13 March 2008

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13 March 2008 Issue Number 219

PRICE SUMMARY - MARCH 2008

Harriman Chemsult Limited24-25 Scala Street, London W1T 2HP Tel: 44 (020) 7462 1860 Fax: 44 (020) 7462 1861Email: [email protected] Website: www.harriman.co.ukHarriman Chemsult (Asia) Pte Ltd, Tel/Fax: 662 672 0415 Email: [email protected] Chemsult America, Tel: (1) 301 371 8303 Fax: (1) 301 371 8305 Email: [email protected]

NORTH AMERICA

Caustic Soda Spot (domestic) $450-460 dst fobSpot (export) $480-500 dmt fob

Sodium Chlorate Crystal Market $490-550 st fdMarket C$590-650 mt fob

Sodium Hydrosulphite Powder Market 60-85 cts/lb fobMarket 75-115 C.cts/lb fob

Hydrogen Peroxide Liquid Market 100% 56-66 cts/lb fd100% C$1550-1800 mt fd

EUROPE

Caustic Soda Liquid Domestic c315-330* dmt fdSpot $380-390 c244-251 dmt fob

Sodium Chlorate Nordic Market c525-600 mt fdContinental Market c525-575 mt fd

Sodium Hydrosulphite Powder Market c1000-1450 mt fdHydrogen Peroxide Liquid Market 100% c480-930 mt fd

FAR EAST

Sodium Chlorate Crystal List 240-340 kg fdSodium Chlorate Crystal Market 82-90 kg fdSodium Hydrosulphite Powder Market $1000-1600 mt c+f Hydrogen Peroxide Liquid Market 100% 80-120 kg fd

Liquid Market 50% $400-450 (drums) mt c+f

* Q1 dst = dry short ton dmt = dry metric ton

Current US Dollar Equivalent: Current c Equivalent:: 0.493 : 101.53 c: 0.643 : 0.767 : 158.63 $: 1.555

Copyright 2008. Access Intelligence, LLC. All rights reserved. Reproduction in whole or in part, inany form or medium, without express written permission by Access Intelligence, LLC is prohibited.

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March 2008 - BCR 219 Harriman Chemsult Ltd

2

NORTH AMERICA

Sodium Chlorate

The North American market is mostly stable and the tighter feel

remains in place. Some producers are virtually sold out but can

serve their regular customers on a normal basis. As a result,

there are no reports of serious supply constraints for contrac-

tually agreed quantities but it appears likely that there is very

little availability for additional enquiries.

The upward trend in demand over the past months has tight-

ened the market considerably and sellers consider the good

offtake as the main reason for the current market balance.

Sodium chlorate producers virtually sell their total output and

there are signs that the latest available inventory figure has

seen another decrease. Suppliers are depleting their invento-ries in order the meet customer requirements and the good

global demand makes it difficult for producers to return to more

comfortable inventory levels. Moreover, there is some concern

regarding availability later during Q1 when several units will be

undergoing maintenance. The recent production constraints

at Eka Chemicals unit at Moses Lake and Ercos facility at

Buckingham have exacerbated the attempts to achieve any

improvement in overall availability. It is understood that both

units are recovering or are already back to normal and, as a

result, there are no longer reports of production difficulties at

present.

Buyers are hoping for some capacity expansions in the futurein order to improve the supply/demand balance. The capacity

expansion at Canexus unit at Brandon came onstream in H2

February and the capacity has risen from 264,000 mt/year to

295,000 mt/year. The impact on the North American market is

expected to remain low as the overall output has only increased

slightly. While the total capacity amounted 1.86 million mt/year

so far, the maximum output of sodium chlorate now is 1.89

million mt/year. The company is hoping to improve its own

situation in the market and to rebuild stocks. This will also give

the seller the opportunity to meet some additional enquiries

and increase the shipped volumes across North America.

The latest import figures of sodium chlorate into North Americaare now available and it appears that the downward trend that

has emerged over the past two years continues. Imports from

Canada declined in Q4 2007 by almost 5% over Q3 and totalled

127,900 mt. This was the second lowest figure last year. While

levels in Q1 and Q3 were almost equal around 134,000 mt,

imports in Q2 were only 121,400 mt. 2007 was the first year

when imports on a quarterly basis were constantly below the

135,000 mt. As a result, yearly imports have dropped. While

around 563,700 mt sodium chlorate were shipped from Canada

into North America in 2006, it was only 518,000 mt the following

year. This is a decline by 8%, which shows the somewhat

downward trend in imports.

Despite the lower number of shipments into North America, the

upward trend on pricing remains present. There has been a

sharp and steady rise since the end of 2006 and levels rose

further in all four quarters of 2007. In Q4 last year, the average

import price for material from Canada was around $420/mt.

This was only a 0.7% increase from Q3 but a 14% rise over Q4

2006. This indicates that the upward trend has softened a bit

and that prices increased less steeply last year.

At the same time, prices in C$ have decreased due to the

strengthening of the Canadian Dollar. In Q4, sellers exported

at C$413/mt compared with C$454/mt during the first quarter

of 2007. This is almost a 10% decrease but the average import

price in 2007 was higher than in the previous year. While

fluctuations in 2006 were flattish, there was a steep upward

movement at the beginning of 2007 and levels have only fallen

slightly below the low of 2006.

Canada Sodium Chlorate Trade

January-December, 000 mt

2005 2006 2007

Imports 0 0 0

Exports

USA 608 564 518Japan 42 48 57

Chile 0 18 17

Thailand 8 8 10

Brazil 7 3 4

Others 4 9 13

Total 668 649 609

Looking at the sodium chlorate trade balance of Canada, it can

be found that shipments into deep sea markets are largely

stable or underwent a slight growth. Exports to Japan have

risen by almost 16% as a consequence of the conversion toECF bleaching processes and higher chlorate demand, while

all other deep sea countries have seen minor fluctuations only.

The US remains the main destination for Canadian material

but total exports have seen a further decline in 2007 down to

518,000 mt.

USA, Sodium Chlorate Imports from Canada, 2001-2007(000 mt/quarter)

90

105

120

135

150

165

01 02 03 04 05 06 07

300

320

340

360

380

400

420

Price

U

S$/m

t

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USA Sodium Chlorate Trade

January-December, 000 mt

2005 2006 2007

Imports

Canada 608 564 518

Others 0 0 0

Total 608 564 518

Exports

Thailand 6 5 5

Mexico 3 4 4

S Korea 3 2 2

Brazil 4 0 1

Others 12 3 14

Total 28 14 26

Net Trade -579 -550 -492

Sales from US sellers have picked up following the softening

in 2006. While exports to the main destinations are stable, the

amount of exports to very small markets has led to the rise in

the total figure of 26,000 mt. For example, there have been

parcels to India and Chile, which have had the main influence

on the above balance. Moreover, shipments to Brazil have

resumed and a small quantity has been moved to the country.

Several companies have published their financial results for

Q4 and the whole year of 2007. While some are reporting an

improvement in their financial performance, Tronox is report-

ing an operating loss. Rising costs were an issue for all

producers in 2007 as well as the rise in prices. Sellers were

looking for higher margins and there are reports of a slight

improvement by some companies.

Canexus has published good results for the year of 2007.

Revenue was 2% higher than the previous year and reached

C$413.6 million. Volumes in North America were somewhat

lower than in 2006 and the stronger Canadian dollar also

affected the result but these were both offset by price in-creases. In North America, sodium chlorate sales were on an

upward trend and reached C$192 million compared with

C$189 million in 2006. Consequently, gross margins picked

up from 27% to 28%. The start up of the new capacity at Brandon

was successful in H2 February. It has been delayed several

times but as the project has now been completed, the low-cost

position of the company is extended further. The capacity is

now around 12% higher, which might create an additional

operating cash flow of C$10 million per year.

Sales in South America were also somewhat higher than in

2006. Sales totalled C$90.7 million, which is an 8.4% rise over

the previous year. This was mainly due to higher prices for bothsodium chlorate and chlor-alkali.

For 2008, an minor increase of sodium chlorate capacity is

planned due to the fast growth of the market and Canexus is

benefiting from the investment opportunities in South America.

The results at Chemtrade Logistics pulp chemical sector have

improved in the fourth quarter of 2007 and revenue has risen by

$1.6 million. This was mainly due to a combination of higher

volumes and a rise in pricing for sodium chlorate. Moreover, the

2006 result was impacted by the force majeure and the reduced

operating rates of approximately 70% in December but there

were no reports of disruption to production in late 2007. As a

result, both EBIDTA and net earnings were higher than during

the comparable period the year before. However, the total of

EBIDTA and net earnings was higher in 2006 than in the

following year due to a rise on costs. Higher sodium chlorate

prices as well as larger volumes were not sufficient to offset the

strong cost increase.

