Business

Ghlor-alkalies continue sluggish performance Chlorine and caustic soda are

confronted with excess

capacity, low profitability at

least through this year; soda

ash has better outlook

Change is more important than it looks in the superficially slow-moving U.S. chlor-alkali business. Featuring three major products, all in the 10 largest-vol­ume U.S. commercial chemicals—chlo­rine, caustic soda (sodium hydroxide), and soda ash (sodium carbonate)—this inorganic stronghold has just undergone major internal shifts. Another big one could be on the way.

The push for continued change comes from the chlor-alkalies' sluggishness. The pressure of slow growth and low profit­ability, particularly for chlorine and caustic soda, is gradually bringing a stra­tegic issue to a head: Which producers will remain in the chlor-alkali industry, and what volume of products will be produced for sale at respectable prices?

Currently, excess production capacity plagues chlorine and caustic soda. In­dustrywide operating rates are about 80%, of nameplate capacity with heavy down­ward pressure on selling prices, even after a moderate pickup in the past six months. Plant operation at 80% of nameplate ca­pacity might not seem all that low for other chemical products, certainly not low

Huge caustic evaporators are part of ex-pansion at PPG Lake Charles plant

enough to account for the substantial discounting from list prices for chlorine and caustic. But an operating rate at 80% is disastrous for these coproducts. Typical operation prior to the mid-1970's was at 95% of nameplate in these unusually ef­ficient plants.

Most chlorine and caustic producers agree that current profitability runs far below returns needed to justify new ca­pacity. Many forecast little additional capacity coming beyond what is now under construction or soon to come off the drawing boards. Unless returns improve significantly, new capacity built at in­flated construction costs will be even more difficult to justify.

The profitability pinch has under­scored for chlorine producers the advan­tages of economics of size. Most plants just built or plants being planned are much larger than existing plants. This cuts overhead costs per unit production in many ways.

Producers with small, often old, plants are well aware of the advantages of size. They may well kick off the next major change in the industry by shutting down small plants and buying chlorine.

An even more drastic switchover to more modern plants already has occurred, quite successfully, in soda ash. This change is nearly complete, from making soda ash synthetically in small plants using salt and limestone to recovering soda ash from trona ore or brines. In some cases, long-time producers of synthetic soda ash shifted to natural product. In other cases, new producers of soda ash came from the ranks of mining companies never before in soda ash. In still other cases, long-time soda ash producers sim­ply bowed out. The remaining soda ash producers are currently enjoying a tight market with rising prices.

Chlorine and caustic won't change technology this sharply but still face a similar phase change in plant economics. Like the rash of new producers in poly­ester fiber in the early 1970's, some new producers of chlorine and caustic, drawn by fat profits in 1973 and 1974, moved into the business on purchased technology or license agreements. Often, these new producers brought little to chlor-alkalies other than money and possibly some marketing know-how.

Again, as in polyester, the newcomers in chlorine and caustic now are very vul­nerable as economics have proved sour and profit margins have disappeared. A shakeout similar to polyester fibers' in the mid-1970's may be the biggest change to come in chlorine-caustic over the next few years.

Just as there were misconceptions on the potential profitability of the fibers industry, so have misconceptions appar­ently developed in recent years on making chlorine and caustic. Historically, the electrolytic cell plants operated princi­pally to obtain chlorine. Coproduct caustic was often dumped because it couldn't be sold. More recently, the di­verse uses of caustic grew enough to make caustic demand strong, sometimes stronger than chlorine's.

This development led to substantial capacity expansions based on the as­sumption that caustic would carry at least its own share of production and other costs rather than be subsidized by chlo­rine. This assumption helped spark the more rapid capacity expansion than the expansion in demand for either chlorine or caustic.

Yet, the current sales situation in chlorine and caustic hints ominously that chlorine economics once again are de­manding electrolysis plant operations. Even for chlorine, capacity growth still exceeds demand growth.

The resulting low profitability, re­flected in laments about chlor-alkali op­erations in companies' quarterly and an­nual reports, suggests a turning away from the concept of caustic's being able to carry its share of costs. Unfortunately, during the interim producers purposely didn't raise selling prices of chlorine as much as chlorine costs would indicate prices should rise, since caustic was contributing nicely to plants' overall return. Without the financial help from caustic, however, the industry is forced to struggle into the 1980's with poor profitability.

No help appears to be coming from market shifts, which in any case have not favored chlorine and caustic soda in re­cent years. The two chemicals have weathered a large loss in their chloroflu-orocarbons outlet and perhaps a year's demand growth in polyvinyl chloride be­cause of environmental concerns.

