Price of Soda Ash Leaped High and Then Plummeted in 2008      
By Cai Shicheng, Zigong Honghe Chemical Co., Ltd.      

By the end of 2008, China's soda ash capacity totaled 24 million t/a, consisting of 10.7 million t/a for combined-soda process, 9.5 million t/a for ammonia-soda process and 3.8 million t/a for natural soda process. Output was 18.81 million tons in 2008, a growth of 6.43% from 2007, the slowest growth in the last 10 years. Consumption of soda ash was about 16.69 million tons, a growth of 8.3%. Export volume was about 2.13 million tons, an increase of 24.8%.  

The price fell back after rise    

In 2008, soda ash was in short supply in the domestic market in the first half of the year but then presented a serious oversupply in the fourth quarter. The price sharply fell 60% from the middle of October to late November. The market quotation trend in 2008 can be divided into four stages:

The first stage: the price of soda ash in the first half of 2008 followed the rising tendency of the second half of 2007. The price was RMB2 100/t-2 200/t in June, a growth of RMB800-900/t from 2007, even jumped RMB1 000/t in some regions, rising 70%.

The second stage: in July, the soda ash supply increased as new capacity was put on the market. However, the demand was still large so prices remained high.

The third stage: soda ash was obviously oversupplied in October and November, and the demand dropped largely. In less than two months, the price of soda ash took a nosedive, dropping to RMB900-1 400/t by the end of November, a decrease of RMB1 200 - 1 300/t; for some companies the decline even exceeded RMB1 300/t, leading to great losses industry wide. Under the serious oversupply conditions, most soda ash producers began to cut their operating rates from the middle of October, and by the end of November, the average rate of the whole industry dropped to 55% - 60%, and the soda ash price stopped dropping.

The fourth stage: because the production downstream recovered gradually and the policies on expanding domestic demand strengthened market confidence, soda ash achieved a basic balance between supply and demand in December. The price rebounded to RMB1 200 - 1 300/t with manufacturers suffering less loss.
   
Factors influencing soda ash market    

Aside from the economic crisis, factors from downstream also affected the domestic soda ash market in 2008, but the most important factors were still within the soda ash industry itself. They are mainly as follows:

1. The supply and demand of raw materials and fuel     

In the first nine months of 2008, such raw materials and fuel as coal, electricity, natural gas, salt and oil were in short supply and their prices rose continuously. The increased feedstock cost drove soda ash's selling price to climb continuously. Because the demand for soda ash fell rapidly in the fourth quarter of 2008, the rapidly dropping price of soda ash caused operating rate to slow down. One of the reasons that soda ash producers suffered heavy losses is that the price of well salt was too high after the prices of fuel materials and raw materials were adjusted to be rational.

2. Soda ash industry    

A few years ago, the soda ash industry got better benefit and manufacturers continuously built more capacity in pursuit of profits, which led to irrational distribution of soda ash facilities. The new capacity was one of the main factors that led to the great decline of price in the domestic market in such a short period.

3. Changes in downstream    

The domestic real estate industry was heavily hit by the economic crisis, lots of house building projects were stopped or suspended, which made the glass price drop below the cost and most glass enterprises suffered heavy losses. One-quarter of float glass production lines in China were forced to stop operating, so the consumption of heavy soda ash was severely reduced. It follows that the sodium tripolyphosphate, washing, smelting and glass bottle industries slowed - especially sodium tripolyphosphate - with the operating rate of the whole industry at only 20% - 30% in the fourth quarter, causing a sharp drop of the demand for light soda ash.

* Good performance in 2008    

Although the price of soda ash was far down during the last three months of 2008, the overall annual profit of the soda ash industry was still better than in 2007. The soda ash price was about RBM1 800/t in 2008. So calculating the operating benefit through a full costing method, ammonia-soda enterprises had average profitability of about RMB350 for every ton soda ash, combined-soda enterprises about RMB925/t, and natural soda enterprises about RMB950/t. It can clearly be seen that ammonia-soda enterprises had the worst profitability, and combined-soda enterprises' profit was a little less than natural soda enterprises.

Continued soft market in 2009    

Now the global economy has fallen into recession, and as a result, China's economic growth will inevitably slow down. Though the Chinese government has promulgated some policies to promote the economic growth, their effects need a long period to develop. Most of these measures will be carried out in the first half of 2009 and it is expected that the benefits will be felt in the late second quarter or the third quarter of 2009.

1. Raw material and fuel     

Prices are declining for raw materials such as coal, gas, salt, petroleum, and the transport of raw materials, and there is still large space for further reduction. Those raw materials and fuel will be in oversupply in 2009 in various degrees, and the prices may fall to the levels of 2006 or earlier 2007. Take coal for example. Its present price is far away from a market price that fully reflects the influence of oversupply. Less than 50% of the national supply was committed in the 2009 Meeting for the Placement of Coal Orders, so the price will undoubtedly fall. As a result, the production cost of soda ash will fall back to the level of 2008 and the profitability of the soda ash industry will increase.

2. Production    

The overall soda ash capacity is 24 million t/a, and another 6 million t/a is under construction, but as a result of the economic slowdown in 2009, these construction projects will be delayed. Limiting production to keep rational prices will be major measure for profit in 2009 and the following several years. At present, the domestic soda ash manufacturers have planned overhauls ahead of time so the output reduction is inevitable. It is estimated that the output increase of soda ash in China in 2009 will less than 5% from 2008.The total output will be about 19 million tons or even lower. In the second half of 2009, driven by domestic demand, the price will gradually pick up and operating rates will gradually improve.

3. Consumption     

Though the policy of expanding domestic demand will have some favorable effect, it will probably not be much. Supposing that China's GDP grows by 8% in 2009, the total consumption of soda ash in the domestic market will be less than 17.5 million tons, most likely be around 17 million tons. From February to May in 2009, downstream enterprises will enter a long period of stagnation - liquor consumption will have a substantial reduction, and most glass bottle manufacturers will have a recess until March 2009, and then go to operation in the second quarter after maintenance. House building peaks and the reconstruction after the earthquake in Sichuan province will stay at the foundation phase and the demand