Historical chlorine demand growth is characterized by a boom and bust cycle that tracks global GDP growth rate closely. Typically, demand will

Transcription

1 Historical chlorine demand growth is characterized by a boom and bust cycle that tracks global GDP growth rate closely. Typically, demand will rebound immediately after declining and this cycle seems to repeat itself every six to eight years. True enough, the decline in 2015 was followed by a swift recovery last year. What has happened? What are the changes that have occurred over the past 12 months? How will the road to recovery for global chlorine demand look like in the next five years'? This presentation will provide an update of the global chlor-alkali market, from the perspective of chlorine supply and demand, highlighting the key drivers and the regional dynamics that are shaping the global chlorine market. 1

2 Global ECU margins had stayed healthy in 2016, especially for the Northeast Asia region producers, where its ECU margins have turn the corners to generate positive return, supported by the strong recovery in caustic and PVC prices during the 2H European producers' ECU margins were still on an upward trajectory last year, while North American producers had fairly steady returns. 2

3 3

4 4

5 Historically, chlorine demand growth is characterized by a boom and bust cycle that tracks global GDP growth rate closely. Demand normally rebounds after the economy is out of recession and typically, the rate of demand growth will be faster than the rate of its decline. However, the global chlorine had experienced a peculiarity not seen before 2015, which was a demand contraction despite the global economy not being in recession. This peculiarity was a direct result of a sharp decline in China's chlorine demand in 2015, which has contracted by 5% when compared with previous year. Lower spending on construction sector and inventories overhang from raw materials to finished products in the form of unoccupied building and underutilized infrastructures are suppressing the demand for chlorine. As a result, the overall global chlorine demand shrunk by around 2.0%. The rebound in global chlorine demand growth in 2016 is rather spectacular, increasing by around 5% globally, largely supported by China's gain of about 10%. 5

6 6

7 The above graph shows chlorine capacity excess on a global basis. The numbers in the graph are derived by simply subtracting demand from capacity as shown by the bars and then dividing the net excess by capacity to derive the excess capacity on a percentage basis. Global chlorine excess capacity has stayed above the 20 percent level over the past five years. The excess in supply appears to have passed its peak in We expect an improvement going into the second half of this decade. The combined factors of Northeast Asia stopping expansion, rationalization in European capacity, little expansion in North America plus demand catching up with supply should reduce global excess to around 12 percent or less by

8 World chlorine capacity is now around 88 million metric tons. Over the next several years, global capacity is likely to stagnate with little expansions. However, there will be new capacity being build but mostly to replace older plants that are still employing the diaphragm and mercury cells technology. Mercury cell technology, which is primarily still used in Europe, will be nearly eliminated before the end of this decade. North America still has a substantial amount of diaphragm cell process but this will decline over time as older capacity is rationalized and new membrane cell processes are installed. 8

9 9

10 Over the next five years, chlorine demand in Northeast Asia is forecasted to increase by around 5.0 million metric tons, higher than supply expansion of less than half a million metric tons. This will provide an opportunity for demand to catch up with supply and the excess supply situation is expected to diminish rather quickly, resulting in improvement of plant operating rates in Northeast Asia to above 85% by China has stopped expansion. The poor return from the industry over the past several years has impacted investment decisions in China and this has been demonstrated by the absence of any large scale expansion during the second half of this decade. 10

11 The chart shows the year-on-year demand changes for chlorine, based on key downstream applications in China. The rebound in China's chlorine demand growth in 2016, estimated at around 1.8 million metric tons, was the major driver that propelled global demand to grow by 5%. Major chlorine demand improvement was seen in the Chinese vinyls and "others" sector which include demand for burner- HCL. Going forward, the average demand growth for chlorine in China is forecasted to increase by approximately 1.0 million metric tons per year from now till

12 The above chart is showing the price trends for merchant chlorine and caustic soda in the Chinese domestic market. The average ECU value over the past five years for Chinese producers has been around the $440 per ECU tons. This represents a decline of around 15% compared with the average of the previous 5 years. Based on our latest view, we expect Chinese producer's ECU value to improve to $480 per ECU tons level, on average for the next two years, largely supported by a more positive outlook on caustic prices in the domestic market. 12

