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Soda Ash: Survival of the fittest - Views on News from Equitymaster
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  • Jun 8, 2002

    Soda Ash: Survival of the fittest

    Soda ash (sodium carbonate) typically finds usage in soaps, detergents, glass and silicates and in the manufacture of chemicals. The domestic soda ash sector consists of five major players, largely led by Tata Chemicals with almost 50% market share of the industry.

    Rising cost of power, falling import duties and slow demand growth from the end industries are the major problems, which the soda ash industry currently faces. Domestic industry continues to face the challenge of oversupply. Again there are big consumers in detergents business like Nirma that have set up their captive production units.

    Year Demand Capacity Production
    1994-95 15.0 18.5 14.9
    1997-98 17.0 19.0 16.0
    2000-01 17.0 24.0 16.7
    2001-02 18.0 24.0 17.7
    2002-03 E 18.0 24.0 18.5

    The world soda ash industry saw significant structural change in the 1990s, and the process is still continuing. US and Chinese production capacity rose substantially, while a number of plants in Europe and Japan closed. As production has outstripped demand, soda ash producers have been unable to raise prices for a number of years. This has led to the closure of some in MECs (Middle East Countries) as companies seek to reduce supplies and raise prices.

    Recent times have however, witnessed a marked improvement in the global demand/supply scenario of soda ash. The improved scenario can be attributed to both demand side and supply side dynamics. While demand has increased, the supply has reduced due to voluntary reduction in production and closure of manufacturing facilities. The balancing of international demand- supply has resulted in an upside in the global prices of soda ash. In the long term, Chinese exports are also expected to fall as domestic demand continues to grow, further reducing the current supply/demand imbalance. Sustained growth in demand by the glass industry should help in maintaining stable price levels in the global markets.

    Again, the trend of falling demand in the region post the economic crisis has reversed and the demand has started picking up. South Asia currently accounts for 39% of the global demand for soda ash primarily met through imports. Indian and Chinese companies are expected to capture a significant market share of the south Asian region, particularly due to economies of scale. However, as far as India is concerned high cost of power dents the industries cost competitiveness. Power accounts for 30% of the total cost of input.

    Compared to a growth rate of 3% in the last decade, the demand for soda ash grew at an annual rate of 6% in FY01. The recent higher demand for soda ash is the result of the increased consumption of detergent and glass, of which soda ash forms a key component. Contrary to the global consumption composition pattern where glass consumes accounts for a major chunk, in the domestic market, the consumption is driven by detergents industry. However, with demand from detergents stagnating and glass demand improving, the domestic pattern is likely to be aligned to the global consumption pattern soon.

    Enhanced demand for soda ash is expected in future from the glass industry, in particular from glass used for construction purposes. Domestic manufacturing capacities of glass have been on the steady rise. For eg. Saint Gobain, one of the leading global players, commissioned a 2-lakh tonne float glass manufacturing facility in FY01.

    Sustained growth of soda ash consumption at this rate is expected to result in capacity utilisation of more than 90% for the domestic industry by the year 2005. This is a positive development for the business as it indicates a widening of the future consumer base of the product and higher overall usage.

    Domestic industry scenario would be determined purely by the rate of growth in the user industries. The import duty on soda ash has already crashed from 35-38% levels to current 20%. This is expected to further reduce to 10%, thus, leaving the domestic industry with no or little protection. Only companies with scale and cost competitiveness are expected to survive. To summarize, the industry is faced with challenges and the only key to survival is cost competitiveness.



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