in the position of western European caustic soda producers in late 2017.
However, in the first half of 2019, this has subsided and variable margins are now in a position where they will do little more than cover producers’ fixed costs.
Some European producers may now be close to a situation where they are forced to cut output for economic reasons.