Tronoxs sales in the Electrolytic Chemicals segment have

risen in 2007 to around $105.7 million compared with $101.5

million in 2006. Sales on a quarterly basis have also risen and

totalled $28.2 million in Q4 2007. This is almost an 18% rise

over the same quarter in 2006. While the segment created a

$0.5 million operating profit during the last quarter of 2006, the

situation was somewhat worse one year later, when Tronox

posted a $0.9 million operating loss. The operating loss for the

year 2007 was $2.3 million compared with a profit of $25.3

million in 2006. The loss was mainly created by the reimburse-

ment of contributions for the perchlorate remediation, which the

company received in the preceding year. Tronoxs electrolytic

chemicals segment includes sodium chlorate, manganese

dioxide, boron trichloride, elemental boron and lithium manga-

nese dioxide.

USA (mostly a crystal market): $490-550/st fd

So far this year, the North American hydrogen peroxide market

has been consistently reported as very solid with offtake running

at a high level. Strong demand that was re-established in Q4

last year after a slightly quieter Q3 has continued this year. The

annual market growth rate for 2007 is put at 3-4%, a consider-

able improvement on 2006, and some feel that something

similar could be achieved in 2008 although there are many

grounds for caution so early in the year. There are no specific

reports of shortages but the market appears very tight at present.This seems to be a result of the current high levels of demand

combined with some difficulties on the supply side. The second

half of 2007 saw a much larger than usual number of unplanned

plant shutdowns both in Canada and the USA. With a continuing

strong market and operating rates at a high level, it has been

difficult for producers to return inventories to a satisfactory level

to accommodate outages planned for Q2. The forward position

could be difficult depending on how demand levels develop

through the next few months.

In contrast to the present positive picture for hydrogen peroxide,

the increasingly less favourable general economic conditions

in North America are a cause for concern for everyone. Signsthat the US economy is close to or in recession have increased.

Despite injections of liquidity by the Federal Reserve and the

strong likelihood of another reduction in interest rates, credit

markets have continued to deteriorate. Consumer confidence

is already at a low level but continues to be eroded by the

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problems in the housing market with consumer spending alsoincreasingly affected by higher food and fuel costs, reducingdiscretionary buying power. Crude oil prices reached a newrecord in early March. Employment statistics show a fall in thenumber of jobs. Prospects look relatively bleak.

Despite these ominous signs in the general economy, the pulpand paper industry still seems to be running reasonably wellwith the obvious exception of newsprint. North Americanmarket pulp production is at a high level. One reason for thisis the low value of the US dollar. However, growth in the NorthAmerican industry has also been encouraged by difficulties inother parts of the world. Pulp production in Finland has beenreduced by the imposition of escalating duties on pulpwoodexports by Russia. In Indonesia, the government ban on cuttingmixed tropical hardwood has led to lower pulp production sincemid last year.

The latest statistics show that North American printing andwriting paper markets in January were continuing to move in a

similar direction to 2007. Shipments of mechanical paperswere up year on year by about 5% with freesheet down by about3%. Higher demand for high brightness mechanical papersshould continue to benefit hydrogen peroxide consumption.

The offtake of hydrogen peroxide in Canada is continuing to beboosted by strong demand for BCTMP, which always requiresa high unit consumption of peroxide in its production. TheBCTMP business is very export oriented and shipments havebeen growing firmly over the past five years mainly to Asia,particularly China, mostly for use in boxboard. High levels ofdemand from Asia last year allowed BCTMP prices to beincreased several times and this is continuing in 2008. InFebruary, prices in Asia rose by $30/mt and in Europe by $20/mt to leave them more than 20% higher than at this time last yearwith a significant improvement in margins for producers, en-couraging full production.

Several factors have acted to favour the BCTMP business inCanada. Demand in China has been increased since mid-2007 following the closure by the government of many smallpolluting straw pulp mills. Disruptions in European BCTMPproduction, especially in Finland as a result of shortages ofimported Russian wood and significantly increased costs,tended to increase BCTMP demands from Canada throughout2007. The start up of International Papers 200,000 mt/yearBCTMP mill at Svetogorsk, Russia in December 2007 may

ease this pressure depending on what portion of the output ismarket pulp. However, the impact is offset by M-reals closureof its 105,000 mt/year BCTMP plant at Lielahti, Finland mainlyas a consequence of high wood costs. It has also become clearthat the progressive and now full integration by Sinar Mas of theoutput of the 330,000 mt/year Meadow Lake, SaskatchewanBCTMP mill, which it purchased in January last year, hastightened conditions for BCTMP market pulp.

Since the beginning of 2007, technical experts have consid-ered that some of the unexpected buoyancy in the peroxidemarket has been the result of a gradual rebalancing of pulpbleaching sequences a few points away from sodium chloratein the direction of hydrogen peroxide. Although the affect on a

mill by mill basis is small, some progressive incrementalgrowth in the total market is believed to have been achieved.The driver for this has been mainly cost saving with the tightermarket and above average price increases for sodium chlorateexperienced in 2007. With chlorate prices having again risensharply in 2008, there may be further limited movement in thesame direction this year.

Now, gains for the hydrogen peroxide market at the expense ofsodium hydrosulphite also seem a possibility. As discussedelsewhere in this report, there has been a massive andunprecedented worldwide rise in the price of sulphur as a resultof fertilizer shortages and the costs and prices of all its down-stream products have been rising sharply, including sodium

hydrosulphite. This is expected to continue throughout 2008,possibly longer, and could give short or medium term oppor-tunities for substitute peroxide in some applications.

The official statistics from Statistics Canada for the total monthlyproduction of hydrogen peroxide in Canada have now beenpublished up to the end of 2007. They cover the four productionplants of FMC, Degussa, Arkema and Kemira representingslightly more than one third of total North American hydrogenperoxide capacity. There are no comparable public figures forthe USA.

Canada, Production of Hydrogen Peroxide

(mt 100%)

2004 2005 2006 2007

Q1 61,629 64,220 61,702 61,024Q2 57,861 60,327 N/A 63,512Q3 61,603 60,127 62,009 56,332Q4 62,833 59,216 49,867 55,063

Total 243,926 243,890 173,578 235,931

Capacity Utilisation Rates

Q1 96% 100% 96% 88%Q2 90% 94% N/A 91%Q3 96% 93% 96% 81%Q4 97% 92% 77% 79%

Average 95% 95% 90% 85%

The capacity utilisation rates in the table have been calculatedusing published plant capacity data, amended by any laterchanges notified by the producers. Details of the capacity of allthe hydrogen peroxide plants in North America were lastreported in Bleaching Chemicals Report in July 2007. Until the

end of 2006, the total capacity of the four plants in Canada wastaken as 258,000 mt/year (570 mlbs/year). The expansion ofArkemas plant at Becancour by 20,000 mt/year in November2006 increased total Canadian capacity by about 7.5% andNorth American capacity by about 2.5%. The new Canadiancapacity total of 278,000 mt/year was used to calculate averageutilisation rates for 2007.

The graph shows that there was quite steady production inCanada during 2004 and 2005 close to the rate that might havebeen expected at that time. In contrast, output in 2006 and 2007appears to have been interrupted by a series of plant shut-downs some of which were signalled at the time. In Q2 2006,the production figure was unusually suppressed for statistical

confidentiality rules leaving a gap in the data.

The low output recorded for Q4 2006 appear to have been atleast partly the consequence of Arkemas shutdown for itsexpansion at Becancour, believed to have been close to amonths duration. In H1 2007, output returned to a more usuallevel but was again affected by scheduled and unplanned plant

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shutdowns in Q3 and Q4 2007 equivalent to nearly two weeksclosure in each quarter. The monthly data show significantdownward spikes in September and November. Overall,Canadian production in 2007 was about 3% lower than twoyears earlier in 2005 with no total output figure available for2006.

With growth in the Canadian peroxide market, net exports fromCanada to the USA have been declining each year since 2000.In 2007, they were barely positive. In addition, a bulk import of4,200mt of 70% product from Europe was required to cover ascheduled maintenance outage during H2. Various plantproduction difficulties may account for the relatively tight feel tothe whole North American market throughout 2007. It remainsclear that the market is running sufficiently close to full capacitythat the individual performance of any one of the ten plants canhave a significant impact on the supply demand balance of thewhole market within a quite short period of time. Clearly, thelarger plants are of greater significance in this.

The price of natural gas continues to be an important issue forhydrogen peroxide producers and their customers that areaffected by energy surcharges as it has a direct impact on thecost of raw material hydrogen. Nymex Henry Hub daily spotnatural gas prices were on an upward track throughout Febru-ary reaching $9.4/MMBtu by the end of the month, the highestprice for more than two years. The average for the month was$8.59/MMBtu, 8% higher than in January and 14% higher thanthe February average last year. In early March, prices continuedto rise towards $10/MMBtu driven by cold weather and the

record prices for crude oil.

US stocks of natural gas at the end of February were about 4%above the five year average. Although storage levels arecurrently above average, they are 10% lower than at this timelast year having fallen from record levels at the start of theheating season. Colder than expected weather since Decem-ber has meant that stocks have run down more rapidly thanforecast and will be harder to replace in the summer. If theweather remains cooler than normal in March, prices willcontinue to rise. Increased imports of LNG to rebalance themarket will also mean higher prices. Some previous priceforecasts are beginning to look optimistically low.

