Chemical Profile: Asia VCM

14 June 2013 09:27  [Source: ICB]

Vinyl chloride monomer (VCM) is used almost exclusively in the manufacture of polyvinyl chloride (PVC). Almost 98% of it is used this way. The remainder is consumed in polyvinylidene chloride and chlorinated solvents. Rigid PVC resins provide the most growth activities.

VCM supply in Asia took a second hit - following the explosion at Japan's Tosoh Corporation's Nanyo-based No 2 line in 2011 - when PETRONAS-owned Vinyl Chloride Malaysia exited the vinyls industry in early January 2013. The company's exit saw the decommissioning of its 400,000 tonne/year VCM unit based in Kertih, Malaysia, which led VCM prices in Asia to surge. Meanwhile, Tosoh's 550,000 tonne/year No 2 line has never recovered from the explosion.

The tight supply situation worsened with a spate of scheduled turnarounds and lowered operating rates prompted by poor margins following a decline in VCM and downstream PVC prices in March.

In the upcoming third quarter, supply is expected to be reduced further when northeast Asian countries such as Japan and South Korea enter the summer season, as rising electricity costs add to the financial pressure on production. However, overall demand is also expected to decrease as markets such as Indian and southeast Asia enter the annual monsoon season. This reduction in demand will offset the supply tightness, resulting in a largely balanced and unchanged market, said most market participants.

VCM prices fluctuated in the first half of 2013, with prices peaking in March following a steady increase, before plunging by 10.7% to reach $835/tonne CFR NE Asia in early June. The initial uptrend was supported by supply tightness.

However, prices softened shortly afterwards, in tandem with downstream PVC prices, which fell in early March on weak buying interest after reaching a peak.

Despite this, drastic price declines in VCM were still prevented by the short supply situation within Asia, and prices started firming again in early June.

Commercial production of VCM started in the 1920s, based on the catalytic hydrochlorination of acetylene. However, that route suffered from high energy costs and has become obsolete, except in China.

Nearly all production outside China is now based on ethylene. Ethylene is first reacted with chlorine to make ethylene dichloride (EDC). The EDC is then converted to VCM by thermal cracking, and the hydrogen chloride byproduct can be recycled to an oxychlorination plant to make more EDC.

Many EDC/VCM complexes use an integrated chlorination-oxychlorination process for economic reasons.

INEOS Vinyls (formerly EVC International) has a catalytic process for generating VCM directly from ethane. The company claims a 20-30% reduction in production costs across the PVC chain for the process, which decouples VCM/PVC production from the ethylene cracker.

The absence of new VCM facilities and start-up plans for the next two years to come means that supply in Asia should not see any major change. Given the high transportation costs of gases, importing VCM is not feasible.

Some market participants also believe that with the increasing upstream ethylene dichloride (EDC) supply from the Middle East as a result of new start-ups, the price spread between EDC and VCM will widen further as EDC prices soften on increased supply while VCM prices remain stable.

On the demand front, PVC will continue to be the largest and primary downstream market of VCM. It will also be the main price driver of VCM in this region and vice versa.

The relationship between VCM and PVC is an interesting one, whereby each has the ability to influence the other's price, as we saw between January and March 2013, when a shortage of VCM spot cargoes in Asia drove VCM prices up and exerted upward pressure on PVC prices.

On the other hand, when PVC prices plunged from March on weak buying interest amid high prices, VCM fell in tandem almost at the same time. This relationship between the two products is expected to continue.

By: Jasmine Khoo
+65 6780 4359

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