INSIGHT: Pandemic hits global chlorine demand, but tightens caustic soda

LONDON (ICIS)–The coronavirus pandemic has had far reaching implications for chloralkali buyers and producers, paradoxically driving down demand for many products even as it causes price increases for others.

In the wider chemicals market, the overall impact of the lockdown has been to severely reduce prices and demand, with the global IPEX hitting its lowest level since April 2009 earlier this month.

This has also been true for the majority of chlorine derivatives, with polyvinyl chloride (PVC) spot prices falling in the US, Asia and Europe.

European PVC export prices fell by more than 22% between 13 March and 17 April. In the domestic market, monthly contract prices for April were bwing discussed with significant decreases, due partially to lower prices for feedstock ethylene.

“Demand is poor for every segment of PVC profile pipe because of construction. [There is] very limited business activity, demand is very, very weak,” one trader located in Turkey noted.

However, contrary to price trends in most chemical markets, prices for many co-and by-products of the chloralkali and chlorvinyls markets, such as caustic soda, have risen because of lower utilisation rates. Demand for chlorine has fallen more quickly than demand on the other side of the chloralkali equation.

CHLORALKALI AND THE ECU
Caustic soda and chlorine are created via the same process; the electrolysis of sodium chloride solution.

Chloralkali producers’ profits come from a combination of caustic products such as caustic soda and caustic potash, and chlorine derivatives, primarily PVC and also isocyantes and oxygenates, chloromethanes, solvents and epichlorohydrin and other organics and inorganics.

The construction and automotive markets therefore primarily drive downstream demand for chlorine. Both markets were severely affected by the lockdown in activity in Europe, with demand for new construction projects falling and the automotive industry virtually shut down worldwide.

“PVC demand [for April] is relatively low. I think even more of a drop than 30%, [it is] closer to 40%,” a PVC producer noted.

“The UK has almost completely stopped, France has almost completely stopped. The Netherlands and Germany are relatively OK.”

The German market was less severely affected than the rest of Europe according to sources, with some regions keeping DIY stores open and fewer coronavirus cases recorded than in Europe’s other major economies.

“Demand [was expected to be] down 30-50%- it’s more towards 20% for us this month. It’s a short month anyway, and we closed for a couple of days in Easter, six instead of four days,” one German buyer said.

“With 10% less days, 20% less PVC in the climate is not too bad,” it added, noting that the company had originally scheduled maintenance on its production lines but was unable to complete it because there were more orders than expected.

While demand for polyurethane foams was steady and upbeat up to the first half of March this year, most isocyanates industry participants estimated demand to drop, at a minimum, by around half in April, and there was much uncertainty around how long the downturn will last.

CHLORINE DEMAND IN OTHER MARKETS
The extended national lockdown of India, which is a major import market for chlorine derivative EDC (ethylene dichloride), VCM (vinyl chloride monomer) and PVC (polyvinyl chloride), has curtailed demand and lengthened supply in Asia.

Extended national lockdowns in some southeast Asian countries such as Malaysia and The Philippines have further dampened potential signs of demand recovery and added to mounting inventory pressure. Many integrated chlor-alkali producers in Asia have subsequently lowered their operating rates in April, and are expected to do so throughout May.

CO-PRODUCTS TIGHTEN
Caustic soda demand in Europe has been supported by uses such as pulp and paper and water treatment, which have remained relatively stable, with demand in hygiene applications such as bleach and soaps also rising.

At the same time, chlorine production rates have decreased in Europe according to market sources, which has tightened caustic soda availability.

As a result European spot prices have risen significantly, with average Mediterranean caustic soda prices climbing from $220/dmt (dry mtric tonne) FOB (free on board) to $285/dmt FOB between 28 February and 17 April, an increase of almost 30%. Northwest Europe average prices rose by almost 43%, from $192.5/dmt FOB to $275/dmt FOB, over the same period.

To an extent, lack of liquidity and availability has limited further price increases with few northwest European producers having export volumes to spare for sale because of demand from domestic customers.

“[It is] pretty quiet; NWE producers are not allocating spot due to too much uncertainty,” one trader noted.

The contract market is also firm with second quarter and monthly prices trending towards increases in early discussions.

“[Caustic soda] I think is generally following Europe at +€60-80/dmt… there are no homes for chlorine,” a UK-based distributor noted regarding contract price discussions for the second quarter.

Reduced output caused by declining margins in chlorine derivatives, as well as upcoming plant turnarounds in northeast Asia also means that Asia’s co-product caustic soda supply is expected to tighten in the near term.

BYPRODUCTS ALSO FIRM
Hydrochloric acid (HCl) availability has also tightened because of lower chloralkali output, in particular for isocyanates, which are historically weak in terms of both prices and demand.

Most HCl in Europe is produced as a byproduct of the isocyanates industry and the vinyls industry. This means that lower chlorine output caused by reduced demand in the downstream markets such as automotives and construction is likely to create tighter availability.

This effect had already kicked in at the beginning of 2020, with annual contract prices increasing in northwest Europe and Iberia as demand in the isocyanates market hit a historic low.

The lockdown, whilst also decreasing HCl demand, has further affected HCl supply with sources seeing additional increases in spot prices.

HISTORICAL CONTEXT
The coronavirus epidemic and the response to it have been unprecedented events for Europe, with few similar points of comparison within living memory.

The anticipated economic effect is also almost off the scale with the UK Office for Budget Responsibility (OBR) predicting that the UK’s economic output may shrink by as much as 35% percent in the second quarter.

One example of economic disruption affecting the chloralkali market was the global recession of 2008-2009. European chlorine demand fell precipitously, which caused average chloralkali utilisation rates to fall by nearly 20 percentage points in 2009 compared to the previous year.

One of the knock on effects was a tighter caustic soda market, with FOB export prices reaching their highest recorded point at over $800/dmt. This effect was short lived however as buyers re-adjusted to the situation and reduced their caustic soda requirements, with prices falling to close to their lowest recorded point in the following year.

Analyst view, by Analyst Valentina Cherubin

• Chlorine demand is expected to be affected by the big drop in GDP growth and poor downstream demand. We expect PVC construction, the main Chlorine end-use sector via the intermediates EDC and VCM, to decrease by around 10% versus 2019.
• Preliminary ICIS analysis suggests that European chlorine demand in 2020 might decline by approximately one eighth versus the same period last year, because of the Coronavirus.
• For caustic soda, the expected demand in 2020 might decline by approximately one tenth versus 2019.

INSIGHT by Chris Barker, Bill Bowen, Jonathan Chou, Fergus Jensen and Valentina Cherubin

Visit the ICIS Coronavirus topic page for analysis of the impact on chemical markets and links to latest news.

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