Industry Report

Published: Dec 29, 2021
Updated: Dec 29, 2021

Chlor alkali Industry: Modernising to stay competitive

Although it does not grab headlines like the petrochemical and pharmaceutical industries, the chlor-alkali industry is a very important segment which has contributed significantly to the growth of the chemical and allied industries. The segment, producing caustic soda, chlorine and soda ash besides a few other related products, provides inputs that go into a diverse range of industrial and consumer goods. What is more, in a time when self-reliance is all talk, this industry is notable for meeting most of India’s needs. No doubt, the industry does operate under a threat of cheaper imports, but given inputs at competitive prices and the right policy support, it can stand up to the heat.

In recent years, the chlor-alkali industry has witnessed healthy growth despite certain impediments. The major driving force behind this growth is increasing demand from end-user industries September 15, 2021 Corporate India 23 owing to larger production from the chemicals sector.

Of the three major segments of the chlor-akali industry, chlorine is produced as a by-product during caustic soda production and is widely used during PVC manufacturing, drinking water disinfection and pharmaceutical production. Soda ash is mainly used during glass, soap and detergent and silicate production.

Caustic soda finds major applications in diverse industries such as soaps and detergents, pulp and paper and textile processing. Growth anticipated in all these industries, and the market for chlor-akali in India is forecast to grow in the next five years, with intermittent difficult periods in between.

For example, the industry witnessed a cyclical downturn after H1FY20, which was further exacerbated during FY21 owing to the Covid-19 pandemic-related contraction in demand from major end-user industries. The electro chemical unit (ECU) realizations which represent weighted average realization of caustic soda, chlorine and hydrogen (wherein chlorine and hydrogen are co-products of caustic soda) fell close to their decadal low of around Rs 23,000/MT during FY21 (having previously dipped to around Rs 21,000/ MT in FY11) vis-à-vis the highs of around Rs 38,000/MT in FY19 and around Rs 30,000/MT in FY20. It significantly impacted the profitability margins of the industry players in FY21. However, from March 2021 onwards, there are early signs of recovery for the sector with revival in demand from end-use industries, which is also reflected in the improved ECU realization of around Rs 27,000/MT during Q1FY22.

C.A.R.E. PROJECTION

CARE Ratings expects ECU realizations to remain firm and further improve from this level in the balance part of FY22 in case there is no third wave of the pandemic or major disruptions caused by it. Although any significant improvement in ECU realizations beyond Rs 30,000/MT would be restricted on the back of large capacities scheduled to come onstream in FY22 and FY23, they are expected to largely sustain at such higher levels on the back of some structural changes in the industry which are expected to make it more resilient. As for the outlook going ahead, the following factors can drive the overall competitiveness of the Indian chlor-alkali industry, according to Care Ratings.

Technology shif echnology shift

Caustic soda can be manufactured through diaphragm cell, mercury cell or membrane cell technologies. Manufacturing it using diaphragm cell technology has become obsolete and is no longer in use in India. Furthermore, due to environmental concerns associated with the mercury cell technology, the sector has gradually transitioned from mercury cell to membrane cell technology, which is eco-friendly and consumes 25% less energy. India had been using mercury cell technology for a long time, which made Indian caustic soda costlier on the back of higher pollution control and power cost involved in manufacturing through this technology. India faced the threat of heavy dumping from other countries where cost of production was much lower due to their early shift to membrane cell technology. However, mostly all caustic soda plants in India are now based on membrane cell technology, bringing India on par with other countries in terms of technology. The share of import of caustic soda as a percentage of total domestic consumption reduced to less than 10% during FY21 as against 17%-18% witnessed around five to six years ago, while exports have seen a rising trend in the last five years ended FY21.

