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Some Chemical Prices Have Topped Out, but Upward Pressure Remains

Chemical prices continued to climb in 2006, driven largely by persistently high energy costs. Prices for all oil-based chemicals were affected by high crude oil prices, which were strongly influenced …

Chemical prices continued to climb in 2006, driven largely by persistently high energy costs. Prices for all oil-based chemicals were affected by high crude oil prices, which were strongly influenced by geopolitical uncertainties and speculative trading. Chloralkali and sodium chlorate prices were pushed up by rising electricity rates. And the delivered cost of virtually every chemical reflected the higher cost of transportation fuels.

Most of these conditions still held true as the year came to a close, but markets had stabilized by the second half. On the supply side, there was no repeat of the hurricane-related disruptions that plagued 2005. With the manufacturing and distribution network operating normally, both producers and consumers were able to restore inventories to more comfortable levels. As a result, prices for some chemicals retreated from the extraordinary peaks they had reached late in 2005. On the demand side, the North American paper industry has shed much of its excess capacity.

In 2007, it is likely that price increases will be less frequent — and more difficult to implement — than they have been for the past 18 months.

Pulping

Retrenchment in the pulp business continued in 2006, though perhaps at a slower rate than in the previous two years.

Scotia Economics estimated North American pulp capacity closures in 2006 amounted to 1,000 kilotonnes/y, with a further 650 kilotonnes/y indefinitely idled. Globally, these shutdowns were offset in the second half of the year by roughly 1,500 kilotonnes/y of new pulp capacity in Latin America.

This has apparently had its effect on caustic soda prices, which reached historic highs when the hurricanes curtailed production on the U.S. Gulf Coast in 2005. Good demand and tightening supply had already pushed North American caustic prices up 75% from July 2004 levels before the hurricanes hit. Prices shot up another 30% during the winter months, when supply was very short, but settled back down to the pre-hurricane range during the spring and summer. A further retreat of 10-15% occurred during the last quarter of 2006.

The biggest development for the domestic supply of caustic was Dow Chemical Canada’s decision to close its chloralkali plant at Fort Saskatchewan, AB, in October. This move eliminated roughly 40% of Canada’s total capacity for sodium hydroxide. The merchant market for caustic has been profitable in recent years and Dow will remain in that business, selling product manufactured at its other locations.

The economic reasons for closing the Fort Saskatchewan chloralkali plant relate to downstream units for the chlorine. Dow used all of its chlorine to make ethylene dichloride (EDC), which was in turn used to make vinyl chloride monomer (VCM). The only local customer for VCM was the Oxy Vinyls Canada polyvinyl chloride plant at Scotford, AB. When that plant closed in January, Dow considered its options, but concluded that manufacturing EDC for export would not produce a sufficient return on the investment that would be required.

Following the Dow closure, Canexus finds that its North Vancouver, BC, chloralkali plant represents nearly 70% of regional caustic manufacturing capacity. The company expects regional caustic supply/demand conditions to remain relatively unchanged over the near term, but the market will rely more on imports subject to higher transportation costs. This could lead to stronger caustic prices in western Canada in the first quarter of 2007.

These developments tend to favour a proposal by Canexus to invest $130 million at North Vancouver to expand capacity and convert the existing diaphragm technology to membrane technology. The project will be put before the Canexus board of directors in the first quarter of 2007. The company is also evaluating infrastructure investments at North Vancouver so it can more easily supplement existing production with imports.

Sodium sulphate demand for kraft pulping has been in decline for several years, so most producers have focused their attention on detergent markets. Nevertheless, supply will easily be able to meet pulping demand for the foreseeable future. Canada’s largest producer of sodium sulfate, Saskatchewan Minerals, was sold by Goldcorp to a group of private investors late in 2005. On January 1, 2006, the company introduced an energy surcharge on sodium sulphate, based on the benchmark price of natural gas in Alberta. The surcharge was $15/ton in the first quarter, but has since declined to $3/ton as gas prices have eased.

Saskatchewan Minerals has started work on a $25-million project at its sodium sulphate plant near Chaplin, SK. The project will replace the existing gas-fired burners with “clean coal” technology developed by Airborne Clean Energy, a company affiliated with shareholders of Saskatchewan Minerals. The conversion will greatly reduce the operation’s exposure to volatile natural gas prices. The project should be completed by September 2007. Sulphate capacity will remain unchanged at 130 kilotonnes/y.

