Adjustment of the Chinese Chlor-alkali Industry Is Imperative   

In the last 10 years, the demand for chlor-alkali products coming from the construction, plastic processing, alumina, paper-making and printing & dyeing industries in China has increased dramatically. This has caused chlor-alkali enterprises to constantly expand their capacities. In 2005-2007, the growth rate of China's caustic soda capacity exceeded 20%. Encouraged by winning an anti-dumping case in 2003, China's PVC producers' enthusiasm to expand their capacities runs high. During 2003 to 2007, the annual growth rate of China's PVC capacity exceeded 20%. In 2005, this figure even reached an all-time high of 46%. In 2008, the annual growth rates of China's caustic soda and PVC capacities dropped to 13% and 8%, respectively. In particular, since the outbreak of the global financial crisis in the second half of 2008, the entire chlor-alkali industry has entered a difficult period.

* Capacity expansion continues despite overcapacity   

As of June 2009, China's caustic soda capacity reached 25.52 million t/a. In the first half of 2009, China's caustic soda output was 9.15 million tons. The operating rate of caustic soda plants in China rose from 56% in early 2009 to 80% in June 2009. China's PVC capacity was 16.16 million t/a. In the first half of 2009 in China, PVC output was 4.289 million tons, and the average operating rate of PVC plants was about 53%. The output of caustic soda and PVC in China decreased, year-on-year, for the first time in recent years. The output of major raw materials, such as crude salt and calcium carbide, also declined during the same period. Nevertheless, in 2009, China's PVC and caustic soda capacities will increase 1.67 million t/a and 4.95 million t/a, respectively, of which 350 000 t/a PVC capacity and 800 000 t/a caustic soda capacity were already put into operation in the first half of 2009. Therefore, the serious imbalance between the supply and demand of chlor-alkali products in China can hardly improve in the short term.

Table 1 Output of Chlor-alkali Products in H1 2009   

Products                  PVC      caustic soda    crude salt    calcium carbide
Output (000 t)            4 289    9 148           2 5839        6723
Annual growth rate (%)    -4.1     -4.9            -2.6          -12.8


Table 2  Construction and Expansion of Chlor-alkali Project in 2009-2012   

Company
   New Capacity    Startup date
China Pingmei Shenma Energy & Chemical Group Co., Ltd.
   300 000 t/a PVC    September 2009
   300 000 t/a caustic soda    May 2009   
   450 000 t/a calcium carbide    
Huangshan Huasu New Material Science & Technology Co., Ltd.
   l million t/a PVC     May 2011
Shaanxi Beiyuan Chemical Industry Group Co., Ltd.
   200 000 t/a PVC    end of 2009
   20 000 t/a caustic soda    
Xinjiang Zhongtai Chemical Co., Ltd.
   450 000 t/a PVC    March 2010  
   320 000 t/a caustic soda
Guangxi Tiandong Jinsheng Chemical Co., Ltd.
   200 000 t/a caustic soda    April 24th, 2009
   200 000 t/a PVC        
Inner Mongolia Junzheng Chemical Co., Ltd.
   200 000 t/a PVC    before 2010
   200 000 t/a caustic soda
Wuhai Chemical Co., Ltd. (Inner Mongolia)
   150 000 t/a caustic soda    August 2009
   150 000 t/a PVC              
Shandong Xinfa Chemical Co., Ltd.
    400 000 t/a PVC    2010
South Korean Hanwha Chemical Corp.
    300 000 t/a PVC    2010
Inner Mongolia Morning Great Power Group
   120 000 t/a caustic soda    2010
   120 000 t/a PVC        
Liuzhou Chemical Industry Co., Ltd.
   100 000 t/a caustic soda    2010
   100 000 t/a PVC
Gansu Xinchuan Chemical Co., Ltd.
   200 000 t/a PVC    2010

* Facing weary domestic demand and weak export market   

Due to the impact of the financial crisis, in the first half of 2009 China's domestic demand for downstream products of the chlor-alkali industry shrank by varying degrees. For example, the output of alumina, which is the largest use of caustic soda, dropped 4.6% year on year, and the average operating rate of alumina plants was less than 55%. This has a direct impact on the demand for caustic soda. At the same time, the export volume and price of caustic soda also declined. After China launched relevant stimulus and adjustment policies, the output of plastic products has begun to rebound by vary degrees. The export of PVC is shrinking, but its import is rising sharply. In the first half of 2009, the imports of PVC reached 1.107 million tons, up 160% year on year, but exports was only 30 000 tons, down 92%. China's domestic PVC market is very competitive, and PVC prices fluctuate at a low level.

* The prices of raw materials rise, and key equipment must be imported.   

Compared to the beginning of 2009, the prices of raw materials for PVC production have now risen sharply. For example, the price of ethylene has increased 66% to US$1 014/t in September, the price of EDC (ethylene dichloride) has risen 250% to US$480/t, and the price of VCM (vinyl chloride monomer) has climbed 52% to US$705/t. This has further squeezed the profit space of PVC producers.
   In addition, the government's stepping-up of resource product prices has also accelerated the rise of chlor-alkali production costs. In April 2009, Chinese cities such as Tianjin, Shanghai, Nanjing, Guangzhou, Lanzhou and Yinchuan raised the price of water, and other Chinese cities are also preparing to raise water prices. In March 2009, China opened up 20% of its electricity market, allowing large-scale industrial users of 110 kV or higher voltage to buy electricity directly from power producers and encouraging power consumers and suppliers to negotiate the electricity price.
   At present, ion-exchange membrane caustic soda dominates China's caustic soda market, accounting for about 63% of the total caustic soda output in China. But its core production device, the membrane, is entirely dependent on import. Currently, only the U.S. and Japan can produce this kind of membrane. Another key device, the ion-exchange membrane electrolyzer, can be manufactured only by a few companies such as Asahi Kasei Corp. and Chlorine Engineers Corp. of Japan, UK INOES Group, Germany Uhdenora SpA and Beijing Chemical Machinery Plant. In addition, other devices, such as chlorine compressors and PVC centrifuges, basically depend on import.

* Ways