US chlor-alkali to benefit from shale gas

US chlor-alkali is benefiting from natural gas as more cost-competitive US PVC enters the export market

The shale gas wave in North America is expected to boost growth for the chlor-alkali market as US polyvinyl chloride (PVC) producers take advantage of cheaper ethylene dichloride (EDC) – the feedstock for vinyl chloride monomer (VCM), which is used in making PVC.

Several chlor-alkali plants are expected to expand or start up in the US in the next couple of years
Ed Schipul

EDC is produced by combining ethylene with chlorine gas, a co-product alongside caustic soda in chlor-alkali manufacture. ­Despite current lackluster demand for PVC in the US, chlor-alkali players are enjoying ­robust demand for chlorine as US PVC ­exports have risen sharply in recent years, driven by a combination of large-capacity ­additions, declining domestic demand and the benefit of ethane-based ethylene supply, ­according to UK-based consulting firm ­Nexant in its Vinyls Chain Market Dynamics ­report published in April.

US PVC exports increased from 650,000 tonnes in 2005 to 2.7m tonnes in 2010, ­according to Nexant.

“The most important structural change happening in the chemical industry is the natural gas competitiveness recovery in the US following the shale gas breakthroughs. This is expected to revitalize the petrochemical industry and thus it’s reasonable to anticipate some growth for chlor-alkali as well,” says Carlo Guarino, global business director for US-based Dow Chemical’s Chlor-Vinyl business. He notes that chlorine operating rates in the US landed in the low 90% range for the first quarter of 2011, representing an improvement of 5-6 percentage points compared with the first quarter of 2010.

“These relatively high rates, considered the highest for the last five years, are a consequence of a healthier and more export-oriented vinyl industry. US PVC producers, amid depressed PVC domestic demand, have ­increased its export share on production from 10% in 2005 up to 42% last year due to a lower US dollar, lower energy costs and C2 arbitrage advantage,” Guarino says.

US PVC exports are forecast to rise to 40% of total US production this year compared with 32.5% last year, 20% in 2009 and 10.5% in 2007, says Laurence Alexander, an analyst at US-based investment bank Jefferies & Company.

“The US PVC cost advantage has enabled exports to more than fill the gap, causing prices and margins to rise,” says Alexander. “Though not as dramatic as the ethylene chain, abundant natural gas in the US should also be a secular benefit for US-based PVC producers, putting them lower on the cost curve compared to other naphtha-based ethylene production regions.”

PRODUCERS TAKE ETHANE ADVANTAGE
US chlor-alkali producers such as Dow Chemical and Westlake Chemical are expected to take full advantage of the favorable North American ethylene industry fundamentals.

Westlake is constructing a new chlor-alkali plant in Geismar, Louisiana, scheduled for completion in the second half of 2013. The new chlor-alkali unit is expected to produce 250,000 electrochemical units (ECUs) annually, bringing the company’s total estimated capacity upon completion to 525,000 ECUs/year. One ECU is equivalent to 1 tonne of chlorine and 1.1 tonnes of caustic soda.

In early April, Westlake announced its plans to expand its ethylene capacity by ­debottlenecking its ethylene units and ­increasing its ethane use at its Lake Charles, Louisiana, facility. Westlake is also considering expansion options to upgrade its ethylene production in Calvert City, Kentucky, to take advantage of lower-cost ethane and lighter feeds.

“These projects will enable the company to capture upside potential along the vinyls chains,” according to US-based credit ratings agency Fitch Ratings. “Cost-advantaged ethane as feedstock will maintain the competitiveness of Westlake’s products in the export markets, particularly where naphtha as the predominant feedstock source is more expensive at current crude oil prices.”

Dow Chemical is not a vinyls player, but its chlor-alkali joint venture (JV) partner Mitsui & Co – a global chlorovinyl materials supplier – will benefit from the 800,000 tonne/year chlor-alkali plant being built in Freeport, Texas, under the JV Dow-Mitsui Chlor-Alkali. Dow also plans to expand its US ethylene ­capacity, which will involve a new ethylene cracker on the Gulf Coast by 2017, the restart of an ethylene facility in Louisiana by 2012 and the expansion of ethane feedstock capabilities at two other US ethylene facilities. The 50:50 chlor-alkali venture, which will be ­operational in 2013, will supply Mitsui its share of chlorine, which will be converted to EDC and VCM by Dow for Mitsui’s use.

Another US chlor-alkali producer, PPG Ind-ustries, leased its property at the company’s Natrium, West Virginia, US chlor-alkali site to US-based Gastar Exploration in February for development of Marcellus Shale natural gas resources. More than 30 wells are planned, with construction and drilling activities ­expected to begin in the third quarter of 2011.

CHLOR-ALKALI CAPACITY EXPANDS
Aside from expansion projects by Westlake Chemical and the Dow-Mitsui venture, Japan-based PVC producer Shintech finished the construction of its chlorovinyls facility in Plaquemine, Louisiana, US, in December. which is expected to bring 600,000 tonnes/year of PVC and 580,000 dry metric tons (dmt)/year of caustic soda on stream by the third quarter of 2011. The facility is Shintech’s first chlorovinyls integrated complex.

Formosa Plastics USA is expanding its chlor-alkali plant in Point Comfort, Texas, which will add 25%, or about 230,000 dry short tons (dst)/year of caustic soda capacity. Start-up is expected by July 1. The Point Comfort facility produces olefins, polyethylene (PE), polypropylene (PP), PVC and caustic soda.

The second half of 2011 is expected to see a 6% increase in US chlor-alkali capacity, notes Dow’s Guarino. “But with the increase in ­exports to Latin America and Southeast Asia, we believe the market will stay balanced as it has done for the past three consecutive quarters,” he says.

