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Storms and Energy Create One-Two Punch to Knock Chemical Prices Higher

Chemical costs have been increasing over the past few years and last year was no exception. Higher raw material and energy costs and tight supply/demand balances pushed chemical prices higher in 2005….

Chemical costs have been increasing over the past few years and last year was no exception. Higher raw material and energy costs and tight supply/demand balances pushed chemical prices higher in 2005. Mother Nature compounded the problem as hurricanes on the U.S. Gulf Coast limited chemical supply in the third and fourth quarters. Caustic soda, chlorine and titanium dioxide were particularly hard hit.

When soft market conditions and mill closures are thrown into the mix, 2005 was extremely challenging. Several mills were forced to close because of their inability to compete in global markets.

Prices will remain under upward pressure in 2006. Supply of most chemicals remains snug and energy and raw material costs show no sign of declining in the short term. The good news is that pricing pressures are expected to ease off in the second half. A projected slow down in the North American economy will free up chemical supply and reduce some of the tightness that has existed in recent years.

Pulping

The difficult business environment is largely responsible for recent mill shutdowns. The closures will begin to affect demand for pulping chemicals in 2006.

Neenah Paper closed the smaller of its two pulp mills at Terrace Bay, ON, last year. The No. 1 mill, originally built in 1948, has capacity to produce 125 kilotonnes/yr of pulp.

The company said Terrace Bay and its woodlands were one of the highest-cost pulp operations in Canada. The smaller scale of the No. 1 mill did not justify the investment necessary to compete successfully in today’s global pulp market. The company is focusing on improving the larger No. 2 mill and wood costs, where significant improvements are necessary to achieve long-term viability.

As a result of poor market conditions, the Prince Albert pulp and paper mill in Saskatchewan faces indefinite closure. The company points out that the uncoated free-sheet paper and pulp markets face fundamental challenges, including excess capacity, declining demand, mounting inventories and weak prices. Weyerhaeuser made its determination regarding the Saskatchewan operation as a result of these market conditions. The Prince Albert facility has an annual capacity of 280,000 tons/y of uncoated paper and 130,000 tons/y of market pulp.

Domtar’s Cornwall, ON mill will be permanently shut down, effective March 31, 2006. Total annual capacity of 265,000 tons of uncoated and coated printing grades on three paper machines as well as 160,000 tons of pulp will be permanently taken off the market.

Caustic soda is a barometer of economic activity. Growing GDP generally means increased caustic consumption. The healthy economy in 2005 resulted in good demand for the chemical, creating tight market conditions.

Domestic supply was affected by lower operating rates at Pioneer’s Becancour, QC plant early in the year and in June. Supply became extremely tight in the third quarter because of hurricanes on the U.S. Gulf Coast, which is home to a significant amount of North America’s chloralkali production. Dow closed complexes on the Gulf Coast in anticipation of Hurricane Rita.

Caustic prices went up every quarter last year, although the pulp and paper sector was shielded slightly because of its poor financial position. Nevertheless, caustic costs went up about 2-3% each quarter, for a total increase of more than 10%. Higher natural gas and electricity costs and tight supply/demand balances all played a role in driving up prices.

Increases totaling about 5% are expected in the first half of this year. The tight markets will ease off because of additional caustic supply from Asia and a slower economy in the second half, resulting in a modest price decrease late in the year that could offset earlier increases. Overall, caustic prices will likely remain relatively stable.

To cope with rising caustic costs, Paprican and NORAM Engineering and Constructors have reached an agreement for the worldwide commercialization of the Papricycle process. The technology saves caustic by using the alkali value of the sodium carbonate present in the first extraction stage effluent of the bleaching process. Typically, the first extraction stage caustic charge is reduced by 25-35%. The process can also reduce a mill’s energy consumption.

Sodium sulphate prices were relatively flat in 2005, but mills can expect increases of 5-10% early this year. The price hikes are being driven by higher energy costs, prompting sodium sulphate suppliers to introduce energy surcharges. Prices will remain stable the remainder of the year.

