Caustic Soda Market Was Good in 2011, but 2012 Prospects Are Uncertain   

By Zheng Jiebin, China Chlor-Alkali Online (CCAON)

1  Capacity and output grew rapidly

In 2011, China's caustic soda capacity continued to expand. In the first ten months of the year, the country added new capacity of about 3.5 million t/a, taking the total to 33.7 million t/a. In China, there were 19 large caustic soda producers, each with a capacity of more than 400 000 t/a, and their combined capacity reached 10.68 million t/a, accounting for 31.7% of the national total. Most new caustic soda projects have adopted the ion-exchange membrane technology, and the plant sites are widely distributed around the country.
   In China's central and western regions, where salt resources and electric power are both abundant, caustic soda capacity is expanding fast. New units and expansion projects are, for the most part, intended to support the expansion of PVC capacity there. The rapid rise of the chlor-alkali industry in the central and western regions changes the traditional distribution of China's chlor-alkali capacity, but logistics have become the main bottleneck in the development of chlor-alkali enterprises in the central and western regions. If the irrational distribution of capacity is not properly adjusted, it will prevent the improvement of the overall competitiveness of the industry.
   In March 2011, driven by a recovery in downstream demand and constantly rising caustic soda export prices, the overall operating rate of caustic soda plants in China improved significantly, and the monthly output of caustic soda increased substantially, reaching 2.196 million tons, 2.184 million tons and 2.214 million tons in April, May and June, respectively. In the first nine months, China's total output of caustic soda reached 18.611 million tons, up 17.7% year on year (yoy). The Twelfth Five-Year Plan for Chlor-Alkali Industry states that China's annual caustic soda output will reach 28 million tons after average annual growth of 7%, 2011-2015. Last year, China's caustic soda output is estimated to have reached 24.8 million tons, up nearly 18% yoy.

2  Exports increased sharply

In 2011, China’s export of caustic soda went better than in previous years, mainly driven by a lot of force majeure abroad that affected the international market. Japan, Korea and Taiwan are the main export destinations of liquid caustic soda in Northeast Asia. In the second quarter, the supply of caustic soda in these markets was significantly reduced, thus strongly boosting the export and price of caustic soda from China. These conditions persisted in the third and fourth quarters. Demand for caustic soda was relatively stable in the United States, Australia and Southeast Asia. Despite the high price of caustic soda, in order to ensure their production, the countries and regions still increased their imports of caustic soda from China substantially. In the first nine months, China's export volume of solid caustic soda was 412 000 tons, up 2.1% yoy; the export volume of liquid caustic soda was 1.261 million tons, up 88.5% yoy; and the average export price was US$317 /t, up 53.1% from the same period in 2010.

3  Caustic soda price movement was remarkably periodic

In 2011, caustic soda prices in China moved in four relatively distinct stages. In the first three months, the price was relatively steady, and some tension between upstream and downstream sectors occurred occasionally. From late March to early June, affected by the Japanese earthquake, prices continued to go up, reaching the highest point of the year in June: the ex-factory price of high-end 32% ion-exchange membrane caustic soda in East and South China reached about RMB1 100 /t. In the third stage, ranging from early June to late August, prices went down. Prices continued to rise at first, resulting in a decrease of demand in downstream sectors such as paper, printing and dyeing; meanwhile, exports began to slow down. In the final stage, late August through December, the market demand for liquid chlorine and chlorine products declined, so chlor-alkali producers reduced production and the supply of caustic soda dropped, pushing up caustic soda prices.

4  Policy impacts became prominent

Since March, the implementation scope of the energy saving and emission reduction policy has gradually expanded, and Shandong, Hebei, Guangxi, Hubei and Shaanxi provinces have implemented measures to limit caustic soda production, directly pushing up local caustic soda prices. With the gradual achievement of the energy saving and emission reduction goals in most areas, local caustic soda producers started to recover their production rates, leading to an increased supply of caustic soda and suppressing the rise of caustic soda prices.
   On April 27, 2011, the National Development and Reform Commission (NRDC) issued the Guiding Catalogue of Industrial Structure Adjustment (2011 version) (hereinafter referred to as the Catalogue). Encouraged items involving caustic soda include: zero polar distance, oxygen cathode and other electrolytic cell energy-saving technologies for ion-exchange membrane caustic soda; restricted items: construction of new soda ash and caustic soda plants; and eliminated items: diaphragm process-based caustic soda production facilities. Due to the impact of national policies, a considerable number of diaphragm process caustic soda plants were eliminated from the market. In 2010, China's diaphragm process caustic soda capacity was 4.74 million t/a. In the first half of 2011, only 295 000 t/a was eliminated. There is still a diaphragm process caustic soda capacity of 4.445 million t/a, which must be eliminated before the end of 2015! Although the diaphragm process is being eliminated, China's caustic soda capacity will keep growing as a whole.
   Meanwhile, according to the restrictive expressions of the Catalogue on new chlor-alkali projects, the policy cost of the chlor-alkali industry's capacity expansion will further increase, and the policy environment for the future development of the industry will become more stringent. The early planning of such projects should take into account the carrying capacity of local resources and environments and carefully analyze local water resources, transportation and other conditions.

5  Future trend of the caustic soda market is uncertain

The positive factors pushing up caustic soda prices in 2011, such as electricity shortage and international caustic soda supply shortage, may become negative factors in 2012.
   Electricity shortages that occurred in 2011 arose mainly because the coal and power industries were out of sync with one another. This energy issue has plagued China for many years and may be solved in the 12th Five-Year Plan period (2011-2015). Currently, energy price reform is on the agenda, and the key part of the reforms is electricity prices. In early April 2011, sixteen provinces raised local electricity prices. In early December, NDRC announced nationwide electric rate hikes. Increased power prices directly affect the production and economic benefits of caustic soda producers.
   In the short term, China's caustic soda market still has many favorable factors. But changes in the international market and the gradual increase of domestic caustic soda capacity will further affect the caustic soda prices. In 2011, the total capacity of caustic soda in China is believed to have reached 34.12 million t/a, up 12.9% from the previous year. New capacity was put into production mainly in the second quarter. Chlor-alkali enterprises face increasing costs since the electricity price was raised. In 2012, new caustic soda projects with a combined capacity of more tha