China's Chlor-alkali Industry Faces Severe Challenges

By Zhang Peichao, China Chlor-alkali Industry Association

The operations of China’s chlor-alkali industry came under pressure in the first half of 2012 as a result of several factors such as worsening macroeconomic downward trends, high prices of energy and the other resources used in the industry, new capacity going into production, and slow recovery of demand in downstream industries.

1. PVC

In the first half of the year, the cumulative domestic output of PVC was 6.71 million tons, up 4.6% year-on-year. Overall, the poor market performance remains the main constraint to utilizing potential capacity. Meanwhile, the market supply in some regions was shortened further due to the overhaul of some enterprises. The average operating rate of the industry remained at about 60%.
   From the market performance point of view, the international crude oil price has fallen sharply since the end of the first quarter, reducing the cost of vinyl raw materials. The domestic market was dragged down by the price fall of ethylene-based PVC, and a flood of foreign low-cost products hit the market and increased the likelihood of further declines in domestic PVC prices. Meanwhile, the overall market was affected by a downturn in the futures market.
   Now, due to the complex economic trends of the second half of the year, large uncertainties still hang over the sector, the biggest question being whether the real estate market will rebound and bolster PVC demand. In view of China’s huge unutilized PVC capacity waiting to be released, the domestic PVC market will find a balance in the short term between judicious starting up of production and attending to actual demand.

Table 1 Import and export of major products and raw materials in H1 2012  (kt)
Products    Import/Export    Volume    Change Year-on-year (%)
solid caustic soda    Export    232.7    -12.88
caustic soda liquid    Export    911.1    8.27
pure PVC powder    Import    473.0    -10.91
        Export    163.0    -39.52
Ethylene    Import    636.0    37.57
EDC    Import    265.8    30.68
VCM    Import    261.4    -43.48


2. Caustic soda

In the first half of the year, the cumulative domestic output of caustic soda was 13.045 million tons, up 3.2% year-on-year. According to our analysis, one important reason for the slowdown in output growth was the caustic soda producers’ extra burden caused by low prices of PVC and liquid chlorine. Statistics show that the operating rate of caustic soda equipment was about 70%. No significant change in market conditions is expected in the near future.
   In the first half of the year, the operating rate of electrolysis equipment was dragged down by low prices of PVC and liquid chlorine. So caustic soda prices were boosted by the tighter supply. Starting from the second quarter, the supply in some regions was further tightened due to routine spring maintenance. Moreover, the high prices of raw salt are pushing up caustic soda prices. Currently, domestic caustic soda prices have climbed to a high level, and the price of high-end 32% ionic membrane caustic soda has even reached RMB3 100/t in eastern China. Caustic soda is acting as an important support to chlor-alkali enterprises, and its price is expected to remain high in the near future.

3. Foreign trade of major products and raw materials

The import and export statistics of major chlor-alkali products and vinyl raw materials in China in the first half of the year can be seen in Table 1. The export volume of caustic soda liquid shrank significantly after May, while the export prices of solid caustic soda were boosted by the tighter supply.
   The export competitiveness of China’s PVC products weakened in the first half of the year, and the export volume declined. Imports of vinyl raw materials are affected mainly by the supply fluctuation caused by abnormal equipment conditions of foreign producers.
   Overall, in context of the complex international environment in the first half of 2012, foreign trade of domestic chlor-alkali products was not optimistic. A series of factors, such as RMB appreciation, falling crude oil prices, and the high cost of domestic resources and energy, have made export products less competitive. On the other hand, as it becomes easier for foreign products to enter Chinese market.

