Raw Salt Is in Oversupply

Oversupply caused by capacity release

The production capacity for raw salt was largely released in the
spring of 2006, the constrained supply was eased rapidly and the
raw salt market was in oversupply. The price of raw salt
therefore decreased constantly.

    1. Output of raw salt has increased rapidly   

Eighty-eight percent of China's raw salt output is used to
produce soda ash and caustic soda. The development of the soda
ash and caustic soda sector has made a great impact on the
production of raw salt. Before 2004, the raw salt sector in China
developed slowly and the average annual output growth was less
than 8%. During 2004-2005, pulled by increased demand in the
chlor-alkali industry, the market price of raw salt increased
from RMB150/t to RMB400/t, and the market was in short supply.
Due to this price rise, the raw salt sector in China has developed
rapidly since 2004. In 2005, the newly added capacity to produce
raw salt in China was around 10 million t/a, and output reached
44.547 million tons, an increase of 16.3% over 2004.
    The supply and demand of raw salt was basically balanced in
early 2006. With the gradual implementation of newly added
capacity, the output of raw salt increased rapidly, reaching
38.43 million tons in the first nine months of 2006, a rise of
20.2% over the same period of 2005.

2. Output of soda ash and caustic soda has increased rapidly

Since 2003, China has become the leading soda ash producer in
the world. The output of soda ash reached 14.2108 million tons
in 2005, an increase of 12.7% over 2004. After the market price
of soda ash drastically dropped by RMB300/t in early 2006, the
market price gradually stabilized since March 2006. Due to the
supply deficit of soda ash, the production of soda ash maintained
a high growth. The output of soda ash reached 11.717 million tons
in the first nine months of 2006, an increase of 11.2% over the
same period of 2005.
    The output of caustic soda was 12.3998 million tons in 2005,
a rise of 21.4% over 2004. Since the second half of 2005, the
market of caustic soda has been in oversupply. However, pulled
by the development of chlorine products, the chlor-alkali
producers have constantly expanded capacity. The output of
caustic soda reached 10.949 million tons in the first nine months
of 2006, an increase of 18.5% over the same period of 2005.

3. Import decreased and export increased

In 2005, raw salt in China was in short supply, and the domestic
market therefore had big dependence on imported products. The
output of raw salt has increased rapidly in 2006, so the deficit
of supply has been totally changed, and imports decreased
constantly. China imported 1.419 million tons of raw salt in the
first nine months of 2006, a drop of 63.4% from the same period
of 2005. Due to a surplus supply in the domestic market, the
export of raw salt has further increased. The exported amount
of raw salt reached 556.4 thousand tons in the first nine months
of 2006, an increase of 30.5% over the same period of 2005.

4. Price of raw salt decreased continually

In early 2006, the average ex-factory price of raw salt in China
fluctuated at RMB240-RMB250 per ton, and the supply and demand
in the domestic market was basically balanced. With the coming
of the brisk production season in spring, sales pressure on raw
salt gradually appeared, and the price dropped constantly. The
average ex-factory price of raw salt decreased to RMB200 per ton
in August 2006. With the coming of another brisk production
season in autumn, the price of raw salt again dropped rapidly,
and the average ex-factory price of raw salt decreased to a low
of RMB160 per ton in October 2006.

Price of raw salt still has reduction space

It is difficult to change the situation of oversupply in the
domestic raw salt market. Due to the sales difficulty, some
producers have suspended autumn production plans. However, the
output of raw salt will still increase considerably. At present,
the price of raw salt is still much higher than the lowest level
in recent history of RMB90 per ton. Due to the fierce market
competition, the price of raw salt is unlikely to rebound in a
short period of time, and probably will continue to drop.

1. Output of raw salt will continue to increase

The rapid increase in raw salt output is the main reason for the
market oversupply. However, due to the constant expansion of
capacity, the output of raw salt will be difficult to decrease.
The output of raw salt increased rapidly in the first nine months
of 2006, and it is expected that it will reach around 52 million
tons in 2006.

2. Insufficient demand

The soda ash and caustic soda sector, the downstream sector of
raw salt, has developed rapidly in recent years. The output
growth rate of soda ash and caustic soda was 11.2% and 18.5% in
the first nine months of 2006, and it is expected that the output
of soda ash and caustic soda will reach 15.6 million tons and
14.6 million tons respectively. Producing one ton of alkali
consumes around 1.5 tons of raw salt. The demand for raw salt
in the soda ash and caustic soda sector will be around 45.3
million tons in 2006. Compared with the supply amount of around
52 million tons, the domestic demand for raw salt will still be
slightly insufficient.

3. Impact of imported products with low price

Winter is the traditional slack production season of raw salt
in China, but it is the brisk production season in Australia.
Importation of raw salt by China declined drastically in 2006,
but imports still hold a considerable proportion of the domestic
market. Because imported products have low heavy metal content
and high quality, customers from coastal areas, in particular,
have consumed a certain quantity of imported product for a long
time. The import price of raw salt has fallen to around US$32
per ton in 2006, a drop of over 10%. It is expected that the
imported products will have a considerable impact on the
domestic raw salt market in early 2007, and the market price of
raw salt will be unlikely to rebound.

4. Price of raw salt will decrease slowly

The price of raw salt rose rapidly from RMB300/t at the beginning
of 2005 to RMB400/t in May 2005. After hovering at a high level
for several months, the price of raw salt began to drop since
August 2005, and finally dropped to RMB250/t by the end of 2005.
In 2006, the price of raw salt decreased constantly, and the
average monthly price drop has been RMB10/t. Due to the supply
surplus, the price of raw salt will continue to decrease, but
2005's drastic price drop will not be repeated. The main reason
is that the soda ash and caustic soda sector will continue to
develop considerably. It is expected that in the next few years,
pulled by the brisk demand of downstream sectors, such as the
chemical industry, construction and papermaking, the output of
soda ash will keep increasing rapidly. Due to the construction
of some additional units, production capacity in chlor-alkali
sector will still increase considerably in 2007.

Table - Consumption of Raw Salt in Major Downstream Sectors in
China in 2006
Sector                   Caustic soda     Soda ash    
Chemical industry     Food addit