Supplies of sulphur dioxide and sulphuric acid are more than adequate to meet demand, as base metal producers have enjoyed strong prices and healthy demand. Canada’s main sources of sulphur dioxide, Inco and Teck Cominco, operated without significant interruption, despite their involvement in rumored, proposed and actual takeovers.

Bleaching

As in previous years, bleaching chemicals were in tighter supply during 2006 than pulping chemicals. This situation is expected to continue through 2007, making price hikes more likely even in a period of relatively flat demand.

The energy intensity of sodium chlorate manufacture has led to several adjustments on the supply side. Erco completed the closure of its 48 kilotonnes/y sodium chlorate plant in Thunder Bay, ON, in the first quarter of 2006, then permanently shuttered its 80 kilotonnes/y Bruderheim, AB, plant in October. In its Bruderheim announcement, Erco cited high electricity costs and lower realized sodium chlorate prices because of the appreciation of the Canadian dollar on sales denominated in U.S. dollars.

On the other hand, Canexus is pressing its cost advantage at Brandon, MB, with a $50 million project to add a new chlorate cell line that will improve energy and production efficiency and provide for cost-effective capacity growth if market conditions warrant. When the line goes onstream in the first quarter of 2008, it will boost sodium chlorate capacity at Brandon by 12%, to 296,000 kilotonnes/y.

According to Canexus, the reduction in chlorate demand resulting from pulp mill shutdowns in the first half of 2006 has been largely offset by increased demand from other mills, higher exports and the restart of one mill that had been idled by a strike. The company sees a few reasons to expect chlorate demand growth in North America: higher paper brightness standards, mill operating modifications to raise throughput and improve cost efficiency and increased production to offset shuttered capacity. Canexus also points out that market pulp prices are on an upward trend, with northern bleached softwood kraft prices reaching their highest level since early 1996.

Sodium chlorate prices went up by $50/tonne during the fourth quarter of 2006 and another increase is possible during 2007.

Dow’s closure at Fort Saskatchewan won’t affect merchant markets for chlorine because the company used all of its production captively. Spot and contract chlorine prices went up about 8-10% during the hurricane disruptions in 2005. Aside from that, they have been quite stable for two years. Following a typical pattern, there has been some softening of chlorine prices this winter, reflecting the seasonal decline in water treatment demand.

Demand for hydrogen peroxide remains strong and domestic plants appear to be operating at high rates. Arkema reported the completion of a 20 kilotonnes/y expansion at its Becancour, QC, plant in the third quarter of 2006. Factors driving demand for hydroge
n peroxide include the transition of a number of paper mills to high brightness grades and the development of new specialty grades and applications.

Canadian peroxide producers raised prices by $125/tonne on October 1. Energy and transportation fuel charges remain in effect. Despite price increases in each of the past three years, North American peroxide manufacturers are unconvinced that investment in greenfield plants to supply a mature market will pay off. Consequently, new facilities are being located in Asia and South America.

Sodium hydrosulphite (SHS) competes with hydrogen peroxide as a medium brightening agent for mechanical pulps and recycled fibres. As peroxide prices climb, SHS suppliers are able to recover rising energy and raw material costs while maintaining their long-term cost advantage in the bleaching market.

Facing continued increases in the cost of feedstock sodium formate due to structural changes in the industry and declining demand from newsprint producers, Chemtrade decided to cease production of sodium hydrosulphite at Leeds, SC, by the end of 2006. The company has entered into a long-term supply and marketing arrangement with Guangdong Zhongcheng Chemicals in China, the world’s largest — and probably lowest-cost — producer of powder SHS.

In 2004, Vimax Industries announced plans to build a 50 kilotonnes/y grassroots SHS plant near Montreal, QC. No further progress has been announced and there have been reports that the project has been cancelled.

Prices for all sodium silicate products, including liquids, anhydrous glass powders and hydrous powders, went up by about 5% in October. Market conditions appear to support a similar annual in 2007.

Markets for oxygen remain balanced, but producers are facing significant increases in energy and distribution costs. Prices went up by 10% at the end of the first quarter and an additional increase of 10-15% was implemented early in the fourth quarter. Some suppliers have also introduced regional energy surcharges. Industrial gas producers state that capacity utilization is high.

Papermaking

Paper companies continued their struggle to match supply with demand in 2006, but there was some evidence of improvement in the market. Newsprint demand continued its slow, steady decline, but the closure of uncompetitive mills in the past couple of years has resulted in high operating rates among the survivors, so prices improved slightly in the latter half of the year. Demand for coated paper has been weak in recent years, but stabilized in the third and fourth quarters. Uncoated paper demand has been growing, albeit slowly, and a price increase for soft-calender grades was partially implemented during the third quarter. The market for kraft was solid, creating a positive pricing environment for NSBK pulp.