On the supply side, two plants were closed in the U.S., but Canadian capacity remained stable. Supply and demand will remain balanced throughout the year.

Late last year, Inco made an offer to acquire all of the shares of Falconbridge. The offer will remain open until Jan. 27, 2006. If the bid is successful, the combined company would become the leading sulphur dioxide and sulphuric acid producer in Canada. Domestic supply was balanced last year and enough capacity exists to meet market demand.

A strike by unionized employees at Teck Cominco’s Trail, BC plant affect supply of sulphur dioxide and sulphuric acid from that location. The strike began in July, forcing the company to shut down the Trail operations and declare force majeure on all metal and chemical product sales. The strike was resolved in October.

Bleaching

With the exception of caustic, supply of pulping chemicals was generally balanced last year. The opposite is true for bleaching chemicals. Many plants ran above 90% of capacity to keep up with demand from pulp mill bleacheries. With no significant capacity coming on stream, mills will have to cope with continued tight bleaching chemical supplies in 2006.

Higher raw material, freight and electrical power costs put constant pressure on sodium chlorate prices last year. Chlorate costs went up 3-5% in mid-2005, followed by another increase of 3-5% late in the year. Mills can expect their chlorate costs to rise by an additional 3-4% by mid-year.

No new capacity, combined with plant closures, will ensure that the tight supply/demand balance for chorate in 2005 will not ease up in 2006. Erco will close its 48 kilotonnes/y sodium chlorate plant in Thunder Bay, ON in the first quarter of 2006. Canexus, formerly Nexen, closed its chlorate plant in Amherstburg, ON, at end of July. An estimated 7% of domestic supply will be eliminated from the market. High electricity costs are to blame for both closures.

Most of the chlorine used in the pulp and paper sector ends up in chlorine dioxide generators. Although chlorate is the main feedstock, chlorine can also be used as feedstock. Supply was snug last year and will likely be balanced to snug this year.

Chlorine prices went up in step with co-product caustic, but not in the same magnitude. Chlorine prices could go through another modest price hike, probably in the 3-4% range, in the first half, but then they will stabilize.

Hydrogen peroxide supply was extremely tight last year, as domestic plant operating rates were close to 100%. The supply/demand balance will remain tight for the remainder of 2006.

Bleaching with peroxide became considerably more expensive last year as costs went up early in the year and again in mid-2005. An increase of about 4-5% early in the year was followed by another increase of 8-10% in mid-2005. Higher energy and transportation costs drove up prices, forcing peroxide producers to pass along the cost increases to pulp and paper mills. The energy surcharge will remain in effect as long as energy costs remain high. An additional price hike of 5-6% is projected for hydrogen peroxide in the third quarter of 2006.

Sodium hydrosulphite prices went up by about 6 cents/lb last year and should go up by a similar amount by mid-2006. The increase is driven by higher energy and raw material costs.

Chemtrade will lose about one-quarter of its supply of sodium formate, an input i
n the production of sodium hydrosulphite, in the first quarter of 2006. Despite the loss, the company does not expect supply to suffer because it is contracting with offshore supply sources.

Prices went up by $22/tonne on all grades of liquid sodium silicate and $55/tonne on all other sodium silicate products, including anhydrous glass powders and hydrous powders. Another increase of $20-30/tonne is likely for the second quarter.

Oxygen prices rose 5-10% in mid-2005. The changes were in response to rising fuel, energy and transportation costs. An additional increase of 5-8% is anticipated early in 2006 before prices stabilize. Supply of oxygen should remain balanced.

Papermaking

Paper mills struggled to recover from the grip of higher costs. Faced with weaker margins, paper producers were forced to close their plants. Following a strategic review, Abitibi-Consolidated closed two of its operations in eastern Canada late last year. The Stephenville, NF, mill was permanently shutdown, removing 194 kt/y of newsprint capacity. One machine was also closed at Kenora, ON, removing 90 kt/y of newsprint capacity.

