Chlor-alkali & PVC: Global
trends & local ramifications
The chlor-alkali industry, producing mainly chlorine and caustic
soda, serves diverse sectors of the economy. The usage of chlorine is more
diverse than of caustic soda, but markets for both are shaped by what happens
in the larger economy. Downturns impact demand, but they also suppress prices,
which has some correcting influence in itself. These dynamics play out all the
time and some of these were covered in the recent World Chlor-alkali Conference
held in Singapore (and covered in detail elsewhere in this issue).
Chlorine – more intimately tied
Over the last decade or so, global demand for chlorine and
caustic soda have grown in tandem with global GDP. The relationship between
chlor-alkali production and industrial production is particularly strong. This
was very evident in the sharp downward correction in demand for both
commodities in 2009 in the wake of the global economic crisis, as also in the
recovery a year after.
Since that downturn, the global chlor-alkali industry has been
showing consistent year-on-year increase in production. The incremental growth
has been somewhat muted since 2014, averaging about 1.5% each year since, but
that is not surprising for mature commodities.
Chlorine demand is dominated by its use in vinyls, and is much
more GDP sensitive than caustic soda, which has a distinct but more fragmented
customer base. According to estimates made by Mizuho, a securities firm, about
half of the chlorine consumed globally is highly sensitive to industrial
activity.
Technology transition
Global manufacturing capacity for caustic soda is estimated at
about 88-mtpa in 2017, and dominated by the membrane process, which accounts
for nearly 78% of installed capacity (100% in India). The last vestiges of
mercury-based production are on the way out globally, driven by sheer economics
and by restrictions on the use of mercury for industrial purposes. The most
significant change is currently well underway in Europe, and by the end of the
decade the global share of this route in the installed capacity base will halve
to 2%, from about a 4% share in 2017.
The diaphragm process will continue to remain a distant second
manufacturing option, with legacy plants built with the technology continuing
to operate. Virtually all new chlor-alkali plants are now being built on the
membrane route – for the virtues of being both environmentally friendlier and
more energy efficient. While most of the capacity lost in Europe during the
technology transition has been replaced (by membrane capacity), there has been
a marginal decline in caustic soda capacity in that region – from over 13-mtpa
in 2008 to less than 12-mtpa in 2018.
The rise and rise of China
Over the last two decades the most significant force in the
global chemical markets has been China. The chlor-alkali industry is no
exception. Investments in caustic soda/chlorine manufacture in the country have
been spurred by the desire to ramp up capacity for polyvinyl chloride (PVC)
resin to meet local demand.
China’s share of global demand of the three main products in the
vinyl chain – ethylene dichloride (EDC), vinyl chloride monomer (VCM) and PVC
resin – has been climbing almost relentlessly. In the case of EDC, the widely
traded carrier for chlorine, China’s share has increased from under 5% in 2001
to nearly 15% in 2018, while for PVC the rise is from about 20% to 40%.
What is also remarkable is that the country has charted its own
course of development of the vinyl industry and attained a level of
self-sufficiency unimaginable when the plans unfolded.
The carbide route – bypassing ethylene
At the heart of China’s vinyl story is the carbide process,
which starts from coal – a fuel the country is amply blessed with (unlike crude
oil or natural gas). Through the intermediate stages of calcium carbide (hence
the name) and acetylene, VCM, the monomer for PVC, is produced. This is thus an
ethylene-free route, which has unshackled PVC production from a
capital-intensive naphtha or gas cracker – the conventional sources of
ethylene.
But the carbide process has a heavy environmental footprint,
some of which comes from using a carbon-rich fuel as coal as the starting
material, and some from the use of toxic mercury as catalyst in acetylene
production. In addition, it has a high energy footprint.
More than three-quarters of China’s PVC production now comes via
this route – unlike anywhere else in the world. Elsewhere, the oxy-chlorination
route, involving the optimal utilisation of elemental chlorine and the hydrogen
chloride generated in direct chlorination, is preferred.
Environmental challenges
Operating rates for the several PVC units based on this
technology have traditionally been poor, though there has been some improvement
thanks to some rationalisation of older, sub-economic units, and gains from the
experience of running these plants over time. But the capacity build-up has
been so rapid that China turned from being a net importer of PVC to a small,
but not insignificant exporter. Indeed, for some time last year, India was the
biggest market for Chinese PVC resin, though some market share has since been
taken up by other countries not affected by anti-dumping duties levied by
Indian authorities on some Chinese PVC producers and exporters.
But the old ways of operating are now being challenged as never
before in China. New environmental regulations now in place are forcing several
carbide-based PVC plants to shut due inability to meet norms. Rather than pay
the stiff fines that come with non-compliance, or relocate to dedicated zones
identified for chemical manufacturing, capacity is being shuttered. This is not
unique to the PVC industry; indeed several bulk, fine and speciality chemical
plants have been forced to either shut or curb operating rates, disrupting
several supply chains and sending prices for some chemicals soaring.
According to some estimates as much as 13% of existing capacity
for caustic soda and 11% of that for PVC – located near Tianjin and Beijing –
have been impacted by the new norms and more may follow as the rules tighten.
At the same time, approvals for new PVC projects based on the carbide route are
no longer being granted.
All of this will mean that going forward the capacity growth in
China is expected to lag behind demand growth. While the supply overhang that
pervades the PVC industry will not disappear, it will certainly diminish in
time.
New capacity?
Where could new capacity for PVC come from? The best location
seems to the US where shale gas is proving to be a bonanza for ethylene
production and for gas-based power plants. A world-beating cost position in ethylene
and chlorine could spur investments in the vinyl chain in that country.
India is an investment opportunity, as well, given the huge gap
between demand and supply, which is currently met by imports. There are some
indications that Reliance Industries Ltd. is contemplating a new world-scale
PVC plant, but it is as yet unclear whether this will be based on imported EDC
or utilise locally available chlorine for an integrated play.
The former approach will exclude the entire chlor-alkali
industry from any of the benefits a large chlorine sink can bring, and is
undesirable. In the end, the options will be decided by two main factors: the
availability of ethylene and the alternate uses that it can be put to at the
hands of its producer; and the acquisition cost of the chlorine needed. The
chlor-alkali industry here will have no role to play in determining the former,
but it can and should engage in a dialogue that will culminate in the latter
situation emerging as the choice for PVC production.
Ravi Raghavan
Chemical Weekly Issue date: 17th July 2018
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