Published information shows that Solvays monthly energysurcharge for March is $0.05/lb (100%) based on a natural gasclosing price of $8.930/MMBtu. FMCs energy system is quar-terly and the surcharge for Q1 based on a natural gas price of$7.114/MMBtu will remain at $0.035/lb (100%) until the end ofMarch. Other producers do not currently publish this informa-tion.

USA, Hydrogen Peroxide Trade

January December, (mt as product)

2005 2006 2007

ImportsCanada 38,874 36,920 45,685Others 1,518 2,042 2,068

Total 40,392 38,962 47,753

ExportsCanada 29,423 32,641 40,381Mexico 14,458 13,011 13,237Latin America 10,898 5,332 10,463Europe 1,857 1,582 2,945Asia Pacific 731 771 1,128M. East/Africa 356 246 388

Total 57,723 53,583 68,542

US trade statistics for the past three years are shown in thetable. The volumes reported are mt as shipped and not as100%.

For the past eight years, the volume of US imports from Canadahas mostly been following a trend of gradual reduction while US

exports to Canada have generally been reasonably steady. Thepicture is blurred by the fact that the statistics are reported forproduct as shipped and not as 100%. However, the trend is sorobust that it is unlikely to be changed by small movements inthe average concentration of the product shipped in eitherdirection even over this quite long period.

Fundamentally, the trend seems to be the result of the growingtightness in the North American hydrogen peroxide market overthe years and particularly in Canada. Shipments from Canadato the US market have been restrained because of lack ofavailability. Since 2003, the appreciation of the Canadian dollarhas played a part but the trend was already well establishedbefore this became an important consideration. In H2 2007,

there was an unusual situation as trade in both directions wasat a much higher level than in recent years but remained inbalance. As noted earlier, it appears that the reinforcement ofCanadian availability by the 20,000 mt/year (100%) expansionof Arkemas Becancour plant since the end of 2006 was offsetby an increased level of plant shutdowns during the second halfof the year.

Canada, Hydrogen Peroxide Production2004-2007,(000 mt)

40

45

50

55

60

65

Q1

04

Q2

04

Q3

04

Q4

04

Q1

05

Q2

05

Q3

05

Q4

05

Q1

06

Q2

06

Q3

06

Q4

06

Q1

07

Q2

07

Q3

07

Q4

07

Natural Gas, NYMEX Henry Hub Price2007-2008, $/MMBtu Monthly Average

5

6

7

8

9

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb

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In 2007, imports from countries other than Canada were at asimilar level to 2006. However, at 1,189 mt, the volume of what

appears to be specialist high-purity grade hydrogen peroxidefrom Japan was at about 75% of the level recorded last year.The price was also lower at $8.4/kg compared to last yearsaverage of $11.3/kg.

On the export side, shipments to Mexico in 2007 were runningat a similar level to 2006. Meanwhile, shipments to LatinAmerica, which were progressively reduced through 2006 to alow level, rebounded in 2007. However, as the graph showsthere was a significant revision in export destinations. In 2007,the emphasis of exports to Latin America was in Guatemalawhere US hydrogen peroxide mainly replaced material previ-ously supplied by South Korea. There was also a partialrecovery in exports to Chile from the much lower level in 2006.

This year, there have been some unusual new exports. Thevolume shipped to Ireland at 2,740mt was significantly higherthan in previous years. There were also noticeably increasedvolumes to Asia, particularly China and South Korea. The lowervalue of the US dollar may be significant in this. It seemsunlikely, however, that the short term availability situation inNorth America will allow more than nominal increases inshipments of product outside the region.

North American sodium hydrosulphite prices have been mov-ing up since the beginning of the year in response to theunprecedented increase in the price of sulphur over the past

few months. This is a worldwide phenomenon that was initiallyexpected to be of short duration. However, most experts arenow forecasting it to continue at least throughout 2008 andprobably into 2009.

In North America, sulphur prices are currently already about

four to five times their normal level and further increases areexpected in Q2. In Asia, notably in China and India, the price isas much as ten times the normal level and there are, in addition,serious availability problems. About 90% of worldwide sulphurconsumption is for sulphuric acid production. Global demandfor sulphuric acid has risen sharply because looming agricul-tural shortages have significantly increased demand for ferti-lizers and therefore for the sulphuric acid frequently used intheir production.

All downstream products based on sulphur have now suffereda dramatic increase in production costs leading to exceptionalprice rises. The impact has been most noticeable for sulphuricacid as it is so widely used in industry but sulphur dioxide, all

sulphates and sulphites as well as sodium hydrosulphite areaffected. In some cases, recent rises in caustic soda prices areadding to the problem. Sodium hydrosulphite prices have risenall around the world. In North America, surcharges have nowbeen implemented on both imported powder product anddomestically produced solution. As noted in other sections ofthis report, Chinese hydrosulphite prices in export marketshave been increased in a series of rapid steps to rise by a totalof $400/mt since mid-January. European prices are also beingincreased. It seems quite possible that further increases maybe required in Q2 if the situation does not improve.

From a volume perspective, the North American sodiumhydrosulphite market continues to be under some pressure,mainly related to the progressive decline in newsprint produc-tion, a trend that has now been firmly established for at least fiveyears. The ongoing contraction of the US textile sector also hasa negative impact. These factors are only partly mitigated byreasonably steady offtake by the kaolin sector and some morepositive trends in areas such as mechanical paper and tissue.

As expected, the first statistics from the PPPC for the NorthAmerican Newsprint industry in 2008 showed another large fallin newsprint consumption by US daily newspapers in compari-son to the previous year. Consumption in January was 11.5%lower than in January 2007. There were four Sundays in themonth in both years. The decline was close to the negative

trend seen in 2007, which averaged 10.8%.

North America, Newsprint Statistics

January, 000mt

2007 2008 % chg

MonthUS Dailies Consumpt. 545 482 -11.5

Shipments to N.A. 782 736 -5.9Shipments Overseas 144 188 30.2

Production 1,013 910 -10.1

Mill Stocks 412 349 -15.3US Publisher Stocks 810 675 -16.7

Source: Pulp and Paper Products Council

USA, Hydrogen Peroxide Trade with Canada2000-2007, (000 mt as product)

0

5

10

15

20

25

30

35

40

H1

00

H2

00

H1

01

H2

01

H1

02

H2

02

H1

03

H2

03

H1

04

H2

04

H1

05

H2

05

H1

06

H2

06

H1

07

H2

07

Imports from Canada Exports to Canada

USA, Hydrogen Peroxide Exports to Latin America2004-2007, (000 mt as product)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Q4 04 Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07

Others Guatemala Colombia Chile

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USDC trade statistics have tended to underestimatehydrosulphite exports in the past. However, the large reductionin hydrosulphite powder exports in 2007 to Canada, Mexico andelsewhere following the closure of Chemtrades Leeds pow-der plant at the end of 2006 were confirmed.

Chinese export statistics have always appeared to be the mostreliable measure of the movement of sodium hydrosulphiteinto North America from China. These are summarised in theDeep Sea section of this report but the detail for the USA andCanada to the end of 2007 is shown in the graph.

Although ZhongCheng Chemicals and other Chinese produc-ers were previously active in the North American market, thesupply and marketing agreement made between ZhongChengand Chemtrade permanently changed the situation from Q42006. The 31,000mt shipped in 2007 was in line with expec-tations and indicative of future levels.

The balance of the North American caustic soda market istightening. On 21 February Olin declared force majeure on

caustic soda, in response to a series of unscheduled produc-tion outages due to weather, technical and equipment issuesat several plants.

Contributing to the tightness are a number of turnarounds at theend Q1 or early Q2, including maintenance outages at FPC and

Dow. Oxychem has already taken its Taft LA membrane linedown to convert it to KOH production.

Following the $50/dst announcement, OxyChem posted afurther $30/dst price increase at the end of February. Mostproducers are targeting $80/dst but the implementation date issubject to contractual terms. It is expected that the full $80/dstwill be in place in the market by 1 April. So far levels have risenby around $50/dst at the US Gulf.

Regional markets have yet to respond to the $50/dst increasebut this is believed to be a function of time. Some suppliers haveincreased prices by the full $80/dst since 1 March, but othersare only targeting $50/dst at this point.

It is not clear how successful the full $80/dst will be on the EastCoast, as a large volume of imported caustic soda is headingtowards the Eastern Seaboard in March/April. Supply is tight onthe West Coast, however, and the full $80/dst is likely to beaccepted in this market.

On 20 February OxyChem announced a chlorineprice increaseof $35/st for delivery by pipeline and $50/st for rail delivery, withimmediate implementation or as contracts permit. With tangi-ble pressure on chlorine balances, the market interpretation ofthis is defensive, to avert further erosion. However, there aresigns in the market that chlorine pricing may be close to thebottom of the current cycle.

