U.S. Chlorine, Caustic Profit May Tumble 80% by 2011

Chlorine and caustic-soda profit in the U.S. is poised to tumble 80 percent during the next two years, hurting producers such as Dow Chemical Co. (DOW), Olin Corp. (OLN) and Georgia Gulf Corp. (GGC), a consultant said.

Weak demand from housing and paper markets combined with new plant startups in China will drive down U.S. prices for chlorine and caustic soda, collectively known as chlor-alkali, by more than half from last year’s record, Chemical Market Associates Inc. said today at its World Petrochemical Conference in Houston. Profit will drop from a record $750 per metric ton last year to about $200 next year and $150 in 2011, CMAI said in a presentation.

Prices for chlor-alkali, made by running electricity through salt water, are poised to follow declining petrochemicals such as ethylene. Dow is the world’s largest maker of chlor-alkali, followed by Occidental Petroleum Corp. (OXY), Olin and PPG Industries Inc. (PPG) Caustic soda profit has sustained Georgia Gulf as demand for its vinyl construction products dropped.

“The decline really begins to hit in terms of caustic soda pricing going into 2010,” said Mary Blackburn, CMAI director of chlor-alkali and vinyls. “The bad news is we are going into a margin trough, but the good news is we expect it to last only about two to three years.”

Prices for caustic soda, used to make pulp, paper and soaps, recently began to decline from record highs, she said. Chlorine, used to make vinyl products such as siding and PVC pipe, has been sliding since last year as global demand contracted, said Joel Lindahl, a CMAI director.

China, U.S. Supply

Producers in China, the world’s largest producer of the chemicals, need to shut 5 million metric tons of the country’s 30 million tons of production capacity, while the U.S. needs to shut more than 2 million tons of capacity to bring supply in line with demand, Blackburn said.

“You have about 16 percent lower demand than what we thought six months ago,” Blackburn said. “That’s the amount of demand destruction we anticipate given the very weak economy.”

U.S. caustic soda prices, which peaked at about $1,100 a ton in September, will average about $750 a ton this year, little changed from last year’s average, before plunging to about $350 in 2010 and approximately $300 in 2011, CMAI said. Chlorine prices tumbled to $50 a ton in December from $350 in September, averaging about $300 for the year. Chlorine may drop to $200 this year and below $200 in 2010, according to the consultant.

Prices won’t drop to historical lows because of higher costs for energy, a key expense in chlor-alkali production, Blackburn said.

To contact the reporter on this story: Jack Kaskey in New York at jkaskey@bloomberg.net.

To contact the editor responsible for this story: Kevin Miller at kmiller@bloomberg.net.

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