Soda ash survival

Published: Tuesday, 25 May 2010

The global downturn caused the soda ash market to crash from an all time high. Roger Pechey reviews what happened and suggests the emerging period of recovery might force some uncomfortable restructuring in the supply sector

Soda ash markets have undergone a significant change as a consequence of the global financial crisis. There has been a complete transformation of all market parameters and it is possible that the effects of the downturn will still be playing themselves out for some time to come.

Demand has slumped, pricing has collapsed and trading patterns have been re-aligned. Moreover, the market is having to come to terms with a landscape in which there has been virtually an overnight switch from unprecedentedly tight conditions before the recession to a situation in which supply capability significantly outstrips demand.

This is placing intense pressures on a number of producers and is raising speculation that the supply side may yet need to undertake some uncomfortable restructuring before a long term sustainable equilibrium can eventually be restored once again.

Where now?: Searles Lake, California, a source
of trona, amongst other minerals, which attracted
Nirma Ltd of India in 2008, in pre-recession
acquisition mode.

The run-up to global crisis

In the period before the financial crisis, the global soda ash market departed from its traditional stable trends and became significantly overheated. A number of buyers experienced difficulties in procuring as much product as they required and had to resort to making enquiries to increasingly distant supply sources.

In some cases these searches were in vain and consumers had to deplete their stocks almost to undesirable levels; or alternatively had to operate their factories at lower rates than market conditions would ideally warrant.

Accordingly, prices escalated to levels that had never been seen before. Prices on the spot market reached levels in excess of $400/tonne CFR in some localities and these were around two to three times more than the prices paid only a couple of years previously. Even buyers with longer term contracts saw their prices rise to levels that would have seemed inconceivable a short time before when soda ash producers were fighting to stave off bankruptcies.

There was a conjunction of factors that combined to bring about this situation. On the demand side, there was strong growth for a period of years in China, India, Eastern Europe and South America.

China, in particular, had seen consumption growing in excess of 10%/year every year since the Asian financial collapse before the turn of the century. India’s economy was also being swiftly liberalised and increasingly exposed to world trade and this led to healthy growth in the construction and automobile sectors.

In Eastern Europe, some FSU countries were seeing robust growth of around 4-8%/year as they recovered from the massive slump after the break-up of the Soviet Union.

In South America, a number of major countries were increasingly moving away from the cycle of boom and bust that accompanied major political and economic instability.

These countries were therefore magnets for inward investment into world scale glass plants, among a number of other consuming sectors such as detergents and chemicals.

These developments absorbed a lot of spare soda ash capacity that had caused prices to languish at levels where producers were struggling to break even. Nevertheless, on the supply side, there was a distinct reticence among producers outside of China to embark on any significant expansion of their production capacities.

The industry had passed through an extremely difficult phase during the 1990s when projections of demand were not realised and this left several players with unwanted capability that had to be closed down or mothballed. Some of these plants had only recently started coming back into action while others may still never be operated again. Moreover, certain major producers had gone into bankruptcy or teetered on the brink as a consequence of this protracted period of overcapacity.

Leading soda ash producers in 2010 (m. tonnes)

Solvay* USA, Bulgaria**, France, Germany, Italy, Portugal, Russia, Spain, Egypt 9
Tata India, USA, Kenya, UK 5.3
FMC USA*** 3.2
Nirma India, USA 2.6
Shandong Marine China 2.5
Ciech Germany, Poland, Romania 2.3
Soda Sterlitamak Russia 2.1
Tangshan Sanyou China 2
Sisecam/Soda Sanayii Turkey, Bosnia, Bulgaria** 1.7
* Solvay’s capacity includes a plant in Russia: the acquisition of this unit is pending approval however
** Bulgarian capacity is split 80-20 between the two owners, Solvay and Sisecam
*** FMC’s capacity at Green River is shown above: the Granger unit is currently idled and is not included
Source: Harriman Chemsult

Chinese uncertainty

A further cause of caution among Western soda ash producers in expanding their capability was the difficulty in ascertaining with any degree of confidence the strategy of the Chinese soda ash producers.