US Chlorine Prices

Chemicals $295-305/stBleachers/Re-packers $300-310/stWeighted average $300/st

China, Sodium Hydrosulphite Exports to N. America2000-2007, (000 mt)

0

2

4

68

10

12

14

16

18

H1

00

H2

00

H1

01

H2

01

H1

02

H2

02

H1

03

H2

03

H1

04

H2

04

H1

05

H2

05

H1

06

H2

06

H1

07

H2

07

To USA To Canada

Chlor-Alkali

EUROPE

Sodium Chlorate

Sodium chlorate availability for spare product market remainslimited in the European market, while production at most majorplants is running normally and according to seasonal norms.There have been recent cases of interruptions due to powersupply constraints but it appears that these have now beenresolved. Despite the good level of output at chlorate produc-ers, the market has tightened further over the past few weeksand both sellers and buyers consider the current situation asexceptional. However, most suppliers are able to meet theregular requirements of their customers but report that they arestruggling to meet any other occasional enquiries.

The main reason for the tense market balance is an increasein demand. Offtake has picked up in Europe but also globaldemand is on an upward trend. As a result, producers arereceiving a higher number of enquiries from European custom-ers and have more export requirements at the same time.

While producers are supplying their regular customers nor-mally to a large extent, those buyers looking for additionalmaterial are desperate to secure sufficient quantities. Apartfrom the very strong demand, there have been unconfirmedreports of production issues recently which also might havehad an impact on overall availability. However, the effects ofinterruptions to production are believed to be minor but havecontributed to the greater tightness in the market.

In the 2008 outlook, no significant change is expected in themarket and it is anticipated that there will be little spare productavailable. Although the situation has worsened recently, thereare slight sings of relaxation due to a more balanced feel in thepulp market. Pulp inventory has reportedly increased to close

to 30 days due to good wood availability.

As a result of the higher stock levels, sodium chlorate demandis likely to soften. However, offtake is expected to remain strongduring the remainder of H1 2008 and close to the producersoutput figures. Consequently, an improvement in sodium

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Hydrogen Peroxide

chlorate availability would not mean the return to a balancedfeel in the market but rather an easing of the extremely tightsituation at present.

Most companies have now published their financial results oflast year and state that 2007 was a strong year. Several market

players were able to achieve higher sales but also had to dealwith a sharp rise in costs, which was not offset by higher pricesin all cases.

Kemira is reporting that its operating profit in the pulp and papersector has decreased by almost 36% down to c66.8 million in2007. At the same time, the sectors revenue increased fromc993 million in 2006 to c1018 million last year. Demand hasbeen good over the past year and is expected to remain stableduring the coming months. The start of the new paper chemi-cals plant in Uruguay was somewhat delayed but the facility hasnow started operations. The plant has been constructedfollowing Botnias new pulp mill in Uruguay.

It has been a strong year forSodra Cell with new sales recordsdue to a combination of higher volumes and an increase inpricing. However, the results have been negatively impactedby a storm last year that felled around 15 million cubic metresof forest. The operating profit has risen from SK1.551 millionto SK1.669 million in 2007. The company also achieved higherrevenue, which has grown by almost 11% to SK17.794 million.However, profit in the pulp business has dropped slightly dueto the rise in costs. Although capacity utilisation remained ata high level, the producer was working with low inventory. Sodracell was successful in increasing its market share in Europeas Canadian suppliers focussed on markets other than theEuropean one.

Botnia achieved a 5% increase on sales from c1.311 millionin 2006 to c1.371 million last year. At the same time, operatingprofit decreased by 12% and totalled c186 million. However,it remains well above the 2005 level ofc79 million. Strong pulpprices have had a positive impact on the results, while theweaker US$ as well as the rise in raw material costs impactednegatively on the 2007 balance. The financial position wasgood throughout the whole year and pulp supply and demandwere largely balanced. Pulp deliveries have risen by 2%, whileproduction increased by 4% to 2.616 million mt. The new pulpmill in Uruguay successfully started in Q4 and it emerged thatthe cost of investment remained below the estimated figure.The mill is producing material of high quality and the output is

exceeding expectations.

Stora Enso also increased its sales in 2007. The rise was 3.2%and sales totalled c13.374 million last year. This was mainlydue to a combination of higher prices for wood products and ahigher number of deliveries of industrial and magazine paperdue to the healthy demand. In some segments, deliveries havedecreased. For example, fine paper deliveries have seen a6.5% drop as the Berghuizer mill has shut down. There hasbeen an upward trend on operating profit, which increased byc34.2 million up to c906 million. While it was significantlyhigher in wood products, operating profit was lower in con-sumer board, newsprint and magazine paper. In the outlook,offtake for newsprint is expected to remain stable while there

might be a higher number of enquiries for fine paper.

M-real closed some capacity in 2007 and, as a consequence,sales declined from c4.604 million in 2006 to c4.440 million.The operating profit excluding non-recurring items has im-proved and totalled c49 million last year. A combination of costsaving measures, higher prices for uncoated paper as well as

a higher number of deliveries in the Consumer Packagingbusiness is seen as the main reason for the improvement.However, the result was negatively impacted by the weakerUS$, the rise in pulp prices and the low selling price of coatedmagazine paper. Paper deliveries declined by almost 6% andamounted 3.9 million mt (2006: 4.2 million mt). In the outlook,

the company is expecting a rise in demand for its main productsin 2008 and is looking to increase prices for a number ofproducts in order to offset cost increases.

UPM has now published a more detailed report of its 2007results and revealed that sales have increased over 2006 toc10.035 million (2006: c10.022 million). There has been avisible improvement in profitability last year, which was mainlyseen during H1. The effect slowed down during H2 as the risein costs was higher than anticipated. In addition, the strongcompetition in the paper market prohibited the company fromraising prices for products other than newsprint and uncoatedfine paper.

The total cost increase amounted 3% over the previous year butUPM was successful in reducing some variable as well as fixedcosts. Despite the reduction in paper capacity, the companyhas invested in the remaining units in order to improve effi-ciency. In 2008, demand is expected to remain good althoughthere is growing concern regarding the availability and costs ofwood fibre. Moreover, exports duties for wood from Russia areexpected to increase and the UPM is considering alternativesources.

Nordic c525-600/mt fdContinental Europe c525-575/mt fd

The European hydrogen peroxide market seems to have got offto a reasonably strong start to the year continuing the uplift thatwas seen in the last two months of 2007. In overall terms, lastyear was seen as rather disappointing, with the market essen-tially flat against 2006, a contrast to the 5% average annualgrowth experienced over the previous five years. The difficultiesof the pulp and paper industry in the Nordic region, particularlywood shortages in Finland, were a significant factor in slowinggrowth in peroxide consumption although some conversionfrom TCF to ECF bleaching also played a part. Wood shortages

as well as the spate of mill and plant closures announced overthe past few months are expected to continue to have a negativeimpact on peroxide consumption by the pulp and paper industrythis year, mainly in the Nordic region.

Although peroxide demand is traditionally seasonally lower inthe first quarter in comparison to the final quarter of the previousyear, the reports that this years volumes are slightly ahead incomparison to the same time in 2007 are seen as encourag-ing. It appears that some of the difficulties in Finland are beingoffset by better conditions elsewhere. Sweden has certainlybeen much less affected by wood shortages and Germany isalso reported to be more positive than in early 2007. AlthoughEastern Europe is still relatively small in relation to Western

Europe, it is experiencing strong growth. In addition, peroxideofftake by International Papers new 200,000 mt/year BCTMPplant at Svetogorsk, Russia, which started production just at theend of 2007, will go some way towards offsetting a part of thevolume reductions in Finland last year.

Although there is interesting growth in many of the other

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applications of hydrogen peroxide, particularly by the chemicalindustry and in environmental applications, the health of thepulp and paper sector remains as the most important factor ingenerating a strong market for hydrogen peroxide. There is littledoubt that the European pulp and paper industry is progres-sively coming under increased pressure. The high value of the

Euro is very unhelpful in dealing with growing imports fromNorth America and increasing availability of pulp mainly fromSouth America against a backdrop of static or weakeningdemand for paper in Europe. Recent reports on the problemsof Norske Skog and speculation about its possible take over byUPM or Stora Enso could signal the start of a new round ofconsolidation in the European pulp and paper industry.

General economic conditions in Europe are gradually becom-ing more difficult. The situation is made worse by the likelihoodthat the USA is already in recession. Eurostat has reported thatEU-27 economic growth in 2007 was 2.9% with Eurozonegrowth at 2.6%. This was lower than the previous year mainlybecause of the slowdown in consumer spending in Q4. Retail

sales were better in January this year but the underlying trendis weak. Although activity in the service sector has improvedslightly this year, indices show that manufacturing is slowingin Europe. The greatest difficulties are in Southern Europe,which is now seeing a significant slowdown.

The rate of inflation in the Eurozone continued at a record 3.2%in February, well above the preferred level of just below 2%. Thisstill leaves the ECB with the policy dilemma of needing toincrease interest rates to control inflation but without furtherslowing growth. The pressures on the economy are intensify-ing with high commodity prices, the price of crude oil at a record,tighter credit conditions and the Euro at a record level of over 1.5US dollars. Although the Eurozone recorded a significant tradesurplus in 2007, there are concerns that this is now beingquickly eroded by the high exchange rate.