13 13

14 14

15 15

16 16

17 North America and Middle-East will have very limited investment on chlorine assets over the next 5 years despite their established status as a low cost region for energy and feedstocks. Most capital investments in the U.S. are being directed to monetize cheap gases by producing key feedstock such as ethylene. The lower capital cost and better implied return for ethylene derivative products such Polyethylene and Mono-ethylene Glycol are seen as more attractive options for downstream investment when compare with chlorine and its derivatives such as PVC. As a result, there are no aggressive plans for vinyls capacity expansion, both in North America and the Middle East. The table shows that the investment decision is skewed towards Polyethylene with very little knock-on effect on the chlor-alkali & vinyls chain. 17

18 18

19 In the above chart, the size of the bubbles represents the chlorine demand from end-users in million metric ton for 2016, reading from the Y-axis. The X-axis represents IHS Markit assessment of the potential annual average growth rate (AAGR) for the respective sectors in percentage. Some chlorine derivatives markets are more important than others due to its larger market size and stronger demand growth. Vinyls product is the single largest consumer of chlorine. Although its growth projection over the next five years is forecasted at only around 2-3% per year, its contribution in term of volume expansion is close to 40% of total chlorine demand in the forecasted period. The only sector that is forecast to register a slightly negative chlorine growth rate is the pulp and paper industries. MDI, TDI and ECH will be the fastest growing market for chlorine, with their demand growing at to 4-5% per year. 19

20 Global chlorine demand is forecasted to increase by around 8 million metric tons over the next five years. This is marginally higher than our previous view due to the recovery in Northeast Asia and faster growth rates in India and China In the above chart, the size of the bubble represents the per capita consumption in KG per person for the respective region or country in 2016 while the annual average growth projection over the next five years is represented by the percentage on the X-axis. Out of the BRIC (Brazil, Russia, India and China) club, the demand growth will be driven by India & China, while domestic chlorine demand in Brazil & Russia will stagnate or register slower growth rate due to economic downturn and geopolitical conflict. 20

21 21

22 Elementary chlorine is not traded across region, but its derivatives such as EDC, VCM and PVC are traded extensively across the world. The two major net chlorine equivalent exporters in the world are North America (NAM) and Northeast Asia (NEA). NAM chlorine equivalent export is projected to expand from 2.5 million metric tons to almost 3.0 million metric tons by 2021 via increases in EDC and PVC export volumes to Southeast Asia, India and South America. NEA chlorine equivalent export largely consists of VCM and PVC being shipped out to SEA and the Indian subcontinent, respectively. The European import and export position is projected to be almost balanced by Its net PVC export position will be "neutralized" by its requirement to import EDC from outside the region within the next five years. 22

23 Energy prices are anticipated to increase going forward and this will have an impact on regional ECU cash cost. Depending on the type of fuel sources used, the impact to cash cost will vary. In the case of North America, natural gas, the primary energy source use for the chlor-alkali industry, will see a minimum price increase, resulting in negligible changes to NAM ECU cost. Meanwhile, chlorine plants in Europe and Northeast Asia, which consume a mix coal, fuel oil and natural gas, may experience a greater impact on their ECU cost. In relative term, over the next two years, ECU cost in Northeast Asia will increase more than those in WEP and NAM markets. 23

24 Going forward, chlorine supply/demand is anticipated to improve as reinvestment on new capacity has practically stopped amid weak return, particularly in NEA. This will allow time for demand to play catch-up with capacity and towards the end of this decade, global plant operating rate is projected to reach above 85%. NEA may even need some reinvestment by the end of the decade as plant operating rate will reach above 90%. 24

25 The turning point for NEA producer's margins recovery was in Going forward, we anticipate a continuation on the region ECU margins recovery with a year-on-year improvement till it reaches its peak earning cycle towards the year In West Europe, producers ECU margins did well in 2016 and this will continues through the forecast period. West Europe is the largest beneficiary of lower energy prices and couple with its weak euro currency, has reduces its ECU cash cost in terms of the U.S. dollar. Capacity rationalization in Europe will further solidify producer s position to increase their margins, especially after We expect North American producers margins to remain robust throughout the forecast period given their advantage cost position. 25

26 26