Cascades streamlined activities at Cascades Fine Papers Group in Thunder Bay, ON, which specializes in the production of coated and specialty papers. The company closed the PM5 and the converting operations. Some of the converting activities, as well as the production of certain grades of paper, were transferred to other facilities within the Fine Papers Group. The company said the unfavorable market conditions prevailing in the pulp and paper industry have had a particularly negative impact on the print paper sector both in terms of price and demand.

The last stage of Cascades’ recovery plan involves closing the smallest of the four paper machines in Saint-Jerome, QC, which produces 8 tons/y of paper, or 5% of the plant’s output. The company points out that the Canadian market is currently under considerable pressure from foreign competition, partly because of the increase in the value of the Canadian dollar.

Norampac will close its Montreal corrugated products plant during the second quarter of 2006 as part of a global reorganization. The decision to close the facility was based mainly on the plant’s limited expansion potential.

Domtar will close the PM10 and PM11 paper machines at its non-integrated Ottawa-Hull complex. The shutdown will eliminate 65,000 tons/y of paper capacity from the market.

Titanium dioxide prices rose steadily last year, driven higher by increasing raw material, energy and transportation costs. An increase of 6 cents/lb in the second quarter was followed by increases of 5 cents/lb in the third quarter and 7 cents/lb in the fourth quarter. In total, prices went up by about 10-12%, depending on the grade. Prices will likely continue to climb in 2006, but more modest increases are projected. The total increases for 2006 will likely be in the 4-6% range.

Supply was snug in 2005 and became extremely tight in the third quarter. Hurricane Katrina caused extensive flooding at DuPont’s the titanium dioxide plant at DeLisle, MI. As a result, the company declared force majeure for its titanium dioxide businesses. Pigment supply will return to more balanced levels in 2006.

Styrene-butadiene latex prices rose dramatically in 2004. Paper mills were spared the rapid runup in SB latex prices last year, but costs went up by about 4-6% in the spring before stabilizing late in the year. Prices should remain stable in the short term. In the long term, prices will depend on styrene monomer feedstock costs. Little price movement is expected either way. At most, paper mills can expect inflationary increases for SB latex.

Dramatic increases in energy and raw material costs drove up kaolin prices. Prices went up by $15-$30/ton in mid-2006, depending on location and grade. An energy surcharge was introduced late last year. Additional increases of 3-5% are projected for 2006.

Imerys introduced Contour Xtreme kaolin for the global paper industry at the TAPPI Coating conference last April in Toronto. The fine platy pigment provides synergy with carbonates, combining the benefits of platy clays and fine glossing clays. The shape-engineered kaolin is produced from Middle Georgia crudes.

Calcium carbonate energy surcharges were also introduced. Increases amounted to $3-$15/ton, depending on grade. Calcium carbonate price hikes generally track inflation and energy cost increases.

Specialties

Prices for a wide variety of specialty products also rose in 2005. Prices for paper colorants, pigments and process chemicals went up by an average of 8% last year.

NanoQuebec and the Pulp and Paper Research Institute of Canada have signed an agreement targeting the development of nanotechnology applications for the forestry sector. Paprican sees nanotechnology development as one of the keys in improving the competitiveness of the Canadian forestry sector in very challenging world markets.

Under the agreement, the two organizations will bring together their networks of relationships. Both NanoQuebec and Paprican have strategic links with universities, industry, and government. In addition, Paprican will involve its sister institutes, Forintek and the Forest Engineering Research Institute of Canada.

With an initial time frame of three years, the agreement aims to optimize the impact of nanotechnology on the forestry sector and to reinforce the competitive position of the key companies in the sector.

Joe Piccione is editor of Camford Chemical Report, a weekly newsletter on Canada’s processing industries, as well as the editor of CHEM! Materials, Processing & Control, a quarterly magazine focusing on process equipment and instrumentation.

Joe has more than 20 years experience tracking developments in pulp and paper technologies and analyzing trends in chemical supply, demand and prices.

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