Europe's chlor-alkali industry will face in 2023 many of the same challenges that presented themselves in the previous 12 months, many of which arise from the continent's energy crisis.
Soaring energy costs contributed to contractual caustic soda prices across Europe surging to record levels above €2,000/dmt in the fourth quarter of 2022, and these remain at the forefront of producers' and buyers' minds as energy cost volatility extends into 2023. Spot electricity prices in December once again climbed above €400/MWh across parts of Europe, after some limited relief in October and early November, renewing margin concerns.
The outlook is complicated by various energy subsidy schemes and wholesale market caps, in place or proposed, which may ease the greatest pressure on electricity costs. But details are unclear in many cases.
The economic downturn is another issue affecting the European chlor-alkali industry. Demand for caustic soda and chlorinated derivatives has dwindled throughout 2022 and is likely to remain lower than usual in the early part of 2023 as market participants along the supply chain continue to grapple with elevated energy and raw material costs, and high inflation and interest rates.
European chlorine demand began to fall in early 2022 and most producers, particularly those integrated into vinyls and isocyanates, responded by reducing second-quarter operating rates to the low-70pc level. As chlorine demand decline accelerated, operating rates were reduced further — Eurochlor reported 58pc for October.
Caustic soda demand started to fall in late summer then declined at a faster rate during the fourth quarter as prices climbed above €2,000/dmt. Although prices pulled back to some extent in November and December, caustic soda consumption remains substantially subdued and now matches the chlorine year-on-year demand loss of around 20pc.
As the economic slowdown shows no sign of easing in early 2023, any significant ramping up of operating rates in the first quarter is unlikely and local caustic soda production will remain at a lower than usual level. There are signs that imports into Europe will be less frequent in early 2023, with importers less willing to commit to January arrivals because of recent downwards price pressure in European markets. Caustic soda supply is therefore likely to be less abundant in January but this is likely to be at least partially balanced by diminished buying interest, suggesting any real supply shortage could be avoided.
Some exporters, hoping to avoid any potential build-up of product, have started to offer prices for January loading from northwest Europe but prices have not yet been competitive enough to fix any vessels.
An absence of Ukrainian product will continue to be a market feature in 2023 as the war there continues. The supply gap will continue to be replaced by either local product or imports, depending on the specific market circumstances at the time. The EU will ban Russian liquid caustic soda from 8 January for contracts concluded before 7 October 2022, but the overall supply effect is unlikely be significant as most customers have already moved away from Russian product.
Based on all the volatility observed in 2022, the chlor-alkali market is searching for a new 2023 base price. Elevated operating costs mean prices are unlikely to return to pre-energy crisis levels, but buyer response to prices above €2,000/dmt has highlighted this level is unsustainable.
Electricity market developments will remain the key driver of cost, but it is unclear where that meets demand for chlorinated derivatives and caustic soda in a weak economic environment.