At the beginning of March, Arkema announced that it is planningto double the capacity of its hydrogen peroxide plant at Leuna,Germany to 80,000 mt/year by mid-2010 at an investment costof Euro 40 million. Arkema believes that this investment isnecessary to boost its position in Europe and continue to meetgrowing demand from the pulp and paper industry. Thecompany sees the plant as being ideally located to servegrowing markets at the heart of Europe. The capacity increaseis equivalent to about 3% of the current European total.

This announcement was made almost exactly on the anniver-sary of Arkemas similar notification that it intended to increasethe capacity of its Jarrie plant in France by 10%. That expansionbecame operational in Q4 2007. In the announcement, thecompany also called attention to its expansions at Becancourin Canada by 20,000 mt/year in 2006 and at Shanghai by 40,000mt/year due on stream in the middle of this year. When all theseexpansions are completed in mid-2010, Arkemas worldwidecapacity will be 440,000 mt/year in five plants. Arkema will thenbe the only world producer with all its plants exceeding acapacity of 70,000 mt/year.

Total European hydrogen peroxide production capacity figuresfor the end of 2007 are summarised in the following table. The

statistics have been updated from published information andbest estimates where company data are not available.Aragonesas, Belinka, Pulawy and Oltchim are summarised ina separate category as smaller producers. Oltchims plant inRomania has a notified capacity of 6,000 mt/year. There havebeen previous suggestions that this plant is no longer inproduction but this has not been verified.

Total European Hydrogen Peroxide Production Capacity

End-2007

Producer No. plants Kmt/year

Solvay 7 370 29%Evonik Degussa 4 250 20%Eka 3 178 14%Atofina 2 155 12%Kemira 3 142 11%FMC Foret 2 115 9%Smaller producers 4 48 4%

Total Nameplate 25 1,258

Total Effective Capacity (95%) 1,195

Apart from the companies mentioned in this table, there are

believed to be three producers in Russia. Khimprom has acapacity around 20,000 mt/year and there are two very smallothers, one of which is still believed to use an electrolyticprocess. Information on this is very sparse and there are noreports of any of this product being shipped outside Russia.Production in the Ukraine stopped about ten years ago.Eastman, Sokolov certainly closed its plant in the Czech Re-public in mid-2004. In any case, all of these have been excludedfrom the table, as have Negev Peroxide in Israel and the twoTurkish producers, as they are not strictly in Europe althoughthey still supply small quantities of hydrogen peroxide to theEuropean market.

Based on this information, the total nameplate capacity of the25 hydrogen peroxide plants in Europe is currently 1,258 kmt/year. It is, however, generally acknowledged that the effectivecapacity of these plants is substantially lower than this figure.Under current conditions, a reduction of 5% from nameplate isbelieved to be a reasonable estimation and total effectiveEuropean hydrogen peroxide capacity at the end of 2007 was1,195 kmt/year.

The average capacity of the hydrogen peroxide plants in Europeis currently slightly over 50,000 mt/year. There are economiesof scale and the last 20 years has seen the progressive closureof a number of smaller, older and less cost effective units withthe concentration of the business into the larger plants. The

distribution of the number of plants in each size range is shownin the graph.

Europe, Hydrogen Peroxide Plant Capacities

Number of plants in each size range, (000 mt as 100%)

0

1

2

3

4

5

6

7

8

0 - 19 20 - 39 40 - 59 60 - 79 80 - 99 100+

Size range (000 mt as 100%)

Numberofplants

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The changes in European peroxide capacity that have beenannounced over the years since the beginning of 2000 aredetailed in the next table. In the first four years, the only changeswere FMC Forets expansion at Delfzijl at the end of 2001 andthe restart of Degussas mothballed smaller stream at Ant-werp, which brought back about 40,000 mt/year to the market

in 2002. In 2004 and 2005, the capacity additions were all inthe Nordic region and directed at the growth in demand from thepulp and paper industry. In Continental Europe, the smallimprovements at Povoa and Rozenburg were offset by theclosure of Eastman Sokolov.

European Hydrogen Peroxide Production Capacity

Changes since January 2000

Year Plant Kmt/year

Implemented

2000 - -

2001 FMC Foret, Delfzijl (expansion) 15

2002 - -

2003 - -

2004 Solvay, Povoa (improved technology) 32004 Kemira, Rozenburg (debottleneck) 22004 Eastman, Sokolov (plant closed) -52004 Eka, Bohus (debottleneck) 72004 Kemira, Helsingborg (debottleneck) 8

2005 Eka, Alby (debottleneck) 82005 Finnper (improved technology) 45

2006 Solvay, Torrelavega (plant closed) -242006 FMC Foret, Delfzijl (debottleneck) 15

2007 Arkema, Jarrie (expansion) 10

Notified

2008 Solvay, Antwerp (for propylene oxide) 230

2010 Arkema, Leuna (expansion) 40

In 2006, it was expected that Continental European capacitywould again be boosted by the debottlenecking at Delfzijl.However, Solvays mid-year decision to close its high costTorrelavega plant in Spain, partly in response to its earlierexpansion at Finnper, meant that total capacity fell by a net 9,000mt/year. Arkemas 10,000mt/year expansion at Jarrie was theonly change in 2007.

The chart shows the development of European hydrogenperoxide capacity in the eight years from January 2000 to theend of 2007. On present information, nameplate capacity willhave increased over this eight year period by a total of 84,000

mt/year, from 1,174,000 mt/year to 1,258,000 mt/year. Theincrease over the period is 7.2%, an average of less than 1%per year. Correcting this for the recovery of Degussasmothballed stream at Antwerp in 2002 and progressive im-provements in plant effectiveness leads to a conclusion that therise in effective capacity over the period was 140,000 mt/year,equivalent to a little over 1.5% per year. In Europe, capacity has

been increased since 2000 at a significantly slower rate thanthe expansion of the market. Apart from 2007, when there wasno growth, the European market was growing at an average rateof 4-5% over that period.

In March, the first product is expected to be produced by the new230,000 mt/year hydrogen peroxide plant being built at Zandvliet,Antwerp by Solvay in conjunction with BASF and Dow Chemicalas feedstock for propylene oxide production using HPPO tech-nology. The associated propylene oxide plant is scheduled tocome on stream in May.

This new hydrogen peroxide plant stretches technology, beingtwice the size of any single stream hydrogen peroxide plant inthe world today. Its first priority will be to supply the necessaryfeedstock for propylene oxide production reliably. There is atheoretical surplus, which may eventually become available butthe plant is not currently linked to Solvays logistical and supplynetwork for the general market and this will only be a consid-eration for the future.

UK, Hydrogen Peroxide Trade

January December, mt as 100%

2005 2006 2007ImportsSweden *7,259 *6,511 *5,144Spain 3,318 2,675 2,915Netherlands 1,111 2,751 1,556

France 1,973 1,575 1,300Belgium 990 1,851 2,250Germany 702 875 887Italy 43 1 4Israel 53 - 1Others 30 24 58

Total 15,479 16,263 14,115

ExportsFinland 2,304 1,906 493Belgium 1,289 889 1,200Ireland 113 87 323Others 131 83 192

Total 3,837 2,965 2,208

* From Swedish export statistics

United Kingdom imports and exports of hydrogen peroxide

Europe, Total Hydrogen Peroxide Capacity

Changes since 2000, (000 mt as 100%)

1,100

1,125

1,150

1,175

1,200

1,225

1,250

1,275

1,300

Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08

Degussa, Antwerp line 2 out of mothball

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during the whole of 2007 are shown in the previous tabletogether with a comparison against the previous two years. Thestatistics show mt as 100%.

For a reason that is unclear, UK statistics for imports ofhydrogen peroxide from Sweden have now been substantially

understated for number of years. In the table, Swedish exportstatistics to the UK have been substituted as they are believedto be more accurate.

Between 2000 and 2003, there was a strong increase inhydrogen peroxide imports into the UK driven by growth in thevolume supplied from Sweden, which peaked at over 9,000 mtin 2003. After 2004, this volume stabilised at close to 7,000 mt/year and has been gradually falling since then. The productfrom Sweden is imported mainly if not wholly by Eka to supplypart of the demand of the pulp and paper industry in the northof England as well as the requirements of companies associ-ated with the Akzo Nobel group located in the UK.

Imports from Spain have been steady and close to 3,000 mt/year with a regular supply to the pulp and paper industry in thesouth of England. Imports from the Netherlands increasedsignificantly in 2006 as Kemira also began to supply a shareof this business although the volume was reduced in H2 2007.Imports from France have been reasonably steady for someyears close to 1,500 mt/year. The imports from Belgium aresporadic and appear to be mainly inter-site movements withinthe Solvay group. The average prices of the material from

Germany and Italy indicate that this is mainly special or elec-tronic grade. Imports from Israel to the UK distribution marketwere at one time quite significant but fell into decline at the endof 2004 with minimal volumes imported since then.

On the export side, the volume supplied to Finland, mainly inlate 2005 and early 2006, was part of Solvays support to theFinnish market during the capacity expansion at Finnper.Exports to Belgium also seem to be inter-site movements bySolvay.

