Olin swings to $80 million Q1 loss as COVID-19 saps chlorine demand

Sharp declines in demand for chlorine and related products pushed Olin, the world's largest chlor-alkali producer, into an $80 million loss in the first quarter this year, the company said.

"During the second half of March and into April, Olin began to experience reduced demand across our chemical portfolio," CEO John Fischer said during the company's first-quarter earnings call Thursday. The quarterly loss compared to a $41.7 million profit in the first three months of 2019.

Shutdowns around the world to stem the spread of the coronavirus pandemic squeezed economic activity during the quarter and through April, with some regions beginning to show rebounds as shutdowns ease.

Those shutdowns squashed demand for polyvinyl chloride, a construction staple used to make pipes, window frames, vinyl siding and other products. Low crude prices also forced production cuts, reducing demand for hydrochloric acid to aid in oil and gas production. Chlorine is a key feedstock for both products.

However, the downturn in chlorine demand has prompted producers to reduce chlor-alkali rates, shrinking supply of caustic soda, a byproduct of chlorine production and a key feedstock for alumina and pulp and paper industries. That tighter supply has boosted prices that had been under pressure for much of 2019 and into early 2020 amid sluggish demand.

"We expect lower North American chlor-alkali industry operating rates during the second quarter to reduce the caustic soda supply, which is expected to support improved caustic soda pricing," Fischer said.

US chlor-alkali rates in March were 90%, but producers have reduced those rates on lower chlorine demand, and market sources expect industry statistics for April to show output in a range of 70% to 80%.

Olin has announced three price increases for domestic caustic soda so far this year, the latest on Monday for $80/dmt to be effective June 1, in addition to a $60/dst increase announced for May 1. The company also has told customers that caustic soda volumes will be allocated at 70% to 80%, and all sales will be under contract. Fischer said Thursday the company would have no spot volume availability.

"So, I think we, at least in the short run, are bullish on caustic pricing," Fischer said.

S&P Global Platts last assessed caustic soda on Tuesday, with domestic spot prices up $20/dmt to $310-$320/dst FOB plant and domestic contract caustic soda up $20/dmt to $495-$505/dst FOB plant. Platts also assessed US export caustic soda prices up $120/dmt from the prior week to $355-$365/dmt FOB USG.

James Varilek, Olin's chief operating officer, said most or all producers had similar controls on caustic soda orders as supply tightens.

"You see the pullback on the chlorine side of things. Obviously on PVC, extreme pullbacks there. And that imbalance, that was favorable to the chlorine side of things some months ago is now shifting to the other side," Varilek said.

LOWER CHLORINE DEMAND HITS EDC

Chlorine demand destruction has affected intermediates in the chain to manufacture PVC, including ethylene dichloride. Platts last assessed spot export EDC Tuesday at $60-$70/mt FOB USG, holding the previous week's $50/mt decline that brought pricing to its lowest level since Platts began assessing EDC in June 1996.

Olin's production chain does not stretch to PVC, so the company sells its EDC output. The four integrated US PVC producers can keep EDC output internal for downstream PVC production if export prices are unattractive.

Fischer noted that Olin sells the majority of its EDC production on contract, and participates in spot deals opportunistically.

"Obviously, at the prices we've seen recently, that wouldn't qualify as an opportunity," he said.

Demand for chlorine and caustic soda has been out of balance before, with demand high for one and low for the other. But Fischer noted that the switch in the latter part of the first quarter "was very abrupt" as the pandemic spread worldwide, causing economic shocks.

"I don't think anybody has ever experienced a 'global stop' to the economy," Fischer said. "Usually, we experienced a cyclical wind down of chlorine demand, where housing starts weaken before the broader economy. That takes place over 12 to 18 months."