By contrast, some aid is due for chlorine and caustic soda from a continuing heavy investment by large producers in new process technology to beat rising energy costs, the most important production cost in these products. Companies claim con­siderable success in this effort to date. But obviously, the increased cost efficiency at plants has not overcome the drop in re­turn from the two products caused by overcapacity and caustic's relative weakness compared to chlorine.

For details on the immediate 12-month outlook for chlorine, caustic soda, and soda ash, see the following pages.

Bruce F. Greek, C&EN Houston

10 C&EN Feb. 26, 1979

Key Chemicals

Chlorine ci.

• Output up slightly

• Capacity up more

• Prices at discounts

PRODUCTION/CAPACITY

Millions of tons 16

14

I Production Capacity*

1979 1978 1977 a First quarter.

HOW MADE

Electrolysis of salt, recovery from by­product hydrochloric acid

MAJOR DERIVATIVES

Ethylene dichloride 20%, other chlorinated hydrocarbons 12%

MAJOR END USES

Various chemicals 40%, plastics (mostly PVC) 20%, solvents 15%, pulp and paper 15%, water treatment 5%

FOREIGN TRADE

Negligible

PRICES

Posted contracts, Gulf Coast, $135 per ton; much discounting continues

COMMERCIAL VALUE

$1.3 billion for total production, 1978

Chlorine probably will have another slow year in 1979 despite the current boom in many other large-volume U.S. chemicals. Production is expected to be up slightly. Plant capacity and its low use rate likely will be up more than slightly but not much by chemical industry standards. And pricing and profitability are expected to remain weak, even if some small price increases are suc­cessful, largely to trim steep dis­counts.

Specifically, chlorine production is forecast to rise 4% in 1979 to 11.4 million tons. Although possibly too op­timistic, this forecast would about match the 3.4% production growth to 11.0 million tons in 1978, according to esti­mates presented at the Chlorine Insti­tute's recent annual meeting in Atlan­ta.

With growth this low, chlorine's out­look in 1979 hinges importantly on the pace of the overall U.S. economy. Chlorine goes into so many uses that its consumption in any case is a good in­dicator of the general economy. The outstanding exception to this rule among chlorine markets is polyvinyl chloride, whose 8 % production gain in 1978 was a big help. Other important outlets, notably chlorofluorocarbons, which are suffering from environmental curbs, are growing much more slowly.

Even with back-to-back moderate growth years in 1978 and 1979, chlorine production would be just 5% more than in the previous record year, 1974. This percentage tells much of the story for chlorine producers, who overbuilt plants while demand growth fell way below forecasts.

Even so, producers have continued to push up capacity each year faster than production has grown. As a result, op­erating rates have trended downward to levels unheard of in this business five to 10 years ago.

Fortunately for producers, a long-awaited turnaround in capacity use oc­curred in 1978. By the end of the year, the Chlorine Institute listed capacity use at 82.5% of the nameplate maximum. This is considerably improved over 76.5% in December 1977.

Unfortunately, however, the rise in capacity use may not go much further. New capacity coming on stream this year and a slowdown in the U.S. econ­omy seem likely to bring down the op­erating rate to less than 8 0 % for 1979 as a whole.

This level of plant use is an indicator for the chlor-alkali industry's major problem, profitability. Profitability can only be hurt for plants that can easily hit 9 5 % use of nameplate capacity in a good year. In this respect, chlorine-caustic soda plants are more efficient than most organics plants, which have to strain to exceed 90% of rated ca­pacity.

There is a chance that the chlor-alkali industry will swing back to more tradi­tional higher operating rates beyond 1980. This will happen as future plant investment falls under the weight of low profitability in recent years. After current expansion programs are completed, adding some 1.1 million tons of annual capacity over the next year or two, fu­ture expansions are expected to be small.

On top of this, some existing capacity may be shut down. Because of govern­ment regulations requiring toxicity testing and emission controls, econo­mies of size for chlorine plants relative to increasing overhead costs are be­coming important.

Overcapacity worsened chlorine profitability in 1978. Producing com­panies complained repeatedly about chlorine profits in their quarterly finan­cial statements. For the year, according to the Labor Department, chlorine prices fell about 5%. Unofficial discounts may have been worse. Few chlorine pro­ducers foresee prices rising by this amount in 1979.

Yet, power costs are continuing to rise. Electric power accounts for about 4 0 % of total costs in making chlorine and caustic soda, on average. Chlorine Institute officials estimate the range of power costs at 33 to 5 0 % , depending on a plant's age and capital charges.