Since the beginning of the year, it has seemed inevitable thatEuropean sodium hydrosulphite producers would be forced toreact to the unprecedented increases in world sulphur pricesthat have occurred over the past few months. In Europe, theprice of sulphur now appears to have risen to about four or fivetimes its normal level over a relatively short time period. In parts

of Asia, notably China and India, the increase has been evenlarger. At first, this was expected to be a short-term phenom-enon but fears are now increasing that the high level of pricescould continue throughout 2008 and into 2009. The impact onthe production costs and prices of a whole range of commodi-ties has already been very severe. A very large escalation in the

price of sulphuric acid has been most generally noticed but allproducts derived from sulphur are affected including sulphurdioxide, sulphates and sulphites as well as, of course, sodiumhydrosulphite.

Now BASF has taken a lead in Europe by announcing that it willbe increasing the sales prices for its hydrosulphite worldwideby at least Euro120/mt or the equivalent in local currency. Theincrease will be effective from 1 March or as soon as contractsallow. It seems certain that other European producers willfollow with a similar move. This increase is additional to themodest price rise initiatives that were made in Q4 last year butwhich left average prices for the early part of 2008 little changedcompared to 2007. This was before the full impact of escalating

sulphur prices became apparent.

Significant price increases for hydrosulphite have already beenimplemented in other parts of the world. In North America,temporary surcharges started to be introduced towards the endof January. In Asia, the price of Chinese hydrosulphite has nowbeen increased by 400/mt since the end of January on top ofthe $200/mt increase implemented mid-2007.

Although there could be some future impact from the volatileprice situation, the European sodium hydrosulphite market stillappears to be relatively stable in volume terms. Offtake by thepulp and paper industry is expected to strengthen as the yearprogresses following the usual seasonally lower Q1. Theoverall level of European newsprint production is essentiallyflat despite capacity reductions by the major producers. Thedifficult business environment for the textile industry continuesto be a negative factor but demand from this sector for Europeanproduced hydrosulphite could be enhanced by price and avail-ability problems for imported Chinese hydrosulphite.

An extract from the statistics issued by CEPIPRINT on theEuropean mechanical paper industry for newsprint in Januaryis shown in the table. CEPIPRINT noted that European de-mand for newsprint in January remained very similar to theprevious year in both Western and Eastern Europe. Shipmentsto Europe were down by 2.9% on last year because of the

continuing rise in imports as North American producers con-tinued to take advantage of the weak dollar and the differentialbetween European and North American price levels. In com-parison to January 2007, there was strong double digit growthin exports to both Asia and Africa.

Europe, Newsprint Statistics

January, 000mt

2006 2007 2008

MonthTotal shipments 955 940 931

To Europe 827 832 808Outside Europe 128 108 123

European Demand* 857 863 864

* Partly estimated

UK, Hydrogen Peroxide Imports2000-2007, (000 mt as 100%)

0

2

4

6

8

10

12

H1

00

H2

00

H1

01

H2

01

H1

02

H2

02

H1

03

H2

03

H1

04

H2

04

H1

05

H2

05

H1

06

H2

06

H1

07

H2

07

Others France Spain Netherlands Sweden


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These comments show consistency with the situation at theend of 2007 and with the comments of newsprint producers intheir year-end reports. In 2007 as a whole, newsprint demandin Europe was only marginally down with growth in Italy, Spainand most of Eastern Europe but some decline in the UK andGermany.

On the other hand, deliveries from the European industry weredown by 2% because imports from Canada recovered to their2005 level having fallen in 2006. These trends seem likely tocontinue in 2008. During H2 2007, European newsprint pro-ducers became increasingly concerned about the supply de-mand balance in Europe and determined to take action toimprove this. The temporary and permanent capacity reduc-tions announced by major European producers for 2008 amountto about 1 million mt/year or about 7.5% of total Europeannewsprint capacity.

There has been no firm news on the final outcome of thediscussions between newsprint producers and their custom-ers on the level of price increase for 2008. A modest declinefrom last years level is predicted. Although newsprint mill andmachine closures have significantly improved the supply de-mand balance in Europe, prices remain significantly higherthan in North America.

Since the capacity reductions announced in North America forQ1, principally by AbitibiBowater, prices there have been risingstrongly, potentially reducing the difference. However, this hasbeen partly offset by the high and still appreciating value of the

Euro, which continues to put pressure on European prices andencourages further growth in competitive shipments fromNorth America.

Although there has been pressure on the European textileindustry for a long time, business conditions have becomemore difficult over the past three years following abolition oftextile quotas at the beginning of 2005. The disadvantage of theEuropean industry has been increased by the 25% apprecia-tion of the Euro against the US dollar over the past two years tonow exceed $1.5 per Euro.

This has increasingly made the European market a moreattractive destination for Asian textiles than the USA. All parts

of the European textile industry have experienced pressure ondomestic volumes and prices, loss of export opportunities andthe transfer of production facilities elsewhere. Some countriesin southern Europe such as Italy, Spain and Portugal have feltthe effects more than elsewhere and this has had a largerimpact on their domestic hydrosulphite demand.

EU-25, Textile and Clothing Imports

January September, (million mt)

2006 2007 ChgTotal Imports

Textiles 4.47 4.84 8.4%Clothing 3.24 3.38 4.0%

Textiles & Clothing 7.71 8.22 6.5%

Of which:Imports from China

Textiles 0.89 1.10 23.9%Clothing 1.19 1.45 21.6%

Textiles & Clothing 2.08 2.55 22.6%

Source: Eurostat

In 2006, total imports of textiles and clothing into EU-25 coun-tries grew by 6.1% by volume with textiles increasing by 4% andclothing by 9%. The latest confirmed European statistics up tothe end of Q3 2007 again show that the rate of growth hasaccelerated this year. Part of the reason for this may be that Q12006 was an exceptionally below trend figure, inflating growthin 2007. Nevertheless, it is clear from the last four years datathat the upward trend is in excess of 5% per year. Europeantextile production has been eroded because of this.

The total volume of textile and clothing imports into EU-25 in thefirst nine months of 2007 was 6.5% higher than in the sameperiod in the previous year with textiles growing by 8.4% andclothing by 4.0%. China was a major beneficiary of the growthin imports with a total increase of 22.6%. Its textiles grew by23.9% and clothing by 21.6%. Between the first nine monthsof 2006 and the same period in 2007, China moved from a27.0% share of EU-25 imports to a 31.0% share, taking 92%of the growth in volumes.

The average year on year price of all textile and clothing imports

fell by slightly less than 2% in Euro terms in the first nine monthsof 2007. Chinese clothing prices were about the same buttextiles fell by about 10%. Product mix factors may have playeda part in this.

The latest statistics giving details of Chinese hydrosulphite

Europe, Newsprint Total Shipments (CEPIPRINT)

12-month Moving Total, (000 mt)

11,600

11,700

11,800

11,900

12,000

12,100

12,200

12,300

JAN.

05

APR.

05

JUL.

05

OCT.

05

JAN.

06

APR.

06

JUL.

06

OCT.

06

JAN.

07

APR.

07

JUL.

07

OCT.

07

JAN.

08

EU-25, Textile and Clothing Imports, (million mt)

2.2

2.3

2.4

2.5

2.6

2.7

2.8

2.9

3.0

Q1 Q2 Q3 Q4

2005 2006 2007

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exports to Europe by country of destination are shown in thetable for the whole of 2007 with a comparison to the previoustwo years. The data are summarised on a half-yearly basis inthe graph over the past eight years. Usually, the volume in thefirst half has tended to be stronger than in the second half. Thiswas again the case in 2007 but total shipments in H1 were the

highest ever recorded with exceptionally large movements toGermany and to the Netherlands. In contrast, the volumesrecorded in H2 were the lowest since before the year 2000.Shipments to Italy, which are usually quite consistent, wereabnormally low with movements to other European countriesalso heavily reduced. This sharp fall in the volume of importswas associated with the significant increase in price levels.

Chinese Exports of Sodium Hydrosulphite to W. Europe

January December, (mt)

2005 2006 2007

Italy 1,276 1,387 889Spain 646 550 497Portugal 393 382 279Greece 195 63 101Germany 191 140 418Netherlands 140 232 263Belgium 40 - 43Others 27 37 60

W. Europe 2,908 2,791 2,550

The volume of Chinese hydrosulphite imported into WesternEuropean domestic markets has generally been very stable,averaging in the range 2,500-3,000 mt/year, comparativelysmall in relation to the total European market. The volumesimported have been concentrated into Southern Europe, par-ticularly Italy, Spain and Portugal where the market is orientedtowards small textile users, often supplied through distribu-tors, and willing to use product supplied in small drums withlittle if any technical back-up. This is of little interest in NorthernEurope where supply is required in IBCs or as a solution.

It seems likely that the higher imports into Netherlands andGermany in H1 2007 were exceptional and through an interme-diary. These volumes declined to the usual level in H2. Incontrast, it appears that the sharp reduction in import volumesin H2 2007 was a response to the decision of Chinese export-ers to increase their prices by an average of $200/mt mid-year.

