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.
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.
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.
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.
Chemical Weekly Issue date: 17th July 2018