With power and other production costs continuing to rise, it's hard to imagine selling prices for chlorine fall­ing. But industry officials say they could—by competition. They don't ex­pect much relief either. The one saving grace for companies has been large efficiency gains in chlorine technology over the past several years. Such sav­ings are expected to continue.

Even with these gains and careful weighing of capital commitments, however, chlorine profitability isn't really expected to improve much in 1979. The quarterly complaints from company chief executives to stockholders about chlorine probably will continue.

Feb. 26, 1979 C&EN 11

Key Chemicals

Caustic Soda NaOH

• Demand weak

• Capacity in excess Pricing weak

PRODUCTION/CAPACITY

Millions of tons

14

1979 a First quarter.

1978 1977

HOW MADE

Electrolysis of salt

MAJOR END USES

Various chemicals 50%, pulp and paper 15%, alumina manufacture 5%, textiles 5%, petroleum refining 5 %, soap and detergents 5 %

FOREIGN TRADE

Exports—7 to 10% of production; imports—negligible

PRICES

$ 140 per ton, contract; sold most often as 50% solution in water; widespread deep discounting

COMMERCIAL VALUE

$1.3 billion for total production, 1978

V

Caustic soda marketers probably have more to complain about than do sellers of almost any other large-volume U.S. chemical. In effect, they are being forced to stuff more product into a re­luctant market at lower and lower prices.

It all depends on the ironbound rela­tionship between caustic and its co-product, chlorine. After several years of mutually profitable harmony, this rela­tionship has undergone an ominous flip-flop in the past year or so. If it con­tinues, the economics of the electro­lytic-process plants producing the two products from raw material salt could be in grave trouble.

Caustic's dilemma does not seem immediately apparent from basic pro­duction figures. These show caustic output rising steadily in line with chlorine to about 11.4 million tons in 1978 from 11.0 million tons in 1977. Similar growth in 1979 will result in production of about 11.8 million tons.

The trouble is that this growth for caustic is all forced by the overriding concern at chlorine-caustic plants to meet chlorine demand. Putting out enough product to meet chlorine de­mand brings a parallel increase in caustic output whether the market wants it or not. Right now, the market does not.

In fact, caustic soda currently is so difficult to move that operation of some electrolytic plants is being limited by this factor and not by chlorine demand. The result is a growing relative firmness for chlorine. This divergence of fortunes seems likely to continue through 1979.

Electrolytic plant operators determine operating results by combining sales of the two products, subtracting total costs, and coming up with the resulting net in­come. Combined production is ex­pressed in electrochemical units (e.c.u.), which actually refer to the electricity going into the cell. For example, in 1978, selling prices in terms of an e.c.u. went down about 5%.

Such overall measures can hide what is actually happening to the individual products. Currently, chlorine, with a significantly firmer selling price than caustic's, is carrying an inordinately large share of the cost of an e.c.u.

To make matters worse, basic chemistry slightly favors caustic soda production over chlorine in the electro­lytic cells, theoretically about 10%. In

practice, however, caustic soda's mar­gin has not been this high for a long time. One main reason is that, in difficult marketing times such as the present, not all caustic produced is "finished." The finishing stage involves passing it through large auxiliary evaporating units to yield a final product in the form of 50 to 73% solutions or pure solid flakes or pellets.

Caustic that is not finished is often used around a plant site for neutraliza­tion purposes. Usually, this material is not reported as production. Currently, many industry sources also believe that official government figures on caustic production exclude much liquid con­verted to solid form. Hence, official numbers of caustic output are under­stated.

Neutralizing uses are the largest collective market for finished caustic as well. For example, this is caustic's function in many of its strictly chemical markets, which make up about half of the total. In these and nonchemical markets, caustic frequently does its job in processing and then leaves the scene before the final product comes out.

Because caustic goes into so many uses, its consumption, like chlorine's, reflects the ups and downs of the gen­eral economy. But, also like chlorine, a few major uses can exert special influ­ence. Examples of such uses presently hurting caustic are alumina and pulp and paper.

The alumina market is only tepid for caustic, despite the boom in the end-product aluminum industry. U.S. alumi­num producers face foreign competition resulting in increasing imports. For this reason and because of aluminum's poor performance up to 1978, most alumi­num producers are being skimpy on capital for new metal production ca­pacity.

Slack caustic demand in the U.S. pulp and paper industry is more a labor problem and less a basic demand problem. Strikes by paper mill workers in some western states may now spread to the Southeast. This threat tends to reduce caustic demand in the Southeast because of uncertainties as to how long production there will continue.