Experience had shown that the Chinese players might pursue unpredictable and sometimes counter-intuitive strategies that then have a knock-on influence around the world far beyond the boundaries of the Asian region. China has rapidly grown to become the world’s largest producing and consuming country. In 2008, it produced almost 19m. tonnes of soda ash compared with just over 8m. tonnes in 2000, corresponding to an average annual growth rate of just under 11%/year.

Nevertheless, most of this Chinese output was consumed within the country itself. (This contrasts with production of just over 11m. tonnes in the USA in 2008 and domestic consumption of slightly less than 6m. tonnes.).

However, in addition to the rapidly growing domestic demand, the Chinese producers also established an increasingly significant presence in export markets: in 2008, they shipped more than 2m. tonnes into deep sea markets. Most of this was delivered into the Asian region, which had earlier been almost the sole preserve of the US exporting agency, ANSAC.

On occasion, however, the Chinese shippers adopted proactive strategies to displace sizeable volumes of US soda ash from the South East Asian arena. This product then had to be placed elsewhere with the likelihood that sudden fluctuations in US product availability could potentially impact pricing elsewhere in the world.

End end uses of soda ash (%)

Source: Harriman Chemsult

A tight market

The US soda ash industry is the largest exporter in the world market with nearly 5.4m. tonnes shipped in 2008. However, this apparent dominance also imposes a measure of vulnerability as the export shipments then accounted for some 45% of the US production. This manifests itself as a cautious approach towards chasing volume increases.

It is perceived that the US producers prefer to maintain profits on conservative growth projections rather than run the risk of an oversupply situation that could cause pricing to collapse and margins to be lost.

Thus, immediately before the recession, the global soda ash market found itself in a situation where there had been little growth in production capacity outside of China for a period of some five to ten years.

The market was tight everywhere and it was variously estimated that the global average operating rate in 2007 and the first half of 2008 was around 96%. This was extremely high by the normal standards of commodity chemicals and meant that there was no spare capacity when scheduled maintenance and unplanned outages occurred. The firm balance was a significant contributory factor in the steep rise of soda ash pricing that preceded the crash.

However, the market also saw the onset of heightened cost-push factors. Soda ash manufacture is a highly power intensive procedure and all producers were hit hard by the escalating cost of energy. This applied especially to operators of the synthetic Solvay and Hou processes that are used outside of North America.

Despite the rapid increase in input costs, the global soda ash supply side was in the comparatively rare position of making good profits for the first time for around a decade. The progressive improvements in demand and pricing had transformed the prospects for many of the leading players. Some had been seeking ways to exit the industry, but instead a number of companies began tentatively to consider ways of expanding their capacities.

Moreover, the transformation in company balance sheets engendered an environment in which it was more attractive to invest in the industry rather than to disinvest. Nowhere was this more pronounced than in India.

World soda ash prices since 2006

Source: Harriman Chemsult

Indian expansions

The leading Indian producers found themselves to be cash-rich as a result of the buoyant Indian market and they used their strengthened positions to become players on a global scale. The most active of these was Tata Chemicals Ltd which initially acquired Brunner Mond Plc of the UK and then followed this up with the purchase of General Chemical Soda Ash Partners Inc. of the USA.

Brunner Mond had around 1.3m. tpa of synthetic soda ash capacity in Europe, together with a further 700,000 tpa in Kenya based on natural trona ores at Lake Magadi. General Chemical has some 2.5m. tpa of capacity based on mined trona ores.

Together, these acquisitions enabled Tata to leapfrog to second position behind Solvay SA in the world league table of soda ash producers with a total capacity of around 5.5m. tpa.

The diversified Indian detergents company, Nirma Ltd, was also active in buying up one of its smaller Indian competitors, Saurashtra Chemicals, and then Searles Valley Minerals Inc. of the USA that has trona based capacity of some 1.3m. tpa.

