Caustic Soda Capacity Expansion Continued in China    

1. The performances of China's caustic soda industry in 2009

(1) Production capacity grew rapidly and the capacity utilization rate dropped

As of the end of 2009, China's caustic soda production capacity reached 27.93 million t/a, accounting for about 34% of the global total, and China's caustic soda output was 18.91 million tons in 2009, up 8.6% year on year, with a capacity utilization rate of 67.7%. China's caustic soda capacity and output both ranked first in the world. By layout, in 2009 the caustic soda capacity of eastern China, northwestern China, northern China and central China accounted for 39%, 22%, 12% and 13% of national total, respectively. Of total, the caustic soda production capacity of northwestern China grew fastest, stating that China's caustic soda production is gradually being transferred to western regions.
   In recent years, China's caustic soda capacity has increased rapidly. Because of the global financial crisis, the output growth was lower than its capacity growth. In 2009, many new caustic soda units were difficult to operate at full capacity, and the national average capacity utilization rate was the lowest in recent years.

China's caustic soda capacity and output in recent years
Year    Capacity    Growth    Output    Annual
　　    (mln t/a)    (%)    (mln tons)    growth (%)
2001    8.45    11.2    7.38    10.9
2002    9.87    16.8    8.22    11.4
2003    10.75    8.9     9.40    14.4
2004    11.90    10.7    10.60    12.8
2005    14.70    23.5    12.40    17.0
2006    18.10    23.1    15.11    21.9
2007    21.81    20.5    17.59    16.4
2008    24.72    13.3    18.52    5.3
2009    27.93    13.0    18.91    8.6
Source: CNCIC


(2) Exports declined

From 2005 to 2008, as the construction of chlor-alkali plants was sped up in China, the export of caustic soda was vigorous. But in 2009, China's caustic soda export amount and prices both dropped. In 2009, China exported 1.527 million tons of caustic soda, down 26.4% year on year, of which the export of liquid caustic soda was only 935 000 tons, down 43.3%.

China's import and export of caustic soda
         in recent years     (thousand tons)
Year    Imports    Exports
2001    27.3    598.7
2002    114.8    378.5
2003    104.7    372.5
2004    91.2    342.8
2005    48.0    854.0
2006    27.0    1 331.0
2007    32.0    1 474.0
2008    20.0    2 075.0
2009    34.0    1 527.0
Source: CNCIC


(3) Prices declined

Due to the severe impact of the global financial crisis, from the end of 2008 to early 2009, many caustic soda units in China were shut down, and the average capacity utilization rate was less than 40%. Because the output of caustic soda declined substantially and its market supply reduced, its prices remained at high levels. As China's economy recovered gradually, the operating rates of caustic soda plants began to rise in March 2009. The operating rates of caustic soda plants were related to both the caustic soda market structure of areas where the plants are located and the amount of caustic soda consumed by caustic soda producers themselves. Eastern coastal area is China's major caustic soda consumption region. The fast recovery of downstream markets played a significant role in supporting the operating rates of caustic soda plants in the due region. The average operating rate of caustic soda plants in Jiangsu province was over 80% in March 2009, and the average operating rate of caustic soda plants in other areas was also more than 60%. Due to a sudden increase in caustic soda production, since March 2009, caustic soda prices had been declining till July 2009. Later on, caustic soda prices in various regions have been hovering at lower level. Especially in northwestern China, because the caustic soda plants are generally of large scale but the local consumption of caustic soda in that region is very small, caustic soda prices continued to decline there.

2. Outlook of China's caustic soda industry in 2010

(1) Capacity will continue to grow
rapidly

   In order to speed up the development of their salt chemical and polyvinyl chloride businesses, several companies are now building or plan to build caustic soda units in China. According to current statistics, it is expected that the combined capacity of new caustic soda plants that are scheduled for startup in the first half of 2010 will reach about 2.9 million t/a, and in the second half, nearly 2.5 million t/a capacity will be added. So it is expected that as of the end of 2010, China's total new caustic soda capacity will reach about 5.4 million t/a. In 2010, caustic soda producers with a capacity of over 1 million t/a each will emerge in China for the first time. Overcapacity will be more serious. New caustic soda units all adopt the ionic membrane process. At the same time, China will phase out diaphragm caustic soda plants with a combined capacity of 380 000 t/a in 2010, the proportion of diaphragm caustic soda will continue to decline.

(2) Exports will turn better

Based on the expected global economic recovery, in 2010 China's caustic soda export amount will increase significantly. The major export destinations of China-made liquid caustic soda are the United States, Australia and Canada, so the caustic soda export will heavily depend on the recovery of these countries' demand.

(3) Production and demand will remain a stable growth

The constant improvement of China's economy and global industrial recovery will stimulate and boost China's domestic demand for caustic soda. At the same time, the textile, paper and alumina industries are also gradually recovering, which will, to a certain degree, help to increase the demand for caustic soda. It is expected that in 2010, China's caustic soda output and apparent consumption will both increase by 7% to 8% and the output will reach about 21 million tons.
   
(4) Prices can hardly rise

China's caustic soda capacity increased rapidly, but most of the new caustic soda units were built to match with polyvinyl chloride plants. The demand for liquid chlorine will force the operating rate of the caustic soda units to rise, so the production of caustic soda will certainly be excessive. In 2010, electricity price, transportation cost, labor cost and environmental protection and security costs will increase, but the price of