New Delhi, January 25, 2018: Lately the global as well as domestic prices of caustic soda have risen sharply by ~35-45% in 9M FY2018 following healthy demand growth and lower supplies due to plant closures in Europe and China. The one of major two reasons for this is a decision by the European Union in December 2013, discontinuing the Mercury process for chlor-alkali units (~26% of total Europe capacity) beyond December 11, 2017. However, conversion to Membrane cell technology being an expensive exercise which along with high cost of power in these countries made conversion unviable for several units, consequently leading to the shutdown of mercury cell plants in Europe and thereby capacity loss. This is expected to keep Europe in short supply over the medium term.
As for plant closures in China, the second major reason for spike in prices, says Mr. K Ravichandran, Sr. VP, Group Head, Corporate Sector Ratings, ICRA, “The chlor-alkali plants in China, the largest player globally, are running at reduced capacity following poor chlorine realisations besides stricter environmental norms being enforced by the government. Additionally, the growing demand globally on the back of economic recovery has led to buoyancy in caustic soda prices.”
Globally, the chlor-alkali industry is driven by demand of chlorine as its major derivative PVC is used largely in the housing market, and since chlorine is a co-product of caustic soda, the demand and offtake of chlorine impacts the production of caustic soda. This is, however, in contrast to the Indian market where caustic soda enjoys a relatively more mature and developed market than that of chlorine. Due to restrictions in sea borne chlorine trade, domestic chlorine prices are largely unrelated to global chlorine prices unlike import-parity prices for other commodities. Following large capacity expansion in FY2017, domestic chlorine prices, especially in the western and northern regions, decreased from low positive or negative of ~Rs. 2000/MT in FY2016 to deep negative of ~Rs. 6000-7000/MT in H2 FY2017 (i.e. the chlor-alkali producers have to pay this amount to chlorine consumers). Chlorine prices have improved to negative of ~Rs. 2000-3000/MT due to the healthy demand absorbing the excess supply in the market, and going forward, chlorine prices are expected to remain stable or improve marginally.
As per an ICRA note, India’s total domestic caustic soda installed capacity is expected to grow from 36.62 lakh MTPA as on FY2017-end to 40.03 lakh MTPA in FY2019 following brownfield expansions by large players like Grasim Industries, DCM Shriram, etc. Moreover, capacity would continue to increase over the long-term with greenfield project of GACL-NALCO Alkalies & Chemicals. (a Joint Venture with 60% stakes held by GACL and 40% by NALCO) at Dahej with a capacity of 800 tpd, and other brownfield expansions. On the demand front, while domestic caustic soda consumption increased by 4.9% p.a. during FY2012-FY2017, it reflected a slowdown with growth of 1.6% in FY2017 against 3.9% in FY2016 following moderation in economic growth in H2 FY2017 due to demonetisation in November 2016.
Mr. Ravichandran said, “Domestic consumption of caustic soda and chlorine are expected to show 5-8% growth over the medium term. With healthy performance in recent years and expectation of increase in demand from key consuming sectors, the industry may likely witness some capacity additions going forward. The demand growth from aluminium and textiles could be robust over the medium term, while segments like soaps and detergents, organic and inorganic chemicals, etc. may report moderate and steady growth in caustic soda consumption. Although domestic consumption of chlorine is sensitive to any adverse regulations, healthy prospects of exports for chlorine derivatives would be primary driver for chlorine demand growth.”.
Indian chlor-alkali players reported improved performance in FY2016 and FY2017 with higher realisations and soft input costs such as that of coal. Following higher volumes as well as higher ECU realisations, profitability of chlor-alkali players has further improved in H1 FY2018. With recent spike, higher crude oil prices are leading to rise in energy costs (including coal prices) globally. Besides, domestic coal prices have also increased significantly over the last few quarters with upward revision in prices by Coal India Ltd. Despite increase in coal prices, profitability margins of domestic chlor-alkali players may improve materially in the near to medium term due to significant rise in global prices of caustic soda and improving domestic realisations for chlorine. However, margins could moderate over the longer term with decline in prices of caustic soda.
Corporate Comm India(CCI Newswire)