In a comparatively short time span, the Indian soda ash industry took control of around 15-20% of world soda ash production capacity.

Thus, in the immediate run-up to the global credit crisis, prospects in the soda ash industry were the most promising that anyone could remember for a very long time. World soda ash demand was growing at the unprecedented rate of around 5%/year, pricing was being supported at record levels, and producers were generating healthy profits.

Production of soda ash by continent 2007-2010 (m. tonnes)

Source: Harriman Chemsult

Consequences of the Crash

The aforementioned scenario was transformed almost overnight. Credit dried up and hit all soda ash end use sectors with the result that activity levels fell away sharply. However, there was a multiplier effect since players at all points along the supply chain ran down their stocks of raw materials and finished goods to the bare minimum in order to reduce their borrowing as much as possible.

This reaction fed back along the pipeline and caused soda ash offtake rates to fall immediately by as much as 30-50% in some cases. Sectors such as detergents and glass containers had been considered to be almost recession-proof since it is assumed that people continue to wash clothes and drink beverages even when the economy is difficult.

However, even these sectors were not immune this time around as producers, distributors and retailers all cut their inventories as much as possible. Soda ash supplies into these segments therefore initially fell by some 10-15%. The biggest impact, though, was felt in the flat glass sector as the withdrawal of credit had a disproportionately large effect on automobile manufacture and the construction industry.

A number of governments around the world introduced incentive schemes to scrap old cars and replace them with new ones as a way of supporting the industry. This did have a beneficial effect on soda ash demand levels. However, the damage in the construction industry has been much more severe. Thus there are various estimates that shipments of soda ash into the flat glass industry could remain depressed for a couple of years more or even longer.

Regional contrasts

The effects of the recession on soda ash demand have been felt most acutely in the mature regions of North America and Western Europe. Consumption in the USA in the full year 2009 was 15% down from the preceding year. In Western Europe, it is estimated that demand fell by a similar proportion, although the industry publishes no official data.

In Eastern Europe, demand in Russia fell by 14% but some other East European countries were even more adversely affected by the credit crunch and other factors such as high energy costs. Thus soda ash demand in the Ukraine fell by nearly 35% in 2009 compared with the preceding year.

Outside of Europe and North America, soda ash demand proved to be more resilient. In Asia and South America, demand fell steeply in the first half of 2009 but signs of recovery were already emerging in Q3 and by Q4 they were well under way.

The performance in China was even more impressive. In Q1 2009, Chinese soda ash demand was around 18% down from the same period of 2008. In Q2 virtually all of this decline was recovered and consumption then continued to increase for the remainder of the year. Demand in Q4 2009 was some 12% more than the highest quarter of 2008. Taken overall, Chinese demand actually increased by 2% for the full year 2009, even when including the collapse in the first half of the year.

It appears that the Chinese domestic soda ash market growth is now completely back on its pre-recession track and other Asian and South American markets are not far behind. However, current expectations are that it will take considerably longer for the lost demand to reappear in North America and Western Europe.

Pricing impact

Another impact of the recession has been on soda ash pricing. Availability has switched from being scarce to significantly in excess of demand. Producers accordingly now have to chase buyers rather than the other way round. Pre-crisis prices in the Asian region were variously around $300/tonne FOB but they were down to the vicinity of $150-160/tonne FOB by the end of 2009.

There are signs, though, that prices are now rising again. A similar story has unfolded in Europe. The largest bulk buyers have seen their prices fall from around €240-285/tonne FD to about Û160-190/tonne FD.

Pricing in North America, though, was much less severely affected. This was because one producer, FMC Corp., closed one of its plants to bring supply more closely in balance with demand. Also, the industry generally stepped up its efforts to export into the Asian and South American regions so that there was very little unallocated product in the North American regions.

The collapse of pricing has further created an even greater problem for a number of soda ash producers. Pricing has fallen to around the cost of production, and even below in some cases, for producers in Europe and China that are using higher cost synthetic production processes. Thus, some producers are currently operating at negligible profit margins, while others are actually running at a loss.

