INSIGHT: Chlor-alkali faces critical ETS issues

21 April 2008 17:52  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Chlor-alkali production in Europe has been under severe environmental pressure for years but it is the future economics of the business that now give greatest cause for concern.

Producers need electrons - electricity - and a great many of them to strip sodium from chlorine. But electricity prices look as though they might rise sharply, particularly given Europe’s strong desire to curb carbon dioxide emissions and rewrite the rules for its (carbon) emissions trading scheme (ETS).

It would not take much to tip the balance for the sector which is not so much energy- as electricity-expensive. Electricity generators are expected to have to pay a great deal more for the carbon they produce under the post-2012 ETS. Those costs will be passed on to consumers, Europe’s chlor-alkali makers among them.

EuroChlor director Alistair Steel, is not being alarmist when he talks of potentially sharp rises in power costs.

To make one tonne of chlorine and 1.1 tonnes of caustic soda producers need to consume around 3 MWh (megawatt hours) of electricity. Electricity constitutes between 39% and 44% of the total costs of production and up to 60% of cash costs.

At the top of the cycle, producers currently can make money and re-invest with electricity prices around €45/MWh - the price put forward by Steel in an interview with ICIS news.

But the EuroChlor chief fears electricity prices rising to closer to €75/MWh as the post-2012 phase of the ETS takes hold and carbon costs rise as projected.

Without doubt, the costs associated with carbon reduction will be passed on to consumers. Energy-intensive industries (EIIs), particularly, will be hard hit.

The European Commission (EC) says it has a plan to assist EIIs to meet international competition and players not subjected to such stringent carbon-control induced costs. But the sectors to be covered by these yet-to-be-introduced measures have not been named.

Steel, quite rightly, wants the chlor-alkali business designated as an EII and given careful attention.

Chlor-alkali players continue to invest to move away from mercury production and to the more environmentally-friendly membrane electrolysis alternative, but this is costing them some €3bn ($4.8bn).

They would find it hard to bear significant increases in operating costs at a time when they need still to concentrate on upgrading productive assets.

“Margins will be slashed to the point where producers at the bottom end of the cycle end up losing money,” Steel says. Even at the top end, investment decisions would become very difficult, he suggests.

Steel was talking following a largely technical chlor-alkali conference held last week in France. The reaction of his audience to his remarks was reportedly “astounded silence”.

This week, polyvinyl chloride (PVC) makers gather in the UK to take a look at their global business from both a technical and a global market perspective. Higher cost chlorine feedstock would make business life difficult for all Europe’s producers.

Saddling a vitally important industrial segment with damagingly high costs hardly makes sense and, to give it its due, the EC understands this.

It is working with industries, including chemicals, to try to come up with a workable formula that helps them manage high carbon-related costs. The backdrop to this is further international agreement on measures to control climate change.

The chemicals sector is addressing its own ETS issues through targeted political lobbying and discussion on-going within the high-level group (HLG) on chemicals.

For the time being, however, producers have to deal with an uncertainty that is hardly conducive to the further significant investment needed to maintain their asset intensive business in Europe.

Europe’s chlor-alkali makers are under extreme pressure yet again. One way or another they have to face potentially devastating matters of the environmental kind.

($1 = €0.63)

By: Nigel Davis
+44 20 8652 3214

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