State of the Salt – Summer 2012September 4, 2012
The winter of 2011/2012 proved to be the warmest winter on record for the US and Canada and the fallout of that weather event will ripple through the salt and deicing industry for at least a couple of years. The sole exception was Alaska who saw record snowfalls and cold.
There is a general belief in the marketplace that high inventory levels from the supply side will drive price wars and lower prices, however this fallacy is not to be embraced for too long. The reality is that those record inventory levels of salt throughout the country have, for the most part, been on the ground for three quarters of a year or more and storing materials is an expensive venture no matter how it is managed. The costs of the material, its transportation, the loading and unloading, and the storage are all stranded assets right now sitting under a tarp that is as tall as a four story building throughout major population centers in the snow belt. Those costs increase each month when the rent check is due; so while one might expect to see salt providers dumping inventory through price reductions, any discounting and fire sale offers will be very short lived. And, most major producers will avoid engaging in price wars which will only further erode thin margins on material that should have been sold last winter.
Supplies are plentiful and many salt mines are idle or operating at minimal rates currently awaiting the return of winter demand. The Sifto Goderich, ONT facility, the largest salt mine in the world, was hit with an F4 tornado a year ago that killed one worker and caused extensive damage. Incredibly, Sifto got the mine back in operation in just weeks and were able to meet all of their contract commitments for last season. In the spring of this year, they furloughed 400 workers for nearly two months as a result of very low demand coming off the winter of 2011/2012. Today, just weeks after they went back to work, those workers have gone out on strike on the one year anniversary of the tornado. We do not expect this strike to have any short term impact on the road salt market, and likely will have no impact on evaporated and other grades produced at that facility. If this strike wears on for an extended period, it likely would have some potential impact on the marketplace. Compass Minerals saw their 2nd quarter profits fall 32% as compared to Cargill whose profits plunged 82%, so the salt producers are anxious to see demand return and flush these high inventories.
Coming off the record low sales of last year, don’t expect producers to be giving away the store to move inventory; the damage of carrying costs is already done and the only way to stimulate sales at this point is with successive chemical intensive weather systems: ice storms, light snow storms, and freeze/thaw patterns. Accordingly, expect to see salt prices either up slightly or flat. Flat or level pricing is a reduction in the net return for salt producers and coupled with spiraling fuel and diesel costs will put a significant dent in profits this year where contractual delivered pricing without fuel escalators are in place.
If the winter weather comes back with a vengeance early, we could have some real problems. The drought in the Mid-West has resulted in extremely low levels on the Mississippi, and that has interrupted and reduced barge traffic. The barges which would typically be hauling corn and grain belt commodities down to ships in New Orleans and then reloading with salt to take up river are virtually non-existent. Low water on the river coupled with the drought wiping out much of our corn and grain crops will reduce available barge traffic. Ocean vessel bookings are substantially off as well. So, while inventories are high, the wrong (or right depending upon your viewpoint) set of winter weather and demand circumstances could wreak havoc in the Midwest as the river system will not have the ability to quickly reload these stockpiles; and, if an early freeze sets in on the lakes coupled with heavy snow, we will see a spiraling price event like we witnessed a few years ago where salt prices tripled overnight. So in this context, it is a house of cards that is totally subject to the weather timing and veracity.
There will be some discounting of old inventory from distributors and wholesalers on a spot basis, but for the most part without weather, products are not in demand and there is virtually no price low enough to move any appreciable inventory before the snow demands it. Adding to upward price pressure are crushed profit margins at the producer level.
Magnesium chloride, calcium chloride, and acetates are in the same position as salt producers with inventories packed to the ceiling from last year. At this time last year, nearly every weather pundit in the business was predicting a repeat of the previous 2010/2011 heavy snow year in the central US and Northeast US, so premium melter inventories were stacked up at the highest levels ever as the market was telling the supply side that they wanted to make sure that they were covered with sufficient inventories to meet the predicted demand – which never came.
