Thursday, July 5, 2012

World Chlor-Alkali Conference 2012

UNCERTAIN OUTLOOK

Cautious chlor-alkali industry awaits economic & industrial revival

The marked economic slowdown in emerging markets like China and India, the Euro-zone crisis and general stagnation in the global economy is clouding the global chlor-alkali industry's near-term growth outlook. The industry, whose fortunes are intrinsically linked to GDP fluctuations, is tentative about how the aforesaid global events would unfold and repercussions on its growth prospects. Even as the industry is wary of the near-term prospects, there are hopes of better longer-term growth with possibilities of an industrial revival sometime after 2014. The shale gas revolution in the US has also given a shot in the arm to the North American chlor-alkali sector.

These trends and developments were debated at length by leading industry experts at the 16th World Chlor-alkali Conference, co-organised by ICIS and Tecnon OrbiChem, in Singapore recently.

In the chlor-alkali industry, electrolysis of sodium chloride solution (brine) gives 1.1 units of caustic soda for every unit of chlorine. This extremely energy-intensive process is carried out either by membrane, diaphragm or mercury cell technologies. The largest end-use for chlorine is in the manufacture of ethylene dichloride (EDC), which in turn is used to make vinyl chloride (VCM) and subsequently polyvinyl chloride (PVC). Large volumes of caustic soda are used in diverse end-uses, particularly within the chemical industry, but two dominate: alumina and the pulp & paper.

For both caustic soda and chlorine, uses are well-established, but differing growth rates make managing the surpluses of one product (usually caustic soda) an integral part of the business dynamics.

More sensitive to GDP

Chlor-alkali 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 time of about three years – when caustic soda prices are high, chlorine prices are low and vice versa.

According to speakers at the event, the chlor-alkali industry entered 2012 in a reasonably healthy state, with a high dependence on the caustic soda side of production. In contrast, the chlorine side became progressively weaker during 2011 due to slow demand for PVC as the housing construction business struggled around the world. Given that chlorine is consumed in large quantities in infrastructure related sectors, weak chlorine markets (and strong caustic soda) are typical of an economic slowdown. Therefore, the possibility of a prolonged uncertainty in global economic conditions is an unwelcome development for the chlor-alkali industry.

According to Mr. Mikiya Yamada, Managing Director, Equity Research, Barclays Capital Japan, the chlor-alkali industry is now more sensitive to global GDP movements. Almost 40% of PVC – which makes up for a large chunk of chlorine demand – is used in fixed assets. So chlorine is more affected by economic factors, he pointed out.

Chlorine growth on the anvil

"The global recession hit the chlor-alkali industry hard and it is only just starting to see some recovery," remarked Ms. Janet Wright, Business Manager - Chlor-alkali & Vinyls, Tecnon Orbichem, UK. Even though most end-use areas of chlorine had been ravaged by the recession, growth from the chlorine side would be stronger in the future than in caustic soda, she pointed out.

On a global basis, large consumers of chlorine include vinyls, phosgene chemistry (including MDI and TDI) and chlorinated C3s (propylene oxide and epichlorohydrin). Big caustic soda consumers like the alumina industry and pulp & paper industries were also impacted by the recession.

Mr. Charles Fryer, Chairman, Tecnon Orbichem, UK, pointed out that the chlor-alkali markets worldwide were rather stable in 2010, after the traumas of 2008-2009. Strong PVC markets in Asia, supported by buoyant construction activity in China, compensated for weak PVC markets in the West. In 2011, a downturn in building construction in China led to weakening prices for PVC, VCM and especially EDC worldwide. The resulting cutbacks in chlorine consumption and therefore caustic soda co-production led to escalating caustic soda prices in 2011, he said.

"After the recession, caustic soda came out strongly first and then chlorine, which was very surprising," noted Ms. Wright. "This was mainly because of tight supply situation. We don't believe that in the longer term, caustic soda will outgrow chlorine demand," she emphasised. "With global chlor-alkali rates being restricted because of the low chlorine demand this has meant that caustic soda stocks have continued to be tight and so 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," she added.

Global chlorine consumption by end-use - 2011

Sector

Share [%]

Vinyls

39

Phosgene (MDI, TDI, PC)

9

Chloromethanes

4

Chlorinated C3 (PO, ECH)

9

Water treatment

6

Synthesis HCl

11

Hypochlorite

4

Other inorganics

13

Other organics

4

Source: Tecnon OrbiChem

Global caustic soda demand by usage - 2011

Sector

Share [%]

Alumina

13

Pulp & paper

16

Soaps & detergents

8

Textiles

10

Organics (Pharmaceuticals, polycarbonate, silver chemicals, etc.)

18

Inorganics (Sodium silicates, STPP)

11

Water treatment

3

Hypo

4

Food

1

Others

16

Source: Tecnon OrbiChem

Ms. Wright predicted steady to strong growth in the coming years in many chlorine derivatives – especially in the vinyls sector, Chinese PVC markets, MDI, TDI and chloromethanes. "Chlorine growth is going to outstrip demand for caustic soda in the foreseeable future. Chlorine production and capacity will be increased to meet chlorine demand – with much in China & US," she said. She forecast the global chlorine industry to grow at an average 3.6% in the coming years, while caustic soda would clock a lower 3.2% per annum. "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," remarked Ms. Wright.

Global caustic soda demand: trends and forecast

In this scenario of surplus caustic soda, the industry would have to look at various ways and means it. Ms. Wright emphasised the need for the industry to use chlorine twice to ensure caustic soda is not produced in surplus. This could be done either by using by-product 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 realised, she said.