Southeast Asia also will see capacity ­expansions with the announcement last month of Japan-based Asahi Glass Co. investing yen 5bn ($62m, €43m) to expand its Anyer chlor-alkali capacity by 30% through its Indonesian JV company Asahimas Chemical with Mitsubishi Corp. The Anyer plant has a 350,000 tonne/year caustic soda unit and a 250,000 tonne/year ethylene dichloride unit. The expansion will boost caustic soda capacity to 500,000 tonnes.

The additional facilities are expected to start operation in the first quarter of 2013. Asahimas Chemical accounts for more than 50% of Indonesia’s caustic soda market, ­according to Asahi Glass. China, meanwhile, continues its chlor-alkali and PVC capacity build-up even as rising crude oil, salt and ­energy prices have increased production costs in the region. Industry sources indicate China as the largest caustic soda producer worldwide with a capacity of 38.5m dmt, accounting for half of global capacity.

The global chlor-alkali market is also witnessing capacity changes because of environmental regulations. In Europe, mercury cell chlor-alkali capacity will be required to be shut down in the next 10 years, says Guarino.

“Bulgaria-based Polimeri AD has stopped its chlor-alkali production and will likely not restart its diaphragm-based facility unless they find funds to convert to membrane. Meanwhile, France-based Arkema is also restructuring its chlorine system by substituting mercury processing with membrane. Details of the conversion have not been disclosed,” notes Guarino.

Arkema’s chlor-alkali plant in Jarrie, France, has a capacity of 170,000 tonnes/year. Trade group EuroChlor estimates 7,600 tonnes of liquid mercury are used in 34 electrolysis plants in 15 countries across Europe.

Chlorine transportation concerns in Europe will drive changes as players continue to make plans to avoid moving chlorine around, says Janet Wright, chlor-alkali business manager at UK-based consultancy Tecnon Orbichem. “This might involve building small chlorine plants next to customers as in the case with Germany-based Leuna-Harze,” she says.

Leuna-Harze is constructing a 15,000 tonnes/year chlorine unit, which is expected to come onstream in mid-2012. The electrolysis plant will be fully integrated into the company’s chemical production in Leuna.

In Brazil, discussions with environmental agencies and the government are being held to ban asbestos for building and construction, says Guarino. “The outcomes of these will certainly affect the chlor-alkali plants using diaphragm technology, which are accountable for 55% of the country’s capacity.” A case in point is Carbocloro, the JV between petrochemical firms Occidental Petroleum, based in the US, and Brazil-basedUnipar, which transformed its diaphragm technology with a capacity of around 160,000 dmt/year, in Sao Paulo to non-asbestos diaphragm because of the asbestos ban implemented in the state since 2010, adds Guarino.

Brazil’s caustic soda production capacity is estimated at 1.7m dmt/year, notes Flavio Vilhena Dias, consultant for Brazil-based Fibria. “The main Brazilian producers are Braskem, Carbocloro, Dow Chemical and Solvay, which account for 90% of the country’s total caustic soda production. Most of these producers ­import a lot from their parent companies such as Dow Chemical and Occidental Chemical in the US,” he adds.

CAUSTIC SODA DEMAND IMPROVES
South America has been one of the main growth regions for caustic soda demand ­because of its strong alumina and pulp and paper industries – caustic soda’s main market applications, says Tecnon’s Wright.

In Brazil, caustic soda imports last year were estimated at 1.1m dmt with aluminum producer Alunorte the largest importer at 650,000 dmt, says Dias. “We expect to have record imports in 2011 forecast to reach $420m compared to last year’s $210m.”

US vinyls and other derivatives producers continue to be supported by high levels of exports as the domestic vinyls industry remains weak because of the poor housing market.

CAUSTIC SODA RECOVERY
“Caustic soda demand has recovered well from the recession across most regions, but chlorine has continued to lag, which is an unusual situation,” says Wright. “Chlorine demand will eventually improve, and with it, operating rates. This will tip the supply-­demand balance leading to the usual cyclical downward pressure on caustic soda.”

Wright points out that recent higher caustic soda price levels across most regions are mostly because of outages. The March earthquake and tsunami in Japan led to further tightening in the Asian caustic soda balances, while China had to contend with energy restrictions, which affected the country’s chlor-alkali operating rates. “All of these led to upward ­momentum on chlor-alkali pricing levels. However, as buyers continue to resist these increases, the market is questioning how much further they will now rise,” she says.

As of May, ICIS assessed liquid caustic soda spot prices across China, Southeast Asia, Europe, US and Latin America within the $400-500/dmt levels – double the price seen from the same period last year.

“Caustic soda demand in the US has ­improved by around 5% over 2010 and some customers forecast a 10% growth in their caustic consumption compared to last year,” says Guarino. “In Europe, there were multiple turnarounds that keep the market tight in Q2. Spot is limited thus far, and attempts among producers to get help on covering short positions are not very successful.”

Recovery from tight global caustic soda supply is uncertain this year, adds Guarino. “It is too early to judge whether the Japanese industry will restart some or all of the chlor-alkali plants affected by the tsunami, how Europe finishes the turnaround season and how quickly the new capacity in the US is absorbed. The consensus industry view is that all these factors, if they come together, may create a slightly long position late in 2011 or early 2012 and prices will erode from the May 2011 levels.”

He adds: “This price erosion has been speculated by caustic customers for the past six months, and so far, demand is continuing to outstrip supply. We believe the current ­upward momentum will carry well into the second half of 2011.”

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