The distributor/textile market in Southern Europe is very quicklysensitive to price.

For many years, the price of Chinese hydrosulphite enteringEurope has tended to be low in comparison to the normalEuropean price level. With Chinese prices quotes in US

dollars, the increasing strength of the Euro has accentuatedthis difference. Chinese hydrosulphite prices tended to belower than elsewhere partly because of lower costs in Chinabut also as a result of overcapacity and consequently over-intensive competition between different Chinese producers,which reduced returns to unrealistic levels. This situationbegan to change in 2007 mainly as a result of the Chinesegovernments decision to shutdown heavily polluting or veryenergy inefficient production. Three polluting hydrosulphiteplants in China were closed by the government in H2 2007,reducing the level of over-capacity. The resulting reduction inavailability allowed prices to rise in Chinese domestic andexport markets.

The impact of the significant mid-year increase in the price levelof hydrosulphite exported to Europe is clear from the graph. Infact, a comparison of Q4 with Q2 prices shows an overallincrease of 50% during the course of H2 2007. Hydrosulphiteproduction costs have been increasing in China as a result ofgeneralised cost inflation, because of the accelerating appre-ciation of the Yuan against the US dollar and as a consequenceof the reduction in export VAT rebates.

However, since Q4 2007, the massive increase in world sul-

phur prices has been the most important factor driving pricerises. Sulphur prices in China are now estimated to be anunprecedented ten times their level one year ago. A return tothe normal level of price is not now expected in 2008. Inconsequence, Chinese hydrosulphite producers have in-creased export prices by $400/mt since the beginning of 2008.Since the explosion at the hydrosulphite plant of ZhejiangHuidelong at the end of February as noted in the Deep Seasection of this report, availability in China has been critical. Ittherefore seems likely that European imports of hydrosulphitefrom China in 2008 will be at a much lower volume and muchhigher price than in previous years.

The caustic soda market continues to be affected by supplyconstraints and the balance of the market has tightened.Several producers have been hit by production issues in Q1,

China, Sodium Hydrosulphite Exports to W. Europe2000-2007, (mt)

0

200

400

600

800

1,000

1,200

1,400

1,6001,800

2,000

H1

00

H2

00

H1

01

H2

01

H1

02

H2

02

H1

03

H2

03

H1

04

H2

04

H1

05

H2

05

H1

06

H2

06

H1

07

H2

07

Other W. Europe Spain/Portugal/Greece Italy

China, Sodium Hydrosulphite Exports to W. Europe2000-2007, Average Price Index (H2 2003=100)

95

105

115

125

135

145

155

165

175

H1

00

H2

00

H1

01

H2

01

H1

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Chlor-Alkali

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including Akzo, Dow and Vestolit. A number of other suppliersare understood to be struggling with low inventory due to earlierand ongoing production outages.

As a result, the market appears to be tightening. Since the startof Q1 producers had been reporting low inventory levels and

difficulties in supplying customers but until fairly recently,buyers did not appear to be affected by any supply issues.However, their perception of the market appears to be chang-ing, as the tightness seems to be filtering through to thedistributor and end-user levels of the market.

The tighter market conditions would appear to support produc-ers aspirations for higher caustic soda prices. At the end ofFebruary a Northwest European major announced a c45/dmtprice increase on caustic soda for Continental Europe and a30/dmt rise for the UK, with immediate application or whereterms permit. This has been followed by a c50/dmt price

increase announcement, effective 1 April. Although there havebeen no further official announcements yet, it has emerged thatother producers are also looking to raise prices by c40-50/dmtin Q2. In Italy, producers have announced a c20/dmt priceincrease, effective 1 March, in response to the tighter supplyconditions.

The shipping market has been actively traded in recent weeks.European suppliers are reporting strong demand from theAmericas and several parcels have been fixed for end ofFebruary or early March loading. Spot export price ideas aremoving upwards and there are indications of fixtures at around$400/dmt fob or above.

Chlorine production in January amounted to over 910,000 mt,roughly in line with the same month last year. Average dailyproduction in January 2008 saw a 1.3% rise over the previousmonth.

Sodium Chlorate

DEEP SEA

Sodium chlorate imports into South Africa have seen anothersignificant rise in 2007. This was mainly due to the improve-ment in performance following the restructure of business atdomestic pulp mills. For example, the operational perform-ance at Mondis PM31 paper machine at Merebank has im-proved significantly. As a result of upgrade works, productionat the site in Richards Bay has also improved and output pickedup by 4% in 2007.

Due to the increase in output sodium chlorate requirements inSouth Africa are now somewhat higher and the most recentfigures are showing a clear upward trend in imports. In total,around 13,100 mt of material were shipped into the country in2007 and this is a 25% rise compared with the previous year(2006: 9,800 mt). Finland remains the main importer but thecountries share has decreased considerably. While Finnishproducers were importing around 8,300 mt in 2006, the total

amount in 2007 was 6,700 mt. At the same time, shipmentsfrom Canada were about four times higher. The level has risenfrom 1,500 mt in 2006 to 6,200 mt in the following year.Canadas share on chlorate imports into South Africa wasrather low over the past years but reached an equal level toFinlands share in 2007. While virtually all material in 2006 wasof Finnish or Canadian origin, shipments from other countries

have resumed last year. There were some small quantitiesfrom Germany and China last year but these were accountingfor less than 2%. As the upward movement of imports is mainlydue to the improvement of profitability, it is expected thatshipments will level off around the current import amount.

Prices are also on an upward trend and have reached a newrecord level. In 2007, the average import price was $491/mt; analmost 14% rise over 2006. This is a much steeper rise thanseen in the past years, when the average growth rate variedaround 2-4%. The only exception was 2001/2002 when levelshave seen a similar rise to the one last year. It is expected thatthe upward pressure continues over the coming months but asomewhat slower growth rate appears to be likely.

The hydrogen peroxide market in Chile continued to growstrongly in 2007, driven by rapidly increasing demand from thepulp and paper industry. The two major new pulp projectscompleted in H2 2006 by Arauco at its Nueva Aldea mill and byCMPC at Santa Fe together added just over 1.6 million mt to

Chiles market pulp output, increasing it by about 50% to a newtotal close to 5 million mt. This added a significant incrementto Chiles annual hydrogen peroxide requirements from 2007.Demand is also growing from Chiles important mining sectormainly in the areas of metal separation and cyanide detoxifica-tion.

There is currently no production of hydrogen peroxide in Chileand the market is entirely supplied by imports. At the end of2004, Solvay announced plans to build a greenfield plant witha capacity in the range 40,000-50,000 mt/year (100%) to supplythe growing demand in the country. Although the plannedlocation of the new unit was not identified, Solvays intentionwas to re-use redundant equipment from an older permanently

deactivated hydrogen peroxide unit at Deer Park, Texas, USAthat became available during the 2005 expansion of that plant.

Solvays original target was to build the plant in time to startproduction during 2008. However, these plans appear to havebeen shelved for the time being because of the current uncer-tainties in Chiles energy and particularly natural gas supplies.

Hydrogen Peroxide

South Africa, Sodium Chlorate Imports, 2000-2007

0

2

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8

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14

00 01 02 03 04 05 06 07

Imports,

(000mt)

300

350

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500

Price,$/mt

Other Canada Finland $/mt

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Instead, Solvay seems to be giving greater priority to a progres-sive expansion of its Peroxidos plant at Curitiba in Brazil byanother 45,000 mt/year up to a final capacity of about 165,000mt/year. Since the discovery of major new deepwater reservesin the Santos basin, off the coast south of Sao Paulo, Brazilsfuture natural gas supplies have looked much more secure as

a long-term source of hydrogen raw material for hydrogenperoxide production.

Meanwhile, Chile is facing a long term energy crisis. Thecountry requires natural gas for power generation as well asdomestic and industrial use. Because of long term politicalproblems with neighbouring Bolivia and Peru, neither countryis prepared to export natural gas to Chile, despite their largereserves. Instead, Chile has to obtain what natural gas it canindirectly through Argentina. However, this supply is diminish-ing, as Argentina is itself running short of natural gas.

Bolivia, where there are huge reserves but supply has stag-nated through lack of investment since nationalisation, has

struggled to meet its long term contractual obligations to Braziland Argentina. However, it tends to give priority to Brazil, whichhas a larger and more important contract. Bolivias exports toArgentina are well below the contracted level and a crisis isdeveloping in Argentina as the southern hemisphere winterapproaches. Argentina suspended natural gas supplies toChile in 2007 and Chile will continue to have difficulties in 2008.

The energy crisis in Chile has been exacerbated by the severedrought that is affecting the country. Apart from giving majorproblems for agriculture, the water levels at hydroelectric damsare at an all-time low affecting hydroelectric power generation.The government has already taken measures such as extend-ing daylight saving time in order to avoid starting electricityrationing in March. To try to cover short-term needs some powergeneration plants have been converted to use diesel or coal.There is investment in new generating plants based on coaland hydroelectric supplies but these cannot be available until2010.

