OUTLOOK '14: Europe chlorvinyl players mull possible market changes

30 December 2013 10:15 Source:ICIS News

By Heidi Finch

LONDON (ICIS)--European chloralkali and polyvinyl chloride (PVC) market players are focused on the looming prospect of changes in the seller landscape and the possibility of production consolidation for 2014.

This is linked to the future of KEM ONE’s chlorvinyl business and how that will play out with its new ownership, and also if the proposed INEOS/Solvay 50:50 chlorvinyl joint venture will receive EU approval.

KEM ONE SAS, the upstream segment of the vinyls producer KEM ONE, was placed into receivership in early 2013 but managed to secure funding to continue operations.

On 20 December, France's Commercial Court of Lyon approved the joint business continuity takeover plan for KEM ONE SAS submitted by US-based buy-out firm OpenGate Capital and industrialist Alain de Krassny.

Other joint venture plans include INEOS Chlorvinyls and Solvay's which was previously announced in May 2013.

"The newly combined business, which will be of world scale, will be able to better respond to rapidly changing European markets and to match increasing competition from global producers,” INEOS chairman Jim Ratcliffe said earlier in the year.

The deadline for the EU Commission to rule on the proposal is 21 March 2014.

The reasons for the sale of KEM ONE’s chlorvinyl business and the proposed INEOS/Solvay joint venture is the lack of profitability through the value chain, the feedstock cost disadvantage when compared to the Middle East and the US, and also the need to consolidate in the structurally over-supplied markets of northwest Europe.

Solvay and INEOS plan to achieve cost savings in their JV by integrating management and commercial personnel, producing a smaller number of grades and consolidating procurement of energy and ethylene feedstock, Clamadieu, CEO of Solvay said earlier in the year. As part of the proposed deal, INEOS will have an option of buying out Solvay's stake in the JV in 4-6 years.

There is a strong concentration of production in northwest Europe which has resulted in a net export position for both caustic soda and PVC.

Some players suggested that something will need to be done with existing capacities, particularly for those with mercury technology which still need to be converted for legislative reasons.

One trader said KEM ONE will have to become more financially viable. It said the new ownership will need to cut capacity and concentrate on more profitable parts of the business. “It will not be the end, but the beginning of a structural consolidation,” the trading source said.

Views on possible effects of a market consolidation in 2014 are mixed. A few caustic soda and PVC buyers said that they do not want to see any market rationalisation, stating that the possible merger of INEOS ChlorVinyls/Solvay will mean a reduced supply base and therefore less flexibility.

A few industry sources said the merger would create a dominant player which could “set the sequence in motion” and lead to other sellers joining forces in order to compete. This would further limit the supply base and is likely to push prices higher, said one main caustic soda buyer.

The same source said if this happened, it would look to purchase product from the US and the Middle East where it could benefit from more competitive options.

A second caustic soda consumer, however, is more upbeat about the prospect of market consolidation in Europe, stating that utilisation rates are low so there is room to compensate even if some production was idled or closed as part of the process.

The same buyer suggested that if run rates were to improve, this would enable sellers to better cover their fixed costs and would therefore help margins and investment potential.

One polyvinyl chloride (PVC) trader was equally as optimistic about the possible INEOS/Solvay joint venture.

It said that INEOS and Solvay would have a big presence in northwest Europe and the UK and this would encourage other suppliers to re-assess sales opportunities, possibly leading to a more local focus for them and consequently lower freight costs.

Also linked to possible market rationalisation is the ongoing need for European chloralkali producers to convert any existing mercury technology to membrane for legislative reasons, and the difficulty in funding such conversion projects.

One chloralkali manufacturer said “profits and margins from the current state of the market is not sufficient to make the necessary conversions, this is the reason why we need price rises for caustic and vinyls, otherwise we won’t have the chlorine to make the whole value chain.”

Caustic soda free on board (FOB) values have seen the most downward pressure in 2013, with FOB Mediterranean (MED) prices seeing the sharpest drop, from $470-490/dmt (dry metric tonne) FOB MED in mid-January 2013, plummeting by $160-170/dmt to $300-330/dmt FOB MED by the end of November.

However, the conversion of existing mercury cell units could come to the fore in 2014 when the possibility of restructuring for KEM ONE and INEOS Chlorvinyls/Solvay could be on the agenda. It is likely to play out for longer for other chloralkali sellers as the deadline is at least a few years after 2014, although the precise final conversion date varies from country to country.

There is also some market talk of the possibility of more US imports arriving in Europe in the future because of the US shale gas cost advantage. This would affect the traditional trade flows in northwest Europe for both caustic soda and PVC because of its  net-export position, particularly for liquid caustic soda as that is mainly exported to the US east coast.

While there is no clear evidence of this being a widespread phenomenon, one main liquid caustic soda buyer in Europe started importing product from the US this year. Another main caustic soda customer said it would be interested in following suit.

However, other players questioned the feasibility, citing difficult logistics and the ability to accommodate larger vessels. One producer suggested that freight costs would be so high that the feedstock cost advantage would be lost.

Parts of the US, namely the US Gulf, traditionally export both PVC and caustic soda to the Mediterranean, which is a structurally short region.

One main caustic soda buyer said it had seen import volumes increasing from the US into the Mediterranean and it suggests that this trend is likely continue on the back of relatively high prices in Europe, the prospect of some additional capacity coming on line in the US and the need to alleviate any possible downward pressure from the domestic US market.

However, this view also needs to be weighed against Dow Chemical’s chlorine and derivative business carve out plans for its US chloralkali assets and chlorinated solvents at Stade in Europe.

The company also plans to shut its chloralkali capacity at Freeport, in the US, but replace it with some new capacity from the start-up of its Dow/Mistui joint venture in early 2014 and some players suggest that the impact of any additional chloralkali capacity of Dow in the US, along with that of few others, is unlikely to be a significant one.

Also, from a global perspective,  Rio Tinto’s plans to suspend production at its alumina refinery at the Gove Peninsula in Australia for financial reasons could have some global repercussions on arbitrage opportunities.

The suspension process for the alumina refinery is expected to start in the first quarter of 2014, according to Australia’s national media. Alumina is a main end-use sector for caustic soda globally.

The proposed alumina refinery closure will mean that global suppliers to that region, primarily from Asia and in particular the Middle East, will need to re-assess their sales strategies.

"The new Saudi Arabian capacity, political thaw in Iran and an Australian alumina refinery closure could have repercussions on Middle Eastern supplies of caustic soda in the Mediterranean," said industry consultant, Stephen Harriman.

In terms of the demand outlook for 2014, some caustic soda and PVC market players expect at least a steady if not slightly improved picture amid some signs of economic recovery.

One trader in December said it already had some northwest Europe customers looking to book volumes for January and February next year, which was a positive signal.

However, it noted that it had not yet seen any forward planning from customers in the Mediterranean. Economic constraints have been most pronounced in this region since the global downturn hit in the second half of 2008.

Some economic recovery in parts of Europe could mean increased chloralkali production rates in 2014, although this will also depend on profitability and it will be key to see if demand improves throughout the value chain, otherwise that could lead to some imbalances and may affect prices.

By Heidi Finch