Surging demand spurs price hikes
Gordon Graff -- Purchasing, 7/15/2004 2:00:00 AM
Tight supplies and a robust demand, particularly in the construction sector, have pushed up chlorine prices to record levels this year. But chlorine producers are still reeling from the run-up in energy and freight distributions costs that have buffeted the chemical industry for the past few years. And their margins, while improving, were hampered until very recently by low prices for caustic soda, a co-product of chlorine production.
SUPPLY: Shrinking capacity
In response to disappointing margins, North American producers of chlor-alkali (chlorine and caustic soda) have reduced their production capacity by some 12% over their peak levels in 2000, according to chlor-alkali supplier Olin Corp. At the same time, demand for chlorine, which was relatively flat in 2003, has picked up over the past six months, producers report. As a result operating rates in chlor-alkali plants are now hovering in the 93-95% range, estimates Steve Brien, global practice leader for chlor-alkali and vinyls at Chemical Market Associates, Inc. (CMAI), Houston, Texas. This compares with operating rates around 85% a year ago, he says.
Despite the uptick in chlorine demand, the down-sized capacity for chlor-alkali is likely to be long-term. "My assumption is they won't come back," says Brien of the shuttered North American chlor-alkali facilities. The real hot spot for chlor-alkali plant construction these days, he notes, is Asia, particularly China.
Chlorine is made by the electrolysis of sodium chloride solution (brine) in one of three types of cells: diaphragm, membrane or mercury. The process produces 1.1 ton of caustic soda solution for each ton of chlorine. This fact complicates chlorine economics because demand for caustic tends to lag behind that of chlorine by anywhere from a few months to a year. The top 10 chlorine producers worldwide are, in descending order, Dow Chemical, Occidental Chemical, Solvay, Formosa, PPG Industries, Bayer, TotalFinaElf, Akzo Nobel, Olin, and Asahi Glass.
DEMAND: Vinyl leads growth
Historically, the growth of chlorine has closely paralleled economic growth. The factor most responsible for the improved picture for chlorine this year, says Brien, has been the booming construction industry, which uses chlorine-derived plastics such as polyvinyl chloride (PVC) and polyurethanes. In fact, he adds, "the entire world economy is up this year," which he says has enhanced the use of chlorine-based materials in housing, automobiles, and municipal water and sewage systems.
Total global demand for chlorine in 2003 was 45.9 million metric tons, CMAI reports. The biggest single outlet for chlorine in 2003 (32% of the total) was in PVC, the company estimates. Other uses were in organics (19% of the total), chlorinated intermediates (7%), water treatment (6%), and pulp and paper (4%). The largest market for chlorine (39% of the total) is in Asia, according to CMAI. North America is the second largest market, with 27% of the total, and Western Europe is third, with 20%.
Industry operating rates for chlorine "are nearing practical capacity levels," states an Occidental Chemical review of the chlorine sector. And "normal seasonal increases in the bleach, water treatment and agricultural end-use markets are expected to push chlorine demand higher" through the middle of the year, the company predicts.
The vigorous activity in chlorine has not, until very recently, been matched by that of its co-product, caustic soda. However, Brien says demand for caustic has "just begun to pick up in the past couple of months," which should improve chlor-alkali margins. Margins in the business, he notes, "have been pretty ugly" for the past three years.
PRICING: Hitting new highs
Chlorine prices have reached the $270 to $275/ton level on the spot market, the highest they have been since around mid-2000, and a dramatic rebound from their low point of around $63/ton in the middle of 2001. The latest round of price increases was a $75/ton hike by U.S. chlorine producers in the first quarter of 2004. The industry is now seeking another $20/ton increase in chlorine tags.
The surge in prices reflects chlorine producers' attempts to deal with sagging margins in an industry where natural gas rates have shot up the past few years from $2/million Btu to around $6/million Btu. Natural gas is the prime fuel used to generate electricity for chlor-alkali cells, and electricity is the largest single cost component in chlor-alkali production. For example, Olin reports that electricity accounts for 56% of the manufacturing costs of a typical U.S. Gulf Coast diaphragm plant when gas rates are $5.5 million/Btu.
Little moderation in chlorine prices is expected for the rest of the year. Chlorine producer Olin forecasts that tags will increase again in late 2004 and into 2005.
The current elevated prices of chlorine should continue to be propped up by a strong demand for the commodity. Assuming that the world economy continues on its present course, says Brien, "I think the profit picture [in chlor-alkali] over the next few looks better now than it has for a long time.
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