Similar to road salt, which is not quite as susceptible to caking due to the addition of YPS and the regulatory driven practice of covered piles, calcium chloride and magnesium chlorides are intensely hygroscopic which means they will draw water from anyplace they can get it, including the air. This means that the 50 lb. bag of calcium chloride you bought last year might well be a 50 or 60 lb. paper weight of lumped and hard material. It’s all dependent on the quality of the packaging. We’ve seen multiple failures of packaging in calcium chloride from Asia; the bags and over-wraps are not UV resistant and they don’t use the best practices in packaging. Some are woven poly bags with a “dry cleaning” type bag liner that is twisted into a gooseneck, then tied before the bag is sewn shut. Be wary of all calcium chloride because there are tens of thousands of tons of calcium along the east coast from Asia that are hard as a rock. The packaging for calcium chloride is a critical component that must be carefully examined for any signs that moisture is getting into it, or that it has been stored outside and the integrity of the package has begun to fail. Caveat emptor to all buyers of imported calcium chloride whether pellets, flake, or granular. Make sure you get a quality statement and warranty statement about the integrity of the material so if you happen to take in what you think is saleable product on a discount and find out later it’s not saleable, you can get some form of restitution. Know that there is a lot of left-over and distressed calcium chloride in the marketplace this year which went out to retailers, then didn’t sell, and was returned, or was never shipped at all and just sat on the docks exposed to the weather.
The exception to this caveat is domestic US production such as OXY Chem and Tetra Technologies who have been moving product at robust sales levels into the exploding Alberta oil industry. Calcium chloride is used in oil drilling and that market has been very strong and continues to pull product strongly. As a result, the calcium chloride products from OXY remain fresh and their unique packaging is designed for outside storage so when and if it is stored outside, you can buy with confidence from both a warranty and integrity viewpoint.
With only a handful of exceptions, nearly all the pure magnesium chloride products offered in the marketplace are packaged extremely well and are stored indoors. These two factors ensure that the material you buy today will be of the same quality as just off the production line. Always ask if something is stored inside or outside before purchase to be certain, and always demand a warranty statement from your supplier.
Acetates are, like everything else, at their highest inventory levels. This is a relatively small quantity when compared to stores of calcium chloride and magnesium chloride because the costs of acetates are 8 times the costs of the other products which tends to limit inventories.
Weather is always the wildcard and the sole demand stimulator. Hard to predict accurately and, like a cocktail party in a political convention, there are too many “professional” differing opinions to know which might be correct. Accuweather’s Joe Bastardi, who amassed such an impressive track record leading up to last winter that he left Accuweather to form WeatherBell is repeating his prediction of doom and gloom from last year for the 2012/2013 winter along with many others. The kick in the pants for all of us in the business that last year was the for the first time in memory, all of the weather pundits predicted a robust active winter mirroring the 2010/2011 record winter.
Remember that many deicing products are imported from countries that lie on the other side of the planet from the US. Ships take months to book, load, and deliver, and containers take a minimum of four weeks to arrive on US shores from virtually any location and in the case of Asia, it’s closer to 8-10 weeks. If the current inventories are quickly depleted, reloads are not going to arrive in time; so it could be a very expensive winter to manage and particularly with the recent uptick in fuels. One other factor is middle east instability; the middle east provides salt, magnesium chloride, and many other minerals to the US, and any political unrest or war with Iran would have a detrimental effect on shipping of these inexpensive commodities.
Overall, this is a short report when compared to my previous manifestos, but this report contains many components to help people make an informed decision as you approach the pre-season buying time. The bottom line is if you see the weather coming together as the weathermen are AGAIN predicting, meaning early, hard, and fast winter snows, be prepared to hedge your position quickly because by the time these potential supply logistic disruptions arrive, it will be too late to cover with relief materials which are not there and are too far away to arrive in time to help. As always, we advocate strong inventories to be confident of on-going supply in winter. Just-in-time inventory management in deicers usually means “just-too-late”.