INSIGHT: Chlor-alkali struggles with overcapacity, end-market weakness

20 August 2013 15:42  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--At the moment, the chlor-alkali business is not great. Caustic demand in Asia is sluggish, with ample supply and seasonally high power costs forcing some producers to cut chlor-alkali plant operating rates.

Producers in the US face reduced caustic offtake from the aluminium industry, which is struggling with some of the lowest prices seen in the past four years – and the threat of even greater inventory overhang in 2014.

In Europe the construction industry remains weak, with eurozone construction output down by 3.0% year on year in June, according to a report on Tuesday from EU statistics agency Eurostat.

On a positive note, construction output was up by 0.7% in the eurozone between May and June 2013.

Chlorine and caustic soda are made together using an electrolytic process that consumes a great deal of electricity. So, chloralkali plant operators measure profitability based not on the price they may get for their chlorine or caustic soda volumes – the two chemicals are produced in a 1:1.1 ratio – but on what they call the electrochemical unit (or ECU) ,which takes that ratio into account.

In Europe the chlor-alkali business is depressed, largely because of weak demand for polyvinyl chloride (PVC) – the key chlorine derivative – into the region’s weakened construction industry. There are many other uses for chlorine, but PVC is dominant.

Caustic soda is an alkali widely used in processing industries, with major markets in pulp and paper and in the production of alumina – and ultimately aluminium – from bauxite. Trends in these sectors are having a major impact on the business globally.

The global caustic soda market is likely to just about match GDP growth over the next few years, with chlorine growing marginally faster, consultants believe. However, producers are adding capacity at a faster rate, so it looks as though market weakness will persist.

Aluminium smelters had been sucking in caustic soda and helping drive demand, but the good days are well and truly over. Aluminium prices this year have dropped to four-year lows and, with overcapacity in the market, smelters such as aluminium giant Alcoa are cutting production capacity.

Aluminium prices dropped below $1,800/tonne (€1,350/tonne) in late June, and while they have recovered they are still 6% down on last year, Reuters reported on Monday.

“The global market [for caustic soda] is very, very quiet,” a northeast Asian trader said this week.

Demand will come back as aluminium inventories are worked down and stronger production rates return, but that could be some time off. The relatively subdued pulp and paper market does not help.

Meanwhile, PVC demand remains low, with weak construction activity in Europe, slower business in Asia and relatively weak demand in the US.

US chlor-alkali market participants had expected 2013 to be stronger, but have been disappointed with the muted pick up in homebuilding, ICIS reported earlier this month.

US PVC producers have benefited from cheaper ethylene, made using competitively priced ethane from shale, and have clearly been relying on exports. But US PVC export growth, while healthy, has slowed in the face of global competition.

“It seems that a combination of weak global economic growth, plus the arrival of new capacity in other regions, is severely limiting US producers’ scope for further volume gains,” ICIS blogger Paul Hodges, chairman of consultants International eChem, said on Tuesday.

Alumina production is likely to be cut back further until prices start to recover.

The strong aluminium markets had provided great support for caustic soda, Hodges said in an earlier blog post, but high stocks threatened aluminium prices, and in turn aluminium production.

The volumes of caustic soda sold into aluminium – which had helped underpin chlor-alkali margins – were under threat.

The alumina market for caustic soda was tough, chlor-alkali producers in Europe admitted at the start of this month, even though the slump in aluminium prices had little direct effect on them.

Of greater concern was that demand for caustic soda in the pulp and paper business was depressed, possibly due to weakened consumer confidence in the region coupled with the seasonal summer slowdown.

($1 = €0.75)

Read Paul Hodges’ Chemicals and the Economy blog
Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog

By: Nigel Davis
+44 20 8652 3214

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