Chlor-alkali market recovers at slow pace

Source: ECN

2010/09/05

Correction: In the ICIS Chemical Business story headlined "Chlor-alkali market recovers at a slow pace," OxyChem's senior vice president of basic chemicals was incorrectly identified as Robert Paterson. His correct name Robert Peterson. A corrected version follows.

Marginal improvements have been seen worldwide coming out of recession. Capacity rationalization is still expected ahead

The global chlor-alkali industry saw improvements in pricing and production during the first half of 2010, much to the relief of major players that had watched operating rates worldwide fall to their lowest levels in a decade after the crash of late 2008.

China, the emerging powerhouse of global chlor-alkali production and growth, saw operating rates fall to the 50-60% range during the recession of 2009. US operating rates see-sawed between 70% and 80% last year after collapsing to 50% in late 2008. Operating rates in Western Europe ranged between 65% and 75% last year after bottoming in the mid-50s late in 2008.

 

 Dow Chemical plans to build a new facility in Freeport, Texas, US

Global chlorine consumption was hit especially hard as the meltdown in housing and construction cooled demand for polyvinyl chloride (PVC) worldwide. About 38% of the chlorine consumed in 2009 went into vinyls production, reports UK-based consultancy Tecnon OrbiChem, which provides market forecasts and studies on the chlor-alkali and vinyls chains.

The vinyls chain is the largest consumer of chlorine globally, says Janet Wright, Tecnon OrbiChem's chlor-alkali business manager. She estimates current global chlorine capacity at 76.7m tonnes/year.

"Rates had been generally lower due to the weaker chlorine and vinyls markets last year, and things have only marginally improved so far this year, which is why we are now seeing a tighter caustic soda market," Wright adds.

Chlorine and caustic soda are co-products and roughly evenly produced. Since chlorine cannot be stored, chlor-alkali plants are operated in line with chlorine demand. Low operating rates combined with increasing demand for caustic soda are resulting in a tight market and a rising price for the product.

Caustic soda demand is largely taken up by alumina production, wood pulping for paper production and soap making.

"Chlor-alkali operating rates have remained on the low side across most regions last year and this has tightened caustic soda supply," says Wright.

"There has been an improvement in caustic soda demand this year and two of the larger consuming industries - alumina, and pulp and paper - have improved since 2009, and as caustic soda is currently tight, prices are being supported," she adds.

Global caustic soda demand plummeted in the first half of 2009 after reaching record highs in late 2008, says Carlo Guarino, global business director for US-based Dow Chemical's Chlor-Vinyl business.

"The second quarter [Q2] was the lowest quarter last year in terms of caustic soda demand," says Guarino. "The start of recovery in Q4 2009 and continued steady but slow improvement have been the hallmark of 2010 so far. Caustic soda is currently balanced to tight in all regions."

Chlorine demand, on the other hand, still remains weak, as the US housing and automobiles markets are still quite enfeebled and vinyls demand in Asia is also still struggling, says Wright.

"Vinyls demand in the European industry has seen a slight improvement this year but progress is slow," she adds.

BUBBLING OPTIMISM
Q2 earnings announcements from several US chlor-alkali players revealed improved demand this year compared with 2009.

Missouri, US-based Olin reported higher Q2 2010 operating rates for its chlor-alkali operations at 83%, compared with 75% in Q1 and 70% in the same period a year ago. Improved demand for chlorine, caustic soda and bleach stemming from exports, as well as maintenance outages at five facilities drove the increase, Olin CEO Joseph Rupp said during an earnings call on July 23.

"Chlorine and caustic soda volumes for Q2 improved 7% compared to Q1 2010, and 23% compared to Q2 2009," Rupp stated. "Still, even though we have experienced a significant improvement in chlorine and caustic soda shipments this year, demand remains well below historic levels."

