Industrial Production Numbers Tell Good Story

The heart and soul of this market is about unemployment, but we can't let unemployment exist in a Thursday vacuum. In other words, we have to try to figure out whether business is going up or down so that employment can be predicted.

I am looking at numbers like the industrial production number that came out today and trying to put myself in the mindset of an employer who sees that number, which was higher than forecast. And I would be worried that I have cut back too much.

I would look at the early predictors of business, in this case corrugated boxes and now caustic soda and chlorine because that's a building block for basic infrastructure as it leads to PVC piping, which you don't need unless you are starting to build things. I see from Pactiv (PTV - commentary - Trade Now) and Temple Inland (TIN - commentary - Trade Now) and International Paper (IP - commentary - Trade Now) that corrugated's hot. I hear from PPG (PPG - commentary - Trade Now) that caustic and chlorine are going up in price.

Caustic soda is combined with another ingredient (because it is corrosive on its own) and is used in: pulp and paper, textiles -- (cotton/nylon/polyester), detergents, soaps/detergents/bleaches, petroleum products (used to explore/produce/process petroleum and nat gas), aluminum production, chemical processing (used as a feedstock in plastics, fabrics, adhesives, coatings, herbicides, dyes, inks), water treatment.

On average, caustic soda demand in a "normal" year is 3% with average capacity utilization rates of 87%-90%. Utilization rates are 79% (79% in July, 76% in June) so increasing but still below "normal." Spot prices have gone from $25/ton to recently $125-$150/ton last week. There have been two price increases.

PVC and polyurethane account for about 55% of global demand for chlorine. Chlorine affects 55% of the European chemical industry. Demand for chlorine typically grows 2.2%. Utilization rates have climbed from 62% in March to 79% in August, and as a result, prices have stalled despite the $225/ton price increases. NA contract prices are $390/ton currently (but down from $450 in August). They got the bulk of the $300/ton price increase because inventories remain historically low levels. No one expects the additional $75/ton price increase as demand remains soft -- which could change with stabilizing demand.

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