Chlor-alkali breaks the cycle

The chlor-alkali industry is a cyclical business where the ECU value, which is the combined value of chlorine and caustic soda, tends to move up and down with a cycle of about three years. With regard to ethylene dichloride (EDC) prices and therefore the chlorine equivalent, the trend is usually counter cyclical to caustic soda. That is, when caustic soda prices are high, chlorine prices are low and vice versa.

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There are some large consumers of chlorine, on a global basis, including vinyls, phosgene chemistry, which includes methyl di-p-phenylene isocyanate (MDI) and toluene di-isocyanate (TDI), and the chlorinated C3s which include propylene oxide and epichlorohydrin (ECH). Although the recession has taken its toll on many of these industries, global consultancy Tecnon OrbiChem still believes that growth from the chlorine side of the molecule will be stronger in the future than the growth that will be seen in caustic soda.

Caustic soda, on the whole, goes into a different set of industries than chlorine. The bigger consumers are the alumina industry and pulp and paper. Both of these industries were also impacted by the recession.

BUCKING THE TREND

However, during 2010 the industry witnessed something unusual, as coming out of the recession it was caustic soda that recovered first and more quickly than chlorine. With global chlor-alkali rates being restricted because of the low chlorine demand this has meant that caustic soda stocks have continued to be on the tight side of balanced in many places.

In the early part of 2012, the chlor-alkali industry was seeing a high dependence on the caustic soda side of production, as this has been the main source of profitability, but as demand for caustic soda is now easing, market balances look set to change.

There are some who believe that caustic soda demand growth is still going to outgrow chlorine demand in the future, which would counter the view that balances are going to change and would suggest that the industry cycles have changed. So why don’t we, at Tecnon OrbiChem agree with them?

There is no certainty that cycles will take place with this pattern and indeed coming out of the recent recession we actually saw caustic soda recover first. But historically these patterns have dominated the trends in the industry and the logic of ECU balancing will continue into the future.

The simple reason for this is that chlorine cannot be stored, unless you want to make and then store EDC. This clearly has implications for working capital and with the high ethylene pricing this would certainly not be attractive.

If we believe that the industry cycles are about to change and return to ‘normal,’ this means that we are now expecting chlorine demand to start to recover and to grow at a faster rate than caustic soda. So why have we assumed this will happen?

Many of the chlorine derivatives are expected to see good to strong growth in the coming years and the vinyls sector, which consumes around 40% of global chlorine today, is also showing strong growth. China’s expected growth in polyvinyl chloride (PVC) will be the strongest of all regional growth over the next few years and will continue to grow at an average of around 7-8% /year. Phosgene chemistry represents around 9% of global chlorine consumption and is the fastest growing of the chlorine derivatives. In MDI, for example, we are seeing continuous growth with new plants being built every year. Chloromethanes consume over 4% of global chlorine and as a chemical intermediate is seeing good growth – in particular in their use as a feedstock in hydrofluorocarbons (HFCs).

Overall we expect global chlorine growth to average 3.6% in the coming years.

Our belief is that caustic soda growth will not be as strong as that of chlorine and on average, growth will only be around 3.2%/year.

There will be good growth in China and there is positive growth anticipated in South America and parts of Southeast Asia, especially linked to new alumina production or developments in the pulp & paper industry.

However, growth is linked to GDP and many markets are already mature in terms of caustic soda consumption. The recession and historically high caustic soda pricing levels have also led to some interesting changes in the development of demand patterns with consumers changing formulas to reduce overall caustic soda consumption.

With chlorine set to grow at 3.6% and caustic soda at 3.2%, there is a potential for a growing surplus of caustic soda if present production trends (which are dictated by chlorine demand) and consumption trends continue as they are. The surplus is only a possibility, however, as clearly the industry will have to do something to address this. They cannot physically cope with all this caustic soda, and it is possible that further developments might happen in terms of recycling of chlorine. This could actually be more severe were it not for the fact that the industry is now using more of its chlorine twice.

Tecnon OrbiChem has long believed that the industry should take more advantage by using its chlorine twice in terms of either using by-product hydrochloric acid (HCl) in the system somewhere, such as using it in an oxy-chlorination unit for vinyls production or by considering the use of HCl-to-chlorine technologies. Many of the growth derivatives such as MDI generate HCl and so any future growth in these areas should also think about how to manage site balances to ensure the most value is being realized.

USING CHLORINE TWICE

What is interesting of course is that many in the industry are not really aware of this concept of using chlorine twice. Often when they see a new chlorine derivatives plant being built they assume that there will have to be a new chlor-alkali plant built. This would then suggest more caustic soda for sale and indeed this often couldn’t be further away from the truth.

Another important change in the chlor-alkali industry is new-capacity projects. Several years ago there was a growing belief that with most of the chlorine and vinyls demand happening in Asia, much of the new capacity would be built there, especially in China, where there are still massive expansion plans, or perhaps in the Middle East, leveraged by cheap energy.

However, investors in the Middle East are now more reluctant to build chlor-alkali plants that are based on exported chlorine, in the form of EDC and caustic soda and although they do have cheap energy, there are other projects that are being given priority there. The emergence of shale gas in the US has also led to changes there. Up until the development of shale gas there was a belief that there would be no major growth in the US in terms of chlor-alkali and vinyls capacity. However, the promise of cheap energy has led many companies to think about the potential for building ethylene and vinyls and chlor-alkali capacity and much of the production will be aimed at the export markets.

The developments in new capacity will have an impact on trade patterns and we expect EDC exports from the US to blossom. EDC trade with China will continue to fluctuate and will depend on the crude oil price and the economics of the acetylene versus ethylene route to PVC. With the US and the Middle East likely to supply most of the EDC for China, this swing from year to year will impact operating rates.

If US production continues to expand to feed chlorine derivatives exports then we expect exports of caustic soda to continue to grow too. They will likely continue to support the growing market in South America in particular. It is possible that more Middle East product could be sent into South America but recently some shipments have been going into Europe. This trend will continue although volumes will remain somewhat restricted as it is tending to be kept within the Mediterranean. China will continue to expand its presence in global trade.

• Janet Wright is business manager Chlor-alkali & Vinyls at Tecnon OrbiChem, a global consultancy covering the petrochemicals, fibers and plastics industries.