"Prospects for the next few years are uncertain, with question marks over the economies of all world regions. A hoped-for scenario is a resumption of economic growth in 2013 and booming industrial activity in 2014. This would create an upsurge in chlorine markets in 2013 followed by caustic soda in 2014, but only after a weak caustic soda market in 2013," concluded Mr. Fryer.

ENERGY ADVANTAGE

US chlor-alkali industry looks to make the most of shale gas revolution

The shale gas revolution in the US has helped the chlor-alkali industry to regain competitiveness. 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, vinyl and chlor-alkali capacity and much of the production will be aimed at the export markets given the poor domestic demand.

According to Mr. Brian Habacivch, Senior Vice President of Fellon-McCord & Associates, a US-based energy management and consulting company, the seeds of the shale gas revolution were sown in the period from 2001-2006 when US natural gas production was declining. During this period drilling activity was being ramped up and after 2006 natural gas production rose rapidly from 48-bcfpd (billion cubic feet per day) to 64-bcfpd now. "In 2001-03, the talk in the US was for importing natural gas in view of scarcity, now it is about exporting. By around 2015, export of natural gas from the US is set to start," he remarked.

Mr. Habacivch pointed out that even though many countries have recoverable shale gas reserves, different levels of entry barriers in most countries have stymied quick development. "The open access system in US gives impetus to bring gas to market quickly. This is the key reason for the shale gas revolution," he said. He added that the hydraulic fracturing technology used in shale gas is now being duplicated in crude oil exploration in the US and an "oil shale revolution" is on the way. This would further enhance competitiveness of the US chemical industry in the near future.

Mr. Habacivch's improved outlook for the US industry was seconded by Mr. Marvin Osborne, Director of Marketing - Caustic Soda, for US-based chlor-alkali major, Olin. He predicted new chlorine capacity to come online as new investment is made to take advantage of the lower natural gas costs in the US.

Cheap gas has meant low production cost for ethylene in US, so EDC exports from US have once again become quite competitive. New capacities coming up in the US are expected to have an impact on chlorine export patterns. US EDC trade with China is expected to fluctuate and depend on the crude oil price and the economics of the acetylene versus ethylene route to PVC conundrum. With rising electricity (coal) costs in China, there is likely to be an impact on dominance of acetylene-based PVC in the domestic market. In such a scenario, industry experts see improved competitiveness for PVC made in China from EDC imported from US or Middle East.

North America: Gearing up for exports

Speaking about the North American chlor-alkali industry, Mr. Osborne pointed out that about 62% of production was based on diaphragm grade technology and 35% on membrane grade technology, which would grow to 40% by 2014 as capacity increases.

In the period from 2000 to 2011, even as chlorine capacity was being added in North America, the overall capacity decreased from 16.3-mtpa of chlorine to 15.1-mtpa. This was mostly due to industry consolidation and move towards membrane-based processes from older technologies. So the current capacity expansion in the US is in line with demand, Mr. Osborne said. "Operating rates in the US now is lower than in 1995-2000 period. So there is no chance of an oversupply situation, he added.

According to Mr. Osborne, in the exports market, North America currently has approximately $180-$200 cost advantage over Western Europe and Asia. For the US chlorine sector, in the near term, economic slowdown in Europe and Asia could slow down chlorine derivative exports. However in the longer term, he expected the economy to improve and push up chlorine demand. US will be in a strong position to participate in the global economic recovery and new chlorine capacity will come on line, he said.

He also expected US caustic exports to remain high in 2012, driven mostly by relatively strong South American demand. ECU cost advantage in the US Gulf will allow exports to Australia to be competitive with current Asian exports, he added.

DOMESTIC SCENE

Indian caustic soda market to grow at over 8% in next five years

Unlike the scenario prevalent globally, the Indian chlor-alkali market is driven by caustic soda. This is mainly due to the fact that the major end-user industry of chlorine – PVC – is predominantly based on imported chlorine in the form of EDC. This is compounded further by factors like lack of new investments in the vinyls chain and ability to secure ethylene at the right price.

The Indian chlor-alkali industry made up of around 37 units accounts for only 4% of global capacity. The country's caustic soda capacity is pegged at 3.25-mtpa, with chlorine capacity at 2.8-mtpa. Just around 25% of the capacity is integrated and the industry is plagued by significantly higher cost of power compared to many other regions of the world.

According to Mr. Rajesh Deshpande, General Manager – PVC Marketing, Finolex Industries Ltd., the Indian caustic soda sector grew at around 7% per annum in the last five years and is expected to grow at a CAGR of 8% over the next five years. Robust economy and rising population are expected to propel higher consumption. Mr. Deshpande noted that government intervention on import duty on coal imports would help the industry produce power at competitive prices – addressing a key factor impacting competitiveness. "There is an excellent opportunity in the country to produce chlorine derivatives," he added.

PVC industry

Speaking about the PVC industry in India, Mr. Deshpande said five manufacturers supplied around 1,250-kt of the material. Over 700-kt of resin is imported to meet the total apparent domestic demand of 1,972-kt. He predicted PVC demand to grow at 15% in 2012. With no expansion plans by local manufacturers – expect for Reliance – the supply deficit is set to go up to around 950-kt in 2012 and 1,120-kt in 2013, leading to significantly higher PVC imports.

Indian caustic soda industry: End-uses

Sector

Share [%]

Pulp & paper

15

Alumina

14

Soaps & detergents

7

Organics

11

Inorganics

8

Textiles

21

Others

24

 

Indian chlorine industry: End-uses

Sector

Share [%]

Vinyls

15

Organics

27

Inorganics

25

Pulp & paper

6

Chlorinated paraffin wax

13

Water treatment

4

Pesticides

3

Others

7