Caustic Soda: Supply Shortage and Price Increase Unable to Hide Capacity Surplus Crisis   

By Zhang Peichao China Chlor-Alkali Industry Association    
1. Features of market functioning in 2010   

(1) The scale of production increased continuously and the industrial structure was further adjusted

The net increase of China's caustic soda capacity in the first 11 months of 2010 was 4.11 million t/a, bringing the total capacity to 30.87 million t/a. It was expected at the end of 2009 that the new capacity in 2010 would be more than 5.97 million t/a. The capacity actually starting production, therefore, only accomplished 69% of the plan.
   The new capacity in 2010 was mainly concentrated in Inner Mongolia, Shandong and Zhejiang. All the new units were large units using the ion membrane process. The proportion of the caustic soda capacity in Northwest China increased rapidly and the growth was around 5%. In terms of overall distribution in the whole country, however, the caustic soda production still retained the traditional framework structure in 2010. The proportion of the capacity in North China and East China was still quite big. The total capacity that was withdrawn from January to November was 1.39 million t/a. The proportion of caustic soda using the diaphragm process was reduced to 20%, being 7.0 percentage points lower than the previous year.

(2) The operating rate of producers was on the low side and the output increase was slow

With the commissioning of the new capacity, the output of caustic soda in China also increased. Compared with previous years, however, the 2010 effective operating rate was quite low. From the second quarter, in particular, the monthly output of caustic soda in China had been declining. By November 2010 the total output of caustic soda in China was 19.00 million tons and the average operating rate of production units was only 62%.
   With impacts from the financial crisis in the global market, demand fell off in major sectors consuming caustic soda in the past two years, leading to oversupply in the world caustic soda sector. Major caustic soda downstream sectors in China maintained stable operations in 2010 and the output of various downstream products increased by different degrees. Nevertheless, compared with the abundant supply of caustic soda, the demand increase in downstream sectors was still much too slow and only a fragile backing was offered to the price of caustic soda. Moreover, various local governments strengthened the implementation of policies for energy conservation and emission reduction from the third quarter of 2010 and caustic soda downstream sectors were more or less affected.

(3) Overseas demand was soft and foreign trade fluctuated

Compared with 2009, the export volume of liquid caustic soda in China increased from January to October 2010. The monthly export volume in the first five months was however lower than in the previous year. A rapid increase started in June. The export price of liquid caustic soda in China was relatively low in the first half of 2010 and the product was mostly consumed in the domestic market. Stimulated by the sustained price rise of liquid caustic soda around the world, caustic soda producers made greater efforts in export in the second half of the year. Besides, starting from May liquid caustic soda production in Northeast Asia and Australia was unstable, and the demand in those local markets could not be satisfied. The amount of liquid caustic soda purchased from China was therefore increased.

(4) The policy control was strengthened and the task of energy conservation and emission reduction was tough

Note that to guarantee the attainment of goals for energy conservation and emission reduction during the Eleventh Five-year Plan period, power supply to many caustic soda producers was periodically cut off. The overall operating rate of caustic soda units in China was only 60-70%. The shortage of resources caused by the low operating rate led to a remarkable market price rise of caustic soda in a short period of time. Due to the high price of raw materials and the increase of the comprehensive cost in producers, however, the product price rise could not thoroughly improve the overall operating profits of the caustic soda sector.

2. Analysis of influencing factors in 2011

Judging from the present status, there are already some signs for rehabilitation in the chlor-alkali sector. In addition to the product price that is considerably higher than 2009, the output of major products such as caustic soda and PVC has also increased by different degrees. The profit-making ability of the chlor-alkali sector is now stronger than it was during the financial crisis. Looking forward to 2011, the caustic soda sector will be faced with even more influencing factors.

(1) New capacity

Although there is a significant capacity surplus of caustic soda in China today, steps to expand capacity have never been halted. According to statistics, the capacity of caustic soda units planned for construction in China in 2011 is more than 8.00 million t/a. The completion of these new units will surely topple the market supply/demand balance and aggravate the oversupply.

(2) Cost

With the recovery of the world's macro economy, the starting point of the caustic soda market price in China in 2011 will be much higher than 2010 and producers can reap more profits. As there will be no change in the basic status of oversupply, however, the market price can hardly increase rapidly. With the backing from the cost factor, the potential for reducing the price of caustic soda will also keep shrinking.

(3) Export market

The downstream demand for caustic soda in overseas markets started to recover in 2010 and the volume of caustic soda exported from China was also higher than 2009. In Oceania with Australia as the lead and in Central South America with Jamaica, Suriname and Brazil as the lead, the import volume of caustic soda is more than 3.00 million tons. It is expected that with the recovery of the demand for aluminum oxide, the import volume of caustic soda in these regions will further increase. In West Europe, Canada and the western region of the United States, quite a lot of old electrolytic units have shut down because of degraded competitiveness in the caustic soda production. The net import volume of caustic soda in these regions will therefore also increase further, giving a considerable boost to the export market in China.

(4) Downstream market

Full implementation of China's huge caustic soda capacity needs the backing of matched downstream sectors. In 2011 the global economy still cannot fully overcome the aftermath of the financial crisis. The overall restoration of the market will be slow.

(5) Industrial policy

Macro policies for energy conservation and emission reduction will be the main tone in 2011 and even for a longer period of time in the future. In the environment of such policies, steps for the large-scale expansion of the caustic soda sector through the merging and acquisition of enterprises and the elimination of outdated capacities will be quickened.


Output Statistics of Major Caustic Soda Downstream Sectors in China from January to November 2010
Product    Output (thousand tons)    Growth over the same period of the previous year (%)
                           
Paper pulp    20 359    11.2
Synthetic detergents    6 604    3.0
Aluminum oxide    26 491&