Caustic soda is one of the few commodities with a price that hasn't collapsed during the recession. But don't break out the champagne just yet, as this is due to some unique circumstances that seem to be reversing.

The Process
During the chlor-alkali production process, chlorine and caustic soda are produced in equal parts. Chlorine is used in many applications, particularly in polyvinyl chloride (PVC), or plastic, which is used in the construction and automotive industries. When the recession started to impact demand, operators correctly cut back production so that inventories wouldn't pile up. The side effect of this cutback in chlorine production was a cutback in caustic soda production as well. Since the uses of caustic soda are less cyclical than those of chlorine, with major uses in manufacturing soap and detergent, the result was a shortage of caustic soda and a rise in price. In March, that price was around $800 per ton depending on which grade is quoted. (To learn more about how demand affects businesses, read our Economics Basics Tutorial.)

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How This Has Affected Producers
Dow Chemical (NYSE:DOW) is one of the largest producers of chlorine, and it cut back production to help balance the market as operating rates fell. The company announced as part of its "transformational strategy" that it would close a Texas facility that produced chlor-alkali.

Olin Corp. (NYSE:OLN) said during its fourth quarter 2008 conference call in February that the major issue in chlor-alkali was "a significant decline in demand". Despite a 30% decline in volumes of chlorine and caustic soda, the company earned $86.5 million in its chlor-alkali segment, helped by strong caustic soda pricing. Olin also closed a facility in St. Gabriel, La. that represented 10% of its capacity.

Customers Suffer
The paper industry is a caustic soda user and has been suffering from the rise in prices for quite some time. International Paper (NYSE:IP) said during its Q3 conference call in October 2008 that the price of caustic soda was "five times what it was a couple of years ago". (Read the answer to our frequently asked question What is an earnings conference call? to learn more about this way for companies to relay information to all interested parties.)

MeadWestvaco (NYSE:MWV) said that during 2008, its input costs increased by $200 million over the prior year. The company mentioned caustic soda and sulphuric acid as being at "historically high levels" but noted that a slight moderation was beginning in price levels.

It is expected that the price of caustic soda has reached a plateau and will begin to reverse in 2009 and 2010 for three reasons. As the economy begins to recover, producers will increase production of chlor-alkali and thus increase the caustic soda supply. The market is also seeing extra caustic soda supply from Asian manufacturers who are increasing exports to the U.S. due to the high prices. The last reason is the substitution effect, as manufacturers can switch inputs in their products from caustic soda to soda ash.

Caustic Soda Price Likely To Decline
The market has probably seen the highs in prices for caustic soda during this cycle, as the forces of supply and demand are shifting to balance the market. This will come as a relief to heavy users of this important yet relatively unknown chemical that has many different applications.

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