Caustic Soda Will Be Oversupply in 2007

By Yao Liqin

Rapid output increase

There are more than 220 caustic soda producers in China today.
At the end of 2006 the capacity of caustic soda in China was 17.61
million t/a. The output of caustic soda was 15.118 million tons
in 2006, an increase of 19.0% over 2005 and 1.331 million tons
were exported, an increase of 55.8%. Production increased
fastest in Northwest China, with growth 51.9% faster than 2005.
The output in East China grew 22.9% and 22.3% in Southwest China,
both higher than the national average level.

Co-existence of development opportunities and challenges

The caustic soda sector in China is developing rapidly and there
are both opportunities and challenges.
    Opportunities: (a) Shandong and Jiangsu provinces have
great advantages in raw salt and the production cost of caustic
soda is relatively low. (b) The fine chemical sector based on
chlor-alkali products has been formed in the Yangtze River
region and the downstream demand growth can promote a rapid
development of the chlor-alkali sector. (c) Implementation of
the development strategy for western regions has stimulated
companies there to fully use low-priced raw materials and
energies to develop the chlor-alkali sector. (d) The capacity
of caustic soda in advanced countries has declined and
conditions have favored export of caustic soda from China.
    Challenges:  (a) The development of the chlor-alkali sector
depends on high consumption of resources. Further, pollution is
serious and the impact from the state policies is great. As
prices of water, power and steam increased by different degrees
in 2006, profit in the caustic soda production is reduced. (b)
The distribution of chlor-alkali companies is not rational. The
output of caustic soda in North China and East China accounts
for 66.14% of the national total. Great quantities of liquid
caustic soda produced in the north have to be sold in the south.
Due to the high transport cost, profits of producers were down.
To expand sales, some producers produce great quantities of
solid caustic soda and flake caustic soda. The production cost
of caustic soda has therefore been increased. (c) Due to the
difference in the market trend of liquid chlorine and caustic
soda, the production of caustic soda and the production of liquid
chlorine are not balanced and have mutual constraints.

Development trend

(1) Slowdown in output growth

Many chlor-alkali producers increased output without any profit
increase in 2006. The income from the price rise of caustic soda
failed to offset the price drop of chlorine. The chlor-alkali
sector has a relatively low added value. When there is a price
rise of energy, the risk-withstanding ability of chlor-alkali
producers has to be increased mainly through large-scale
production and upstream/downstream integration. Investments in
new projects will be reduced.

(2) Changes in product portfolio

Requirements for the quality of caustic soda in downstream
sectors will be higher. The application scope of caustic soda
produced through the diaphragm process will be further narrowed.
More than 90% of the new and expanded projects will use the
ion-membrane process. Due to the increasing traffic cost,
low-concentration caustic soda tends to be replaced by
high-concentration caustic soda.

(3) Bottlenecks in production

The unduly great energy consumption in the caustic soda
production has affected its development. According to
statistics made by China Chlor-alkali Industry Association, the
average power consumption was 2410.7kWh/t for the caustic soda
production with the diaphragm process and 2378.3kWh/t for the
caustic soda production with the ion-membrane process in 2006.
Starting from June 30th, 2006 the power price had an average
increase of RMB0.025 per kWh and the production cost of caustic
soda was RMB60 per ton higher. Moreover, the water price also
produces a considerable impact on the production cost of caustic
soda. Producing one ton of caustic soda requires 5-6 tons of
water. The supply deficit and price rise of water has become an
important constraint to the sustainable development of the
caustic soda sector. China has increased inputs in environmental
protection in recent years. Greater efforts are made in
pollution control. Many chlor-alkali producers have to make more
effort in environmental protection and some of them are faced
with the problem of plant relocation.

(4) Prominent features in regional market

The caustic soda market in the south has a considerable deficit
whereas the caustic soda supply in the north is in surplus.
Producers in the north have to export their products or sell
products to the south. The price difference between various
regions can hardly be mitigated.

(5) Oversupply in the domestic market

In major caustic soda downstream sectors, the output of alumina
increased considerably in 2006 but the output growth of all other
downstream products was close to or even lower than the output
growth of caustic soda. After a drastic drop in the second half
of 2006, the price of alumina is already down by more than 50%.
Due to factors such as policy restriction, the output of alumina
is expected to reduce in 2007. The demand of caustic soda in
viscose fiber, chemical, metallurgy, water treatment and
petroleum sectors will increase gradually. The demand of caustic
soda in the papermaking, alumina, light industry and dyestuff
sectors will however reduce. There will be no distinct demand
growth in downstream sectors, but a few new chlor-alkali units
will start production in 2007. It is therefore expected that the
market supply of caustic soda will still be in surplus.

(6) Possibility for price drop

Some downstream sectors can hardly accept the sustained price
rise of caustic soda. More and more users request a price drop.
It is expected that the price rise of caustic soda will stop.
Due to the restriction of transportation of liquid caustic soda,
difficulties in the sales of caustic soda will become greater
and a price drop is therefore quite likely.

Table 1  Major Caustic Soda Producers in China in 2006   
(thousand tons)
Producer                                   Output
Sinopec Qilu Petrochemical Co.              509.1
Tianjin Dagu Chemical Industry Co.            412.6
Shanghai Chlor-Alkali Chemical Co.            395.3
Zhejiang Juhua Group Corp.                    372.6
Jinhua Chemical Group Co.                    303.6
Tianjin Botian Chemical Co.                    280.1
Yibin Tianyuan Co.                            270.0
Jiangsu Jiangdong Chemical Co.     &nb