Chlor-Alkali Market Recovers, Losses Are Replaced by Profits


China Chlor-Alkali Industry Association

Concentration increases

China’s caustic soda capacity reached 39.45 million t/a in 2016, a net increase of 720 kt/a from 2015 (adding 2.03 million t/a new capacity, while phasing out 1.31 million t/a). There are 158 caustic soda producers today, a net drop of five from the end of 2015. China had 23.26 million t/a PVC capacity in 2016, a net drop of 220 kt/a from 2015 (adding 890 kt/a new capacity, while phasing out 1.11 million t/a). There are 75 PVC producers today, a net drop of six from 2015.
Domestic PVC capacity has declined for three consecutive years. Along with stable growth of consumption overall, conditions have driven the average operating rate up from 62% in 2013 to 72% today. The number of enterprises has decreased from 93 in 2013 to 75.
Caustic soda capacity is stable on the whole. Owing to stable growth of consumption, the average caustic soda operating rate has gone up from 74% in 2013 to 83% today. The number of enterprises has been reduced from 176 in 2013 to 158. Obviously, the concentration of the chlor-alkali industry has increased.
The total output of caustic soda in China was 29.86 million tons in the first 11 months of 2016, an increase of 7.6% over the output in the same period of 2015. The total output of PVC was 15.21 million tons, an increase of 2.7%. See Table 1 for details.

Table 1   Output of caustic soda and PVC in China, Jan.-Nov. 2016  (kt)

    Jan.-Feb.    Mar.    Apr.    May    Jun.    Jul.    Aug.    Sep.    Oct.    Nov.
Caustic soda    4 807    2 855    2 760    2 803    2 820    2 677    2 585    2 647    2 859    2 919
PVC    2 631    1 428    1 321    1 383    1 376    1 379    1 331    1 380    1 465    1 447


Considerable increase of prices in H2 2016

Production and sales were in balance in China’s caustic soda market in the first half of 2016. Market activity was slack overall, while prices remained stable with only narrow fluctuations. Pushed by a considerable increase of demand in the face of inadequate output from the major producing regions, prices started a rapid and sustained increase from September, with liquid caustic soda prices growing around RMB100/t monthly in most regions and reaching a historical peak in mid-November. From the end of November, normal caustic soda output was restored, while demand in the dyeing/printing sector downstream became slack. Under stricter environmental controls, downstream enterprises in some regions suspended production, so the demand for caustic soda declined further. The sales volume of high-price caustic soda came down, and sellers started to make small price reductions. Figure 1 shows the prices of caustic soda in China during 2015-2016.
PVC sales increased steadily in China during the first quarter of 2016, and prices were firm. In the second quarter, traders reduced their inventories and market prices came down. Starting from June, the market saw considerable ups and downs. Prices started going up in mid-June, reaching a peak on November 15. With market fluctuations at the end of the year, prices started to drop. On one hand, due to a shortage of raw material calcium carbide, the operating rates of PVC producers were low. On the other hand, the constant increase of raw material cost pushed PVC prices up. Moreover, with impacts from higher logistics and traffic costs, the shipment of PVC produced in Inner Mongolia was less convenient after September and supply shortages elsewhere became prominent. Figure 2 shows the trend of PVC prices in China in 2016.

Growth of export

China exported 1 142.0 kt of liquid caustic soda during January-November 2016 and exported 684.9 kt of solid caustic soda.
The amount of PVC pure powder exported from China was 1 013.3 kt during January-November 2016, and the amount imported was 579.6 kt. The export volume was much higher than in the previous year. The export of PVC was concentrated mainly in the first three quarters, mainly because of brisk demand in some regions of India and Southeast Asia. The monthly PVC export volume dropped somewhat during September-November, falling dramatically by the end of the year.

Market recovery boosted
by downstream sectors

Direct consumers of caustic soda, such as producers of alumina and chemical fibers, enjoyed satisfactory financial performance in 2016. There were also considerable profit-earning opportunities for papermaking and dyeing/printing enterprises in the second half of the year. The alumina sector is the major direct consumer of caustic soda, taking around 1/3 of all output. The alumina sector performed well in 2016 and grew notably, especially in the second half of the year. The price of alumina in the major producing region Shandong went up from around RMB1 650/t at the beginning of the year to RMB2 950/t. Operating rates were relatively high there, offering direct backing for a rise of caustic soda prices.
PVC prices started to go up in June 2016. To manage the risk of rising raw material prices, downstream clients bought PVC months ahead of its use, increasing PVC demand in the short term. The market in the north went slack in November. Profile and pipe processing enterprises in Northeast China suspended production one after another. The demand for PVC in North China also shrank gradually in late November.
Profit margins in the PVC and caustic soda market were much higher in 2016. The combined profits earned by 73 major enterprises surveyed by China Chlor-Alkali Industry Association during January-October 2016 exceeded RMB2.0 billion, in sharp contrast to a combined loss of RMB800 million in the same period of 2015.
The price of PVC is declining today. When the selling price and production cost reach a balance, however, the cost backing will once again push the market to make new adjustments. In the near future, China’s supply/demand pattern for caustic soda will change very little. As the market price is relatively high today, decline is not at all unlikely, but no cliff-like plunge will occur. It is expected that the reduction will be quite rational. With powerful backing from production costs and demand, caustic soda prices in China will remain stable in 2017 with some fluctuation.