On balance, 1979 will be another year when caustic will trail chlorine perfor­mance. This makes a sad contrast to the early and mid-1970's, when caustic dominated the two and more than car­ried its share of production costs.

12 C&EN Feb. 26, 1979

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Name

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I Key Chemicals

Soda Ash • Demand good

• Transport pinched

• Prices up, firm

PRODUCTION/CAPACITY

1979 1978 1977

a First quarter.

HOW MADE

Recovered from trona ore, synthesized from salt and limestone using ammonia

MAJOR END USES

Glass 55%, chemicals 25%, pulp and paper 5 %, soap and detergents 5%

FOREIGN TRADE

Exports—nearly 10% of production, about 775,000 tons in 1978; imports—negligible

PRICES

Ore-based $61 per ton, f.o.b. Green River, Wyo.; little if any discounting

V

The next year for soda ash likely will be dominated by transportation prob­lems and production tightness in the first half and possibly some slumping major markets in the second half.

Overall, U.S. soda ash production probably will be up modestly in 1979, perhaps 3 to 4% to 8.7 million tons from 8.4 million tons in 1978. This growth would be just over half the estimated 6.3% production gain last year. Some potential new demand this year may not be filled, notably in exports.

Companies' nameplate production capacity is down a bit at this point from a year ago at 10.3 million tons a year. Later in 1979, capacity may inch up through some debottlenecking and the ironing-out of startup problems at new plants in Wyoming.

Prices are in good shape for produc­ers. The recent $6.00 increase to $61 a ton f.o.b. Wyoming is sticking and could be followed by another increase later in the year.

Currently, adverse weather in the Midwest is playing havoc with soda ash deliveries. In addition, the usual prob­lems of freight car availability are worse than ever.

If this weren't enough, startup prob­lems in Wyoming mean that presently operable capacity is just adequate to meet expected demand this year.

All of this adds up to severe tightness in soda ash supplies at consuming points. This squeeze has nicely sup­ported the recent price increase.

Transportation problems may ease a bit when the snow melts in the Midwest. Then, snow-covered cars in railyards can be located and track problems eased to allow faster car movement. But for the next month or so, users may face a problem in getting what they need.

Later in the year, shipping problems will ease some more. Deliveries will begin on rail cars of private fleets of some natural soda ash producers. The impact of the new cars probably will not be felt fully until the third quarter.

The continuing shipping problems are due partly to the historic shift in soda ash production sites. These have moved to natural ore deposits in the West from the former synthetic Solvay-process plants in the East. Now a long rail haul is in­volved for most soda ash sales. Except for Kerr-McGee's operations in Califor­nia, all natural soda ash comes from Wyoming.

Only one synthetic soda ash plant

Na2C03

remains—Allied Chemical's at Syra­cuse, N.Y. BASF Wyandotte officially closed its plant in Michigan at the end of 1978.

The closing of most of the synthetic soda ash plants has caused another problem concerning small users. The old synthetic plants were often the major suppliers of soda ash in bagged form. Some distributors and natural soda ash producers still bag the product, but their bagging capacity has not expanded to offset the loss as old plants shut down.

The shutdown of more than 1 million tons of synthetic soda ash capacity during 1978 has had other effects, especially on export markets. New ca­pacity, which should have equaled shutdown capacity by now, is having startup problems. As a result, real op­erable capacity for the year will be about 10% less than the nameplate figure. With demand for soda ash expected to rise as much as 4 % in 1979, U.S. pro­ducers expect to have less material available for export.

The new soda ash price increase likely will also hinder exports, especially those to Europe. Europeans protested last year over low-priced soda ash from the U.S. In Western Europe, competition from Eastern Europe's synthetic soda ash could limit sales at current prices by U.S. sources.

The net effect may be a struggle in 1979 to match 1978 soda ash exports, estimated at about 775,000 tons or about 9 % of production. Much will de­pend on how well the U.S. and other nations' economies fare during the second half of 1979.

Trie effect of the general economy on U.S. use of soda ash comes heavily from the glass market—about 55% of total domestic soda ash outlets. The two big uses of glass—containers and con­struction forms—are both threatened. Glass containers face growing compe­tition from plastics, especially in the larger throwaway sizes. Plastics have been quite successful in displacing glass from many uses. And construction, especially home building, is universally forecast to slow down. This will even­tually have an effect on soda ash usage in construction glass.

Auto production, another important factor in glass consumption, also could hurt the soda ash business later in the year. Either an economic slowdown or a strike by the auto workers could cut into auto production.

14 C&EN Feb. 26, 1979