The most significant development in a year of consolidation was the $3.3-billion merger of Domtar with the fine paper business of Weyerhaeuser. The new Domtar will operate six world-scale uncoated freesheet mills and a variety of specialty facilities, with total annual capacity of over five million tons. It will be the largest manufacturer of uncoated freesheet paper in North America and the second-largest in the world. The merger was announced in August 2006 and is expected to close in the first quarter of 2007.

UPM idled its money-losing Miramichi, NB, mill in February for a three-month period. During the shutdown, the company and its employees developed a cost-reduction and profit enhancement program for the 450 kilotonnes/y mill, in consultation with the provincial government. Deliveries from both of the mill’s coated groundwood machines started in May.

Bowater idled newsprint production on PM3 at Thunder Bay, ON, in 2003. Based on the continued decline in North American newsprint demand, the company stated in the third quarter of 2006 that it does not plan to restart the 140 kilotonnes/y unit.

Catalyst indefinitely closed the groundwood pulp unit at its Port Alberni, BC, mill at the end of September. The pulp will be replaced with deinked pulp from the company’s paper recycling division in Coquitlam, BC. This step will reduce fibre costs and help balance fibre requirements across divisions.

In the fourth quarter, Stora Enso restarted its mill in Port Hawkesbury, NS, following a ten-month shutdown. The 360 kilotonnes/y supercalendered machine (PM2) started up early in October, while the 190 kilotonnes/y newsprint machine started before yearend.

Titanium dioxide markets have been tight for quite some time, with most plants running at 90-95% of capacity. Producers have announced price increases almost every quarter for at least two years, though the increases haven’t always gone through intact. Contract prices were increasing gradually from 2004 to mid-2006, but appear to have remained fairly level since.

Even with high operating rates, most plants in North America are not generating an adequate return on capital employed, so construction of new capacity is taking place overseas, especially in Asia. In the near term, a decline in offshore exports will free up product for growth in domestic consumption.

Suppliers of styrene-butadiene latex and styrene-butadiene acrylate products to the paper industry announced three price increases totaling 15% during 2006. The primary factor was a rapid increase in styrene monomer feedstock costs between May and September. The upward pressure on styrene prices was related to the rising price of gasoline because styrene is made from benzene, a key source of octane in the petroleum refining process. The high price of crude oil also pushed up the cost of other latex feedstocks, including butadiene and acrylonitrile. It is expected that prices will level or ease off in 2007.

Kaolin producers implemented price increases in the range of 15%, effective January 1 to offset rising chemical, energy, mining and transportation costs. Some producers had already introduced energy surcharges early in 2006.

Two of the leading kaolin producers in North America — Imerys Performance Minerals & Ceramics and Huber Engineered Materials — have restructured their Georgia kaolin operations in the past year. The companies have reduced capacity and phased out some unprofitable paper-grade product lines because of the impact of rising costs and competitive alternatives to Georgia kaolin.

Late in 2006, prices went up by 8-10% for all ground calcium carbonate grades sold to the North American paper industry, including products used for filling and coating applications. The increase was in response to higher costs for biocides, dispersants, energy and mining operations.

Specialties

Annual price increases were implemented for several specialty products during 2006. Prices for paper sizing chemicals, oil-based defoamers and pigments were raised by as much as 15-20% because of their relatively high raw material cost. Increases in the 10% range were applied to silicone-based products, deinking agents, tall oil acidulation aids, coating dispersants and water-soluble polymers.

BASF and Paprican have agreed to conduct a four-year program to develop and test patent-pending technology for maximizing the filler content of papers made from chemical or mechanical pulp. Increasing filler content would enable papermakers to reduce production costs, optimize the use of fibre supply and enhance product performance. The purpose of the new technology is to allow paper producers to achieve these benefits without negative impacts on production or the print quality of their paper. The first commercial trial of this technology took place in 2005 at a Paprican member site.

Bob Douglas is the publisher of Camford Chemical Report, a weekly newsletter on Canada’s chemical processing industries, and CPI Product Profiles, a series of 200 data sheets on markets for individual chemical products. Bob has more than 25 years of experience tracking developments in pulp and paper technologies and analyzing trends in chemical and e
nergy supply, demand and prices.