Soda Ash Half-Year Report: Price Halved Before Year's End

2023 has already passed the halfway mark. After experiencing a period of strong expectations followed by a weak reality in the first quarter, soda ash entered an accelerated downward phase in the second quarter. The main reason for this is the imminent start of the Yuanxing Alashan natural soda ash project, which has increased expectations of oversupply month by month. In this situation, downstream glass companies changed their purchasing mentality, focusing on on-demand procurement and continuously reducing raw material inventory, leading to the continuous release of hidden soda ash inventory. Some soda ash manufacturers were forced to actively reduce prices to clear inventory and prioritize profit realization and customer retention. With the influence of these leading companies, other manufacturers followed suit, intensifying market panic and pessimism, resulting in an accelerated decline in spot and futures prices. It was not until the end of May, when the futures price reached around RMB 1550 per ton, close to the production cost line for soda ash manufacturers at that time, that some support emerged. Additionally, with a large number of maintenance plans scheduled for the approaching summer and signs of macroeconomic improvement, the soda ash market entered a volatile phase. In the second half of the year, as new capacity is gradually released, the supply-demand relationship may continue to deteriorate. The response to existing capacity and the extent of market recovery will be important indicators to observe for the future trend of soda ash.

The basics of soda ash

In terms of the fundamental supply situation, there have been no significant changes in the supply of soda ash in the first half of the year. The Yuanxing Energy Alashan soda ash project officially started production on June 28, but it will take time to reach a certain production scale. Therefore, supply changes will be more evident in the second half of the year. It is estimated that the newly added capacity in the second half of the year will reach 8 million tons, which will exert strong pressure on future prices.

Since the beginning of the year, the operating rate of soda ash has remained at a high level of nearly 90% with slight fluctuations (within a 5% range). Weekly production has fluctuated around 600,000 tons (within a range of 40,000 tons). Overall supply has been relatively high compared to the same period in the past three years. Among them, the weekly production of heavy soda ash has remained at around 320,000 to 350,000 tons, until recently when some soda ash facilities underwent conversion (from heavy to light soda ash), resulting in a slight decline in heavy soda ash production to around 300,000 tons. The main reason is that the Yuanxing Energy Alashan project mainly produces heavy soda ash, while the new capacity for light soda ash has a relatively smaller impact. In addition, the demand for light soda ash has recovered slightly better than heavy soda ash in recent times. This is because the post-pandemic service industry has improved relatively quickly, leading to a relatively faster recovery in demand for daily necessities compared to the construction and automotive sectors. As demand for light soda ash is more dispersed and there are inconsistencies in statistical calculations, the demand-supply relationship is measured based on heavy soda ash demand. Currently, the total weekly demand for heavy soda ash from float glass and photovoltaic glass is approximately 355,000 tons (around 335,000 tons at the beginning of the year). This indicates that the supply-demand relationship for heavy soda ash has remained in a tight balance in the first half of the year. In the short term, unless the output from the Yuanxing project can make up for the summer losses, this tight balance may be temporarily disrupted.

Overall, due to the release of a large amount of new capacity, future prices will be suppressed. Therefore, soda ash production companies have maintained high operating rates in the first half of the year to cash in on the high profits. However, this has provided an opportunity for glass companies, which are in a state of supply-demand balance, to catch their breath. Glass companies are reluctant to purchase at high prices, adopt a cautious purchasing mentality, and continue to reduce their raw material inventory (from continuous reduction in inventory from January to February to less than half a month currently). Meanwhile, soda ash production has remained at a high level, resulting in a trend of accumulating inventory for soda ash companies. This premature reaction indicates an oversupply in the market and has to some extent accelerated the downward trend of soda ash prices. Looking ahead, the newly added capacity in the supply side of soda ash will be concentrated in the second half of the year, leading to continuous production growth. However, in the short term, there are many summer maintenance plans, and the loss from heat-related equipment has increased. This can temporarily offset the production from the Yuanxing project (with an annual capacity of 1.5 million tons and an estimated monthly production of 125,000 tons). Therefore, the short-term soda ash production will mainly decrease in July and then increase in August.

In terms of inventory, soda ash inventory has been in a bottoming out and rebounding trend in the first half of the year, increasing from 290,000 tons at the beginning of the year to the current value of 420,000 tons. Since the significant production cutbacks in the middle of last year, soda ash inventory has remained at a low level of volatility. The relatively low base after entering this year is still a key factor supporting soda ash prices. It was not until the first quarter when most downstream companies started reducing raw material inventory that hidden inventory began to be released continuously. Coupled with the rapid decline in soda ash prices and the "buy high, not low" mentality in the market, soda ash inventory for companies started to increase rapidly. In terms of regional inventory levels, the Northwest region, particularly the Qinghai plant, has accumulated a significant amount of inventory due to transportation and time cost issues, accounting for almost half of the total inventory in the first half of the year. This reflects the relatively low and fluctuating inventory levels in other core production and sales regions, confirming the tight supply-demand balance in the soda ash market. Looking ahead, the Yuanxing Energy Alashan natural soda ash project has already started production in its first phase, and subsequent production lines will be tested one by one. In addition, other synthetic soda ash production capacity will also be gradually added in the second half of the year. In the long term, soda ash inventory for companies will increase significantly in a situation where the downstream purchasing mentality is difficult to improve. However, in the short term, with many summer maintenance plans on the supply side of soda ash, it will take some time for the production from the Yuanxing project to have a significant impact on the market. As long as the downstream purchasing mentality does not improve, soda ash inventory may continue to fluctuate, mainly driven by downstream replenishment as a periodic checkpoint.

In the first half of the year, soda ash production profits were continuously squeezed as prices declined. The dual-ton profit for soda ash companies (including ammonium chloride) decreased from around CNY 2,000 per ton at the beginning of the year to around CNY 700 per ton currently. The decline in profits for soda ash companies was due to the rapid decline in ammonium chloride prices caused by high operating rates, the impact of imported ammonia, and weak downstream demand, which compressed profits from both ends. Ammonia-soda companies' profits decreased from around CNY 1,000 per ton at the beginning of the year to around CNY 470 per ton. However, while the downward trend in soda ash prices continued to squeeze profits, the production cost center shifted downward. The main raw materials, raw salt, and fuel such as coal experienced a downward trend in the first half of the year. Although this mitigated the pressure on soda ash costs to some extent, it also opened up space for further price declines. Overall, soda ash production profits in the current year are at a low level compared to the past three years. However, considering that soda ash prices and profits have been relatively high in the past three years, the current soda ash production profits still have room for adjustment from a historical perspective. It is expected that soda ash prices will continue to decline in the future, resulting in further compression of production profits. In the long run, it is not ruled out that soda ash prices may fall below the cost line after all newly added capacity is fully released. In the short term, the fundamentals of soda ash still provide some support, and production profits may temporarily maintain a volatile trend.

Speaking of soda ash costs, coal accounts for a relatively high proportion, with coal costs accounting for nearly 30% of ammonia-soda companies, nearly 20% of soda ash companies, and nearly 70% of natural soda ash companies. Therefore, coal prices have a crucial impact on soda ash production. In the first half of the year, coal prices also remained weak. The Qinhuangdao Q5500