4. The industry faces serious challenges

Capacity growth slowdown
In the first half of the year, 1.67 million t/a of new ionic membrane caustic soda capacity was built and added to the existing capacity of 340 000 t/a; 920 000 t/a of new calcium carbide process PVC capacity was added to the existing 500 000 t/a. On the one hand, capacity expansion is obviously slowing down because the old strategy of using profits in chlorine products to compensate for losses in alkali products did not work out very well in the first half of the year; on the other hand, obsolete equipment is being eliminated continually due to the continuous tightening of the country’s policies on energy conservation and clean production, as well as intensified market competition. The elimination of obsolete equipment has further promoted internal structure adjustments of the chlor-alkali industry. Capacity fluctuations of chlor-alkali products in the first half of the year are summarized in Table 2.
Table 2 Fluctuations of chlor-alkali capacity in H1 2012 (kt/a)
        Caustic soda            PVC
New capacity    Eliminated capacity        New capacity    Eliminated capacity
ionic membrane method    ionic membrane method    diaphragm method    calcium carbide route    calcium carbide route
1670    140    200    920    500

   New capacity completed in the first half of the year, especially new equipment set up in the eastern coastal areas, is not characterize by the traditional matching ratio between caustic soda and PVC, which is 1:1 or 1:0.8. Chlor-alkali enterprises are giving more attention to avoiding the risk in purchasing calcium carbide raw materials and to steer toward caustic soda and more competitive chlorine products. It is worth noting that the caustic soda and PVC industry as a whole has picked up some new features during capacity expansion, new units built in western China still follow the high matching ratio between caustic soda and PVC. Thus, PVC producers will still be major consumers of chlorine in the future.

Slightly weak downstream demand
The market for the main chlor-alkali downstream products continued to grow in the first half of the year, but the growth rate slowed down. Caustic soda downstream application areas include alumina and aluminum production, papermaking, dyeing, chemical fiber, pesticides, etc. In recent years, the application of caustic soda in papermaking has been reduced gradually; the textile industry has low operating rates due to environmental restrictions on sewage disposal and reduced export orders; the alumina industry has been restricted because Indonesia changed its policy on exporting bauxite, the import of raw materials has declined and many domestic producers have cut their production to save costs. Reportedly, Aluminum Corporation of China is planning to reduce its alumina output by 1.7 million tons in the second half of the year. Whether the alumina industry’s support of caustic soda industry can still be strong should be a concern of the people in the industry.
   The main downstream application of PVC is in making plastic products. However, due to the policies regulating the real estate market, the consumption of construction materials, such as pipes and profiles, has been restricted to some extent. And thus the demand for PVC for use in plastic products has been dragged down. Although the news of nationwide low-income housing construction did offer a glimmer of hope, the domestic market demand cannot be pulled up in the short term because some time will pass before PVC materials are needed in the low-income housing construction.

Thin margins
According to an investigation of the operation of 80 key enterprises by China Chlor-Alkali Industry Association, more than 60% of them suffered losses in the first half of this year, with a combined loss of nearly RMB2 billion. Since the prices of liquid chlorine and PVC have been low for quite a long time, high profits brought by caustic soda have been offset largely by the decline of the profitability of chlorine products. Overall, enterprises which produce PVC through less competitive calcium carbide route in eastern China suffered heavy losses. However, the more competitive ethylene process PVC producers in eastern China, large-scale chlor-alkali enterprises in China’s central and western regions that have integration advantages and those enterprises in China’s central and eastern areas that have versatile consumption of chlorine can still achieve a certain profit. The profitability of chlor-alkali enterprises is expected to continue the downward trend.

Cost issues
The cost advantage of producing ethylene and downstream products from shale gas has increased the competitiveness of the USA’s vinyl products significantly. Before 2008, about 50% of all ethylene in the USA was made from natural gas, while 22% was made from naphtha. However, at the beginning of 2012, the proportion of ethylene from natural gas increased to 65%, while only 10% was made from naphtha. According to statistics, the cost of producing ethylene from natural gas in the USA is slightly above US$400/t, while that made from naphtha in Asia and Europe is close to US$1 300/t.
China’s import volume of pure PVC powder from USA has increased sharply since 2009, and the proportion of PVC powder among all imports from the USA has also increased year by year. PVC producers in the USA reportedly use only part of their facilities to produce PVC from shale gas-based ethylene. If the technology were used extensively, their price competitiveness would be greatly enhanced. Then a large supply of low-cost PVC will enter the Chinese market, and the export competitiveness of Chinese chlor-alkali products will be weakened significantly.