Meanwhile, to avoid the dependence on Argentina, large liquidnatural gas processing facilities are being built in severallocations, including Quintero, which is on the coast close toSantiago and further north at Mejillones, Antofagasta. Thesewill allow a long-term solution by importing by sea probablyfrom the Caribbean and Asia. However, most of these projectsare also scheduled for completion from 2010 and the supply

situation will be critical in 2008 and 2009.

The Chilean economy is performing reasonably well. Highinflation rising to 7.8% year on year in December 2007 has beenthe result of increased energy costs and higher food prices dueto the drought. With monetary tightening, inflation shoulddecline in 2008. The latest figure for annual GDP growth was4.1% with industrial production rising at an annual rate of 3.4%

in December. With its economy strongly oriented towardscopper mining, high copper prices have given Chile a strongtrade and fiscal surplus but have led to an appreciation of theChilean Peso against the US dollar creating some cost prob-lems for other export industries.

The pulp industry in Chile is mainly although not entirely in thegeographical north-south centre of the country where the cli-mate is most suitable for fast-growing plantation timber. It wastraditionally based on radiata pine although increasing amountsof eucalyptus are now being used. The industry is dominatedby two large companies, Arauco and CMPC. Both completedmajor pulp expansion projects in 2006 that added significantlyto hydrogen peroxide demand in 2007.

Arauco now has a pulp capacity of over 3 million mt/year fromfive mills in Chile and one in Argentina while CMPC produces2 million mt/year from its three mills in Chile. About 40% of thepulp produced is from eucalyptus and the remainder from pine.Market pulp production costs in Chile are particularly favour-able in comparison to North America and Europe. This ismainly because of the low cost of growing pulpwood in SouthAmerica. Costs in Chile are slightly higher than in Brazil but aremuch lower than in almost all other parts of the world. Overallcost in Chile is also reduced by a good transport infrastructurefrom plantation to mill and mill to port.

Araucos capacity includes the output of its 550,000 mt/yearmarket pulp mill in Valdivia, southern Chile, which startedproduction in February 2004. Unfortunately, the mill wastemporarily shutdown by the local environmental authorities fortwo months in H1 2005 when its treated effluent dischargeswere blamed for the death of rare black-necked swans in anearby nature reserve. When the mill was restarted in Q3 2005,its output was restricted to 440,000 mt/year, 80% of its capacity.Arauco has applied several times to the local environmentalauthorities to increase pulp production to full capacity, mostrecently in Q3 2007 but so far, all these requests have beenrefused.

Arauco started up its greenfield Nueva Aldea pulp mill at Nuble

in the Bio Bio region of Chile, 50km east of Concepcion inSeptember 2006 and it reached full capacity during H1 2007.The 856,000 mt/year two-line mill was designed to produceequal quantities of pine and eucalyptus pulp. About half of thepulp produced is being sold to China with most of the restdestined for Europe. The mill is being operated and monitoredstrictly in accordance with the guidelines ordered by the Chil-ean environmental authorities, COREMA, to avoid any possibil-ity of a repeat of the problems experienced at Valdivia.

In January, Arauco restarted its 140,000 mt/year pulp mill atLicancel, southern Chile after a seven-month break in produc-tion. The mill, which produces bleached pulp from both pineand eucalyptus, was closed in June 2007, after an incident

caused serious pollution of the nearby Rio Mataquito. Amodern effluent treatment plant has now been installed at acost of $8.5 million together with other improvements to the mill.

The other major Chilean pulp producer, CMPC completed themajor new project at its Santa Fe mill at Nacimiento in thecentral Bio Bio region in December 2006. A second bleached

Index of Average Quarterly Exchange RateValue of Chilean Peso Relative to US Dollar

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70

75

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00 01 02 03 04 05 06 07 08

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eucalyptus market pulp line was added, with a capacity of780,000 mt/year raising the total capacity of the mill to 1.14million mt/year. Like Araucos Nueva Aldea mill, the new lineat Santa Fe moved rapidly towards full production in H1 2007.Since the start up, CMPC has diverted some of its attention toimproving the efficiency of its other operations and may con-

sider an expansion at its Laja pine pulp mill in the future.

Both CMPC and Arauco continue to see long-term growthprospects for the Chilean pulp industry. However, it will beabout ten years before a new generation of Chiles pine andeucalyptus forests will begin to be ready for harvesting. Bothcompanies have stated that further significant developmentsin the Chilean pulp industry before that time are unlikely. In themeantime, they continue with investments in Latin Americancountries outside Chile.

The table shows statistics for the import of hydrogen peroxideinto Chile in 2007 compared to the previous two years. Thesestatistics are mt as shipped and not as 100%.

Chile, Hydrogen Peroxide Imports

January December, mt as product

2005 2006 2007

Brazil 12,099 17,064 24,339Belgium 1,045 3,748 4,219USA 6,270 1,576 1,894Korea - - 835Turkey 82 82 482France - - 61Germany 21 62 22Spain 29 1 1Others: 1 6 14

Total 19,547 22,539 31,867

As there is currently no hydrogen peroxide producer in Chile, themarket is covered entirely by imports. Until 2002, while themarket was still quite small, imports tended to be dominatedby supplies from Brazil and Venezuela with very little productcoming from elsewhere.

In 2003, imports from Venezuela significantly reduced and a

much larger position was taken by volumes from Brazil, whichunsurprisingly, given its location and its strong and growinghydrogen peroxide industry, has taken an important part of thegrowth in the market since then.

Over the past four years, shipments from Brazil have beensupplemented by imports mainly from the USA and Belgium.It is most likely that these assistory deliveries from outsideSouth America were required to cover product shortages dur-ing the periods when Peroxidos do Brasil and Degussa wereexpanding their plants in Brazil when regional availability wasstrained.

In H2 2006 and H1 2007, imports from outside the region were

small and the bulk of Chiles needs were met by Brazil. Thelarger volume of imports from outside the region in H2 2007corresponds to the period just before Degussas expansion ofits Barra do Riacho plant in Brazil to 70,000 mt/year, which wasrecently completed. With the greater availability now estab-lished in Brazil, it seems likely that the largest part of Chilesfuture requirements will continue to be supplied from there.

A new development in H2 2007 was a substantial increase inimports from Turkey as well as new imports from South Korea.The Turkish company HPAS with a plant in Bandirma has now

been shipping product to South America for several years,mainly to Brazil and Argentina in 2005 and 2006 but morerecently to Chile, Peru and Colombia. Volumes have beenrather variable, possibly related to the availability of specialisedshipping containers. Similarly, there have been imports fromSouth Korea into Colombia and Guatemala for several yearsand earlier into Brazil but Chile is new in H2 2007.

The graph gives a good indication of the strong development ofthe Chilean market over the past five years. The pulp develop-ments firstly at Valdivia from 2004 then at Nueva Aldea from H22006 and Santa Fe from H1 2007 already generated a visibleincrease in peroxide requirements, which will continue. In theabsence of new pulp developments, the rate of growth isexpected to slow in the future.

During January and February, the price of sodium hydrosulphitefrom China in export markets has been increased in five stepsby a total of $400/mt. This is in addition to the $200/mt increaseapplied in mid-2007. The January increase was implementedas a result of the exceptional increase in sulphur prices thatoccurred in China around the end of the year. However, inaddition to this, hydrosulphite producers were also struggling

with serious availability problems exacerbated by coal andelectricity shortages and transport problems resulting fromwhat is said to be the worst winter conditions in China for 50years. The increases in February were in response to risingcosts and the changed market situation resulting from all thesefactors. Product availability suffered another serious blow withthe 25th February explosion and fire at the hydrosulphite plantof Zhejiang Huidelong, which will put this large plant out ofaction for at least three months

As noted in other sections of this report, world sulphur priceshave been rising at an unprecedented rate over the past threeto six months. During H2 2007, this was generally expected tobe a temporary phenomenon with a rapid return to normality but

by early 2008, it had become clear that there was a crisis ofavailability, which is now expected to continue for most of 2008or even longer. Worldwide demand for fertilisers has increasedrapidly over the past year in response to grain and soyashortages. As part of this, there has been a sharp rise indemand for diammonium phosphate putting huge pressure onits price as well as the price and availability of its raw materials

Chile, Hydrogen Peroxide Imports

2000-2007, (000 mt as product)

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Others Belgium USA Venezuela Brazil


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including phosphate rock, sulphuric acid and ultimately sul-phur.

Although there are large stockpiles of sulphur in various partsof the world, logistics factors are constraining its generalavailability leading to very sharp price rises. China imports

large and growing quantities of sulphur mainly for sulphuricacid production but its inventories fell in Q4 2007 creating ashortage and the start of panic buying with spot prices rocketingtowards ten times the normal level. Because of this, the pricesof all the downstream products of sulphur have been affectedincluding sulphur dioxide, sulphuric acid, sulphites, sulphatesand, of course, sodium hydrosulphite..

The latest trade statistics from China have now been publisheddetailing exports of sodium hydrosulphite up to the end of 2007.A total for the year in excess of 140,000 mt has always be

13 March 2008

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