Declining power cost Declining power cost Caustic soda is produced by way of electrolysis of salt 24 Corporate India September 15, 2021 which is an energy intensive process; power cost is a major input cost comprising around 60% of the total cost of manufacturing it in India. Total cost of power was very high earlier mainly due to usage of mercury cell technology which entailed power consumption of 3,150-3,300 kWh/tonne of caustic soda manufactured, and secondly due to total reliance on conventional sources of thermal power which has now proved to be costlier compared with renewable energy sources. However, with the transition to membrane cell technology, the industry’s average power consumption has reduced by 25% to 2,300-2,450 kWh/tonne of caustic soda production. Hence, in terms of consumption of units of power, India is now on par with other caustic soda-producing countries. This, coupled with the gradual rise in the relatively cheaper renewable power capacity, has resulted in a declining trend in the per unit cost of power consumed which would make the cost of power consumed for producing caustic soda in India largely at par with other countries in the medium term.

Co-products of caustic soda: Chlorine and hydrogen are co-products of caustic soda; i.e., generation of one automatically leads to generation of another. With the production of 1 MT of caustic soda, 0.89 MT of chlorine and 25 kg of hydrogen gas is produced.

Chlorine: There is a marked difference in the dynamics of chlorine in India compared with the global scenario. Globally, 38% of the chlorine produced is used by the vinyl industry, whereas it is only 8% in India in the absence of bulk demand from vinyls. Consequently, the caustic-chlorine industry in India is mainly caustic-driven unlike the rest of the world, where it is chlorine-driven. In India, chlorine fetched negative realization at times due to its associated disposal costs which put pressure on the ECU realizations, thereby making Indian caustic soda less competitive. During FY20, India produced 15.14 lakh mtpa of poly-vinyl chloride (PVC), while imports of the polymer were staggering at 19.16 lakh MT, which was far above the domestic production, thus making India the world’s largest importer. However, the scenario is expected to change now as India has announced the second-highest capacity addition of PVC at 17.4 lakh mtpa by 2025, after China. Hence, the challenge and costs associated with disposal of chlorine is expected to gradually subside going forward. From the past three years, the realizations of chlorine have turned positive for domestic players and the trend is expected to continue even going forward, which should support the ECU realization of the sector.

Hydrogen: In India, around 40% of the hydrogen produced is captively consumed either as a fuel in boilers or for manufacturing of other downstream products, while around 30% of hydrogen is converted into low-value additive hydrochloric acid (HCL) by reacting it with chlorine. Higher value is obtained from the balance 30% of hydrogen as it is either sold to third parties in a compressed form (for use in hydrogenation plants) or consumed to make other products like hydrogen peroxide. Hydrogen gas is presently used in varied industries such as chemicals, petrochemical refining, metallurgical, glass and electronic industries. Hydrogen burns as a clean fuel, producing water as a by-product that makes it an efficient energy carrier and a clean and ecologically balanced fuel.

During the Union budget speech in February 2021, the Finance Minister announced the launch of the Hydrogen Energy Mission to produce hydrogen from renewable sources. In April 2021, the Indian Hydrogen Alliance was formed for commercialising hydrogen technology and developing green and blue hydrogen in the country. Hydrogen is rapidly emerging as an alternative fuel choice to combat climate change and achieve de-carbonisation across industries. Thus, with India’s focus towards transition to cleaner energy, the usage and significance of hydrogen is bound to increase, leading to its improved realisation. All these structural changes (some of which are already underway) are expected to result in a more sustainable rebound in profitability of the Indian caustic chlorine industry. Though there are more than 30 players in the industry, the following companies are worth considering for investment with a medium- to long-term perspective.

Tata Chemicals
FACE VALUE 10
CMP 829.15
52 WEEK HIGH /LOW 892/273

Gujarat Alkalies & Chemicals
FACE VALUE 10
CMP 464.25
52 WEEK HIGH /LOW 523/304

Gujarat Heavy Chemicals
FACE VALUE 10
CMP 381.70
52 WEEK HIGH /LOW 402/141

Sree Rayalaseema Hi-Strength Hypo
FACE VALUE 10
CMP 318.25
52 WEEK HIGH /LOW 370/158

Chemfab Alkalis
FACE VALUE 10
CMP 151.10
52 WEEK HIGH /LOW 195/115