North American caustic soda production has been constrained in the fourth quarter of 2012 consistent with lower chlorine operating rates. Domestic demand remains strong as well as export demand taking advantage of the low cost position of U.S. gulf coast production compared with Asia. Export supply from China to the west coast has improved due to slower domestic demand in China resulting in increased inventories for some export producers. Export supply from China is expected to decline in the first quarter of 2013 due to lower chlorine operating rates in China.
MECU prices did not change during the fourth quarter of 2012. Caustic price improvement has been offset by reductions in chlorine and acid values. Prices are not expected to change in the first quarter of 2013.
South America
Canexus Brazil`s major sodium chlorate customer's pulp production continues to be aligned with our estimate and our overall sodium chlorate sales are close to the 2012 budget. Our chlor-alkali facility in Brazil maintained a 96% operating rate through Q3 and is projected to continue operating at full rates in Q4.
Looking forward into 2013, Management expects to maintain continued high operating rates at our chlor-alkali facility supported by long-term contract positions with key customers. We expect a modest decrease in our sodium chlorate operating rate (about 3,000 MTs) due to lower consumption levels by our major customer resulting from optimization efforts, and to re-align any resulting available capacity with other merchant customers over the next year.
Oil & Gas
Crude oil prices have remained stable during Q4. Prices remain elevated due to global geopolitical concerns but supply-demand fundamentals appear good. Oil inventory levels in the United States and the OECD region remain generally healthy and above five-year norms. Price differentials between Western Canadian grades and other key benchmarks remain wide, supporting demand for oil transportation services based on rail.
Natural gas prices are up slightly in Q4 as colder than normal weather in November accelerated inventory drawdown. However, inventories remain healthy at the upper end of the five year average range. Production is expected to continue to gradually fall in North America into 2013 as drilling rigs are directed to oil wells and until gas prices begin to recover.
Drilling activity in Western Canada has increased slightly in Q4 compared to Q3, with the majority of the activity directed at oil production.
Additional 2013 Annual Operating Plan Assumptions
The following additional points summarize the underlying assumptions for the Canexus 2013 annual operating plan:
-- Canadian dollar expected to average US$1.01-- Estimated incremental funding costs of our defined benefit pension plan will be $4 million-- At September 30, 2012, Canexus had $478 million of major tax pools to shelter taxable income in Canada-- Our capital expenditure program in 2013 is expected to include: -- $24 million to be spent on maintenance capital (including $4 million on our electrolytic cell recoating program in Brazil) -- $116 million on expansion/growth projects (Brandon debottleneck to add an additional 6,000 MTs in 2014 - $5 million; North Vancouver acid growth - $11 million, and NATO $100 million) -- $7 million on high-return continuous improvement projects-- The 2013 capital expenditure program will be financed from the common share offering that closed earlier today, excess distributable cash, committed credit facilities and DRIP proceeds. We expect our leverage (Debt-to-EBITDA ratio) to be approximately 2.3 at the end of 2013 (3.1 for Debt plus convertible debentures-to-EBITDA ratio).
