India’s caustic soda demand may grow by 5% despite a large capacity addition and lower-than-expected consumption

India’s caustic soda demand is likely to continue its recent years’ growth momentum due to sustained growth in consumption reported in the fast moving consumer goods (FMCG) sector, where this chemical is used as a major raw material. With the South West monsoon is forecasted to report normal to surplus rainfalls this year, the rural consumption of FMCG may remain firm, thus driving caustic soda demand.

A study conducted by India Rating titled ‘Chemical Insights’ showed India’s caustic soda demand may rise in mid-single digit in the financial year (FY) 2024-25, which is in line with the past five-year compounded annual growth rate (CAGR) of around 5 percent. Textiles (17 percent), alumina (15 percent), chemicals (both organic and inorganic – 24 percent), soaps and detergents (7 percent), pharma (6 percent) sectors account for around 70 percent of the domestic caustic soda consumption.

The domestic textile demand and detergent consumption is expected to witness steady demand momentum over FY 2024-25, with the continued growth in India’s private final consumption expenditure of around 7 percent year-on-year (yoy). Furthermore, export demand for locally produced textiles, which was weak over FY 2023-24, is likely to recover in FY2024-25, considering possible low-but-modest demand growth in key importing nations over 2024 especially the European Union and the United States and improved yoy volume imports in the United States during January-April 2024.

With India’s sufficient bauxite reserves, the domestic alumina production is expected to remain strong. Moreover, the incremental 3 million tonnes per annum (MTPA) domestic alumina capacity in FY2024-25 is expected to result in around 0.9 million tonnes of incremental caustic soda demand.

Additionally, India’s chemical demand is supported by a healthy domestic end-use demand, although export conditions are expected to be weak over the near term. Demand from pharma is expected to be supported by a possible 8-9 percent yoy recovery in the United States generic focused companies and domestic formulations market in FY2024-25.

Capacity additions
The large capacity additions over FY 2023-24 have resulted in an oversupply of caustic soda in the domestic market. This is expected to continue for another couple of years, as the capacity additions over FY 2025-26 could outweigh the single digit growth in domestic demand. While India would remain a net exporter, the share is unlikely to increase substantially, given the global softness and logistical challenges.

Furthermore, chlorine disposal remains a challenge, given the limited integration into downstream chemicals in India (unlike other markets where it is a core product), and would continue to have a negative carry for most players. While the oversupply is likely to limit the recovery in prices, which remained lower than the mid-cycle average in July 2024, some recovery in earnings before interest, tax, debt, and amortization (EBITDA) margins is likely as inventory losses abate over FY2024-25. Furthermore, the credit profiles of sector companies are supported by their diversified cash flows across various chemicals and the resultant balance sheet headroom.

Supply surplus to continue
Despite the healthy demand, industry capacity utilizations have been within the 75-80 percent range, as per Alkali Manufacturers Association of India, as around 1.2 million tonnes of capacity was added over FY 2023-24, highest in the past decade. With over a million tonnes of capacity likely to be added over FY 2025-26, on the FY 2023-24 base of 6.2 million tonnes, oversupply would continue as domestic demand is likely to grow in a single digit while export markets would remain subdued at least in FY 2024-25.

As a result, domestic capacity utilizations are likely to fall to 70-75 percent over FY 2025-26, unless there is a significant pick-up in exports. This could exert pressure on recovery in domestic caustic soda prices. India’s domestic consumption growth has lagged capacity addition over the past seven-eight years, coming in at 4 percent compared to the average domestic capacity growth of 8.2 percent per annum, resulting in India becoming net exporters from FY 2020-21. India’s exports as a proportion of production had increased to 8-10j percent over FY 2020-21 to FY 2023-24 (FY 2014-15-FY 2019-20: 3 -5 percent) while India’s imports as a proportion of consumption had reduced to around 5 percent over the same period (around 11 percent).

Slight recovery in margins
Chemical Insights expects the domestic oversupply and the subdued global fundamentals to be a key concern over the near term and could impact the recovery in domestic prices. After averaging around US$ 420 a tonne over FY 2015-16-FY 2019-20, international prices jumped to US$ 665 a tonne by FY 2022-23 owing to supply chain constraints amid the post-Covid recovery in demand.

Prices corrected sharply to US$ 425 a tonne in FY 2023-24, close to the mid-cycle average, post which some improvement was seen in FY 2024-25 (July 2024: US$ 495 a tonne). While domestic price also witnessed a sharp jump in FY 2022-23 followed by a correction in FY 2023-24, it remained below the mid-cycle average of around US$ 625 a tonne given the oversupply conditions (FY 2023-24: US$ 510 a tonne, July 2024: US$ 520 a tonne) with limited upside likely in FY 2024-25.

The fall in prices resulted in a revenue decline of 30-35 percent yoy in FY 2023-24 at a sectoral level and impacted the spreads, while production costs sustained at similar levels. The lower product spreads coupled with inventory losses, given the nearly secular fall in prices, resulted in EBITDA margins contracting to around 10 percent in FY 2023-24 (FY 2022-23: 25 percent) with some companies reporting losses in July 2023 - December 2024. Over the past 25 quarters, sector participants have recorded average quarterly EBITDA margins of around 21 percent. The oversupply situation may limit correction in prices, although greater stability is expected in FY 2024-25 which could lead to some improvement in the margins as inventory losses abate.

India to remain net exporter
India’s caustic soda exports grew by 3-3.5 folds yoy in April-May 2024 amid the domestic surplus volumes. However, the ability of export markets to absorb incremental volumes is uncertain amid the current subdued global demand conditions and the competition from China, Japan and Iran in addition to logistical challenges which could cause exports to remain range bound. India’s exports to the European and the United States markets are minimal since the caustic soda industry here is largely consolidated and the freight and logistic costs are high.

Global capacity utilizations have averaged at around 80 percent over the past decade. Accordingly, around half of India’s caustic soda exports are to Africa whose chemical markets are comparatively under-developed with the remaining largely spread across the Middle East and Southeast Asia. India’s key export destinations are South Africa (13 percent), Indonesia (12 percent), Kenya (9 percent), Tanzania (8 percent) and Nigeria (6 percent) which accounted for half of India’s caustic soda exports in terms of volume over FY 2023-24. From an import standpoint, Japan and Iran accounted for around 70 percent of India’s imports in FY 2023-24 with Oman and Qatar being the other key exporters into India. The Director General Trade and Remedies had in December 2021 recommended imposition of anti-dumping duty on the import of caustic soda from Japan, Iran, Qatar and Oman. However, in February 2022, the Central Government did not accept the recommendation due to which domestic players still face import risk.

Range bound global markets
The global capacity utilizations have remained robust at 80-83 percent with higher downstream integration to utilize the chlorine produced as a by-product. China remains dominant in the caustic soda market accounting for around 46 percent of the global capacity and 45 percent of the total consumption with their capacity share increasing by 2-3 percent over the past decade. North American players’ capacity share has reduced by 2-3 percent.

China’s caustic soda production was around 5 percent higher yoy over January-May 2024 and 4 percent higher yoy in 2023, despite its weak domestic downstream demand conditions. This indicates that capacity utilization levels within the country have remained steady. Furthermore, with China having sufficient caustic soda supply, surplus volumes are available with its producers to export and therefore a recovery in Chinese downstream demand remains a key driver of caustic soda prices.


DILIP KUMAR JHA
Editor
dilip.jha@polymerupdate.com