Power costs are THE key to chlor-alkali margins

Implications: Energy costs are the most important input to chlor-alkali production costs.  Companies who have advantaged energy contracts, like those with low cost hydroelectric power, have a significant cost advantage in the market.  If Ineos can secure discounted electricity supplied to their operations in Runcorn, they pull closer to competing with hydroelectric power supplied firm, particularly in northern Europe.

Analysis: Since the production of coproducts chlorine and caustic soda essentially involve placing electrodes in salt water, and running a battery backwards, electricity is the key cost component.  As power markets become deregulated with electricity open for bid, prices become more volatile and seasonal.  This can wreck havoc on high power demand chemicals like chlorine, which carries through to derivative products like PVC.

Sensitivity models on chlor-alkali production costs indicate that a 10% increase in the per KWH electric price reduces cash margins on chlor-alkali production by about $15 (USD) per short ton, all other inputs and prices being equal.  The same 10% change in the other input -- the salt price -- results in about a $3 per ton change.  In turn, at today's prices, chlorine represents about 12-15% of the raw material costs for PVC.  So changes in the cost of chlorine, even for the integrated producer, move margins for PVC.

Several companies in Europe, Canada, and the US have a significant cost advantage in producing chlorine due to long-term power contracts based on low cost hydroelectric power.  Others are forced to purchase incremental power requirements in day ahead markets, placing them at a significant disadvantage for both cost and planning purposes.  For producers who want to expand their operations, simply obtaining economically priced power is often a critical factor.

Without knowing the discount that Ineos could obtain from British Energy over their current contract, it is impossible to say how this will affect their competitive position.  It certainly appears as if there is the potential for reduced costs, and, possible, economical expansion of the chlor-alkali and PVC operations.