In China it is calculated that much of the industry operated at a loss throughout 2009. One solution would be to shut down most of the significant surplus capacity that exists in China. However, there is not a great deal of optimism in industry circles that this will happen. Chinese producers have on occasion been obliged to operate for extended periods in loss-making conditions, which has necessitated government intervention.

Moreover, there is sometimes an external view that industrial enterprises in China are at least as much about creating and sustaining employment as they are about creating a positive margin on a balance sheet. Consequently, while the loss-making condition of the Chinese soda ash industry is causing some local disquiet, there are questions surrounding how quickly this issue will be addressed.

Facing the future

The problems for the European soda ash producers, in contrast, are seen to be much more acute. They have to justify their losses to keen-eyed shareholders. Unfortunately for them, their problems have recently been intensified by the arrival of a large new 1m. tpa soda ash plant that started up in Turkey in the middle of 2009 right at the height of the recession.

This has clearly exacerbated an already intense over-supply situation and stimulated a round of speculation that some difficult restructuring of the European supply side will have to be undertaken at some time over the next year or so.

Already one 300,000 tpa unit in the Netherlands has been shut permanently and another two similar sized plants in Romania and Ukraine have been idled for extended periods. Yet the feeling is that these actions are still far from sufficient to restore the market to a reasonable supply-demand balance.

How any restructuring of production capability will be implemented is far from clear at the moment. What is clear, though, is that it will be necessary to face significant issues.

In the meantime, the US producers remain comparatively unscathed by pricing reductions and loss-making operations. Firstly, US operations have managed to maintain a better balance between supply and demand within their regional market. Secondly, US pricing has accordingly softened to only a minor degree and, thirdly, and most importantly, producers have a much lower cost production process than the synthetic routes utilised in most of the rest of the world.

The US producers manufacture soda ash from vast reserves of naturally occurring trona ore at Green River in Wyoming and from Searles Lake in California. For them, the cash cost of production is around 40% of what it is for the European synthetic route operators.

Consequently, despite the depth of the recession, the US producers remain in a healthy financial condition, which for them is a welcome reversal of the situation in the 1990s and early 2000s when they were making wafer thin margins and also some significant losses.

Nevertheless, taken as a whole, the global soda ash industry has been left with a somewhat undesirable legacy by the financial crisis. While other sectors of the broader economy are progressively shaking off some of the worst effects, the soda ash supply side is likely to face difficult decisions for the foreseeable future Ð at least in Europe and China.

Contributor: Roger Pechey, senior consultant and soda ash market analyst, Harriman Chemsult Ltd, London, UK.

Soda ash snapshot

Soda ash, or sodium carbonate (NaCO3), maybe derived from mining natural deposits (two main sources: the mineral trona from hard rock and from lake brines), or more commonly, from synthetic processes, normally the Solvay process, utilising salt, lime, coal, and ammonia.

Soda ash is a commodity chemical with a global demand approaching some 50m. tpa. Its major application is in the glass industry, and around 50% of total consumption is for the production of flat glass, container glass, fibre glass and various other items such as tableware.

The flat glass sector is probably the most dynamic of these as it goes into the construction industry and also automobile production. Demand for window glass can be especially robust when house building programmes are vigorous and where highrises are being erected.

Fibreglass can also experience good growth rates as this is used in fibre optics and building insulation, although the market for these is much smaller than that for flat glass. The container glass sector accounts for roughly half of total glass production by weight but it is continually seeing ongoing competition with plastic bottles.

Other significant applications for soda ash occur in the chemicals industry, in soaps & detergents, pulp & paper, flue gas desulphurisation, and water treatment.

Most soda ash application areas are relatively mature and therefore the demand for the product is mainly influenced by wider economic trends. In the developed economies of Western Europe and North America, demand growth is usually lower than GDP trends.

In contrast, in the developing economies of Asia, the Middle East, Eastern Europe and South America, growth is frequently at or above GDP levels. In both cases, the demand for soda ash is usually predictable and not susceptible to any significant volatility.