Olin claims to be the third-largest chlor-alkali producer in North America, with a total chlor-alkali capacity of 1.96m short tons/year (1.78m tonnes/year) as of 2009, following Dow Chemical with 3.9m tons/year and Occidental Chemical (OxyChem), with 3.4m tons/year. PPG Industries follows Olin, with a total capacity of 1.85m tons/year.

Olin reported its Q2 2010 ECU (electrochemical unit) netback at $470 (€370)/ton, 7% higher than Q1 value. The increase represents the company's third consecutive quarter of ECU netback increases from the $375/ton value seen in Q3 2009. ECU netbacks are combined net prices received for chlorine and caustic soda.

"We believe Q3 2009 was the low point of the cycle and that we will see an additional increase in ECU netbacks in Q3 2010 compared to the second quarter," Rupp said.

The Q2 ECU netback increase also reflected Olin's $75/ton caustic soda price increase implemented in December. The company expects its $80/ton caustic soda price hike announcement in February, which Olin said is being aggressively pursued by the industry, to affect its Q3 ECU prices.

 "China has many smaller localized chlor-alkali and vinyls producers. It is going to be a long time before any real changes are made there"
Janet Wright
Chlor-alkali business manager, Tecnon OrbiChem

Olin also announced price hikes of $50/ton on chlorine and $35-50/ton on caustic soda in May. Rupp noted that any benefits from the recent increases, if accepted in the marketplace, will be realized in Q4.

ICIS assessed June contract prices for US liquid caustic soda in the 15-16 cents/lb range, with suppliers said to be pushing strongly to implement their price hikes in domestic contracts.

SEEKING PRICE HIKES
Pennsylvania, US-based PPG Industries said during its July 15 Q2 earnings call that it hadbeen implementing an $80/ton price hike for caustic soda announced in May, as well as an additional $35/ton increase for the third quarter announced in July. PPG also plans to raise prices for chlorine by $50/ton for Q3.

"There has been a price increase initiative in Europe and stable pricing in Asia. We think we have a solid pricing environment for caustic soda," said PPG CEO Charles Bunch.

"On chlorine, there is a little more resistance with the PVC customers but the other merchant chlorine customers are receiving price increases, so here too we feel that the pricing environment for chlorine is stable to firm," he added.

The company reported an optimistic environment for chlor-alkali given the low inventory level for caustic soda, lower natural gas cost, lower ethylene price and solid export environment.

"The weak construction activity actually helps the merchant players like PPG, and it strengthens the pricing environment for caustic soda. At this point, even if we continue this economic environment that we saw in [Q2], we feel quite optimistic that we're out of the trough for the chlor-alkali business," said Bunch.

Texas, US-based OxyChem says demand for US chlor-alkali exports industry-wide has been increasing as a result of cost advantages arising from lower natural gas prices and the weak dollar. Sales of US chlor-alkali products were also bolstered by delays in or cancelation of capacity expansions overseas.

"Overall, volumes and prices across most of OxyChem's product lines are gradually recovering, and exports are up significantly," says Robert Peterson, OxyChem's senior vice president, basic chemicals. "The global destocking of chlorine derivative inventories that occurred in the first half of 2009 was followed by improving demand and inventory replenishment in 2010, resulting in a year-over-year improvement."

While demand from the export market has been increasing, Peterson adds that the US market is still plagued by the economic downturn, particularly in derivatives associated with construction.

Dow Chemical says it does not participate in the merchant market for chlorine. For caustic soda, Dow also notes increased demand this year in North America because of the strength in the aluminum industry.

"Assuming economic recovery returns to historical levels for the housing and automotive markets, the outlook for chlor-alkali in the next 12 months will stay on its consistently more positive trend, as these are essential markets for driving demand in the industry," says Guarino.

US CAPACITY CUTS AHEAD?
In July, Dow announced plans to build a new 800,000 ton/year chlor-alkali facility in Free-port, Texas, US, in a 50-50 joint venture (JV) with Japanese chemical firm Mitsui & Co. The plant will produce 880,000 dry metric tons (dmt)/year of caustic soda, which Dow will market on behalf of the JV.

Dow will internally use the chlorine for feedstock in its performance businesses. Dow will also toll manufacture ethylene dichloride (EDC) for Mitsui & Co. from the chlorine off-take.

Guarino says the added capacity offsets the company's shutdowns of older Texas chlor-alkali units during the recession.

"Even with this capacity, the caustic soda market can still be expected to remain fairly balanced, as industry growth around the rate of gross domestic product [GDP] continues and industry producer rationalization is likely to continue for ageing, less competitive assets," he adds.

Some capacity rationalization is expected, most likely in North America, report several industry sources. Olin noted that North American chlorine capacity had already been reduced by 2m tonnes to 13.6m tonnes last year from 15.6m tonnes in 2000.

Between 2000 and 2012, chlor-alkali capacity in North America has been reduced by a total of 6.25m tons/year, but 2.1m tons of new capacity has been added and an additional 3.05m tons/year is expected by 2012, according to Olin.

"The outlook for chlor-alkali in the next 12 months will stay on its consistently more positive trend"
Carlo Guarino
Global business director, Dow Chemical

China, however, continues its capacity build-up even in the midst of recession. Industry sources project that planned caustic soda expansions in China will produce around 3.16m tonnes/year by 2011, and China's PVC capacity will surpass 25m tonnes/year by 2012.

In August, two Chinese companies announced plans to build caustic soda and PVC facilities. Alaer Qingsong Chemical said it expected to build a new 100,000 tonne/year caustic soda plant expandable to 300,000 tonnes/year in northwestern Xinjiang province. The facility is expected to start by the end of 2011 and to serve mostly the local ­market.

The firm is also considering building a new carbide-based PVC plant, but it did not disclose any capacity details.

Inner Mongolia Zhonggu Mining expects to build a 600,000 tonne/year carbide-based PVC plant and a 600,000 tonne/year caustic soda unit in northern Inner Mongolia. The two plants are scheduled to come on stream by 2012.

ICIS assessed current operating rates in China at between 70% and 90%, with some units operating at full capacity because of outages in certain regions. The traded caustic soda price in China is said to have been rising mostly on speculative activity rather than low industry operating rates.

As of August 19, the export price for ­Chinese liquid caustic soda (48%) was assessed by ICIS at $215-$220/dmt, and solid caustic soda (99%) at $280-$295/dmt.

MARKET OUTLOOK
Amid improving global chlor-alkali demand, many industry players expect worldwide ­capacity to remain oversupplied, especially with the 300-plus projects still occurring in China.

"China has many smaller localized chlor-alkali and vinyls producers, and the government has tried to bring in plans to address this issue, but in reality, it is going to be a long time before any real changes are made there," notes Wright.

Minimal capacity has been added in the past five to 10 years in North America but Guarino points out that the region's chlor-alkali industry overall has already been effectively and efficiently balanced through rationalization and consolidation.

"This is primarily due to higher and volatile natural gas, the capital intensity of chlor-alkali capacity and new low-cost production in developing countries. Shale gas development is expected to create a more stable and lower-cost gas and to help return North America's energy cost-competitiveness, which in turn would create industry economics more conducive to reinvestment," says Guarino.

OxyChem's Peterson notes that potential growth for chlor-alkali is likely to come from rapidly growing countries such as China, India, Brazil and other emerging regions as their standard of living increases and global economic conditions improve.

Ongoing plans to convert chlor-alkali production away from mercury technology will also likely affect company strategies in the future, reports Tecnon OrbiChem.

"In the longer term, we believe that chlorine demand will still outpace caustic soda demand and this will inevitably lead to a growing potential surplus of caustic soda that has to be managed," says Wright.

"It is therefore possible that some of the technologies that produce chlorine without caustic soda could be considered more widely and some companies may seek to replace chlorine as a feedstock in their processes."

Read Paul Hodges's Chemicals & the Economy blog for a look at key industry influencers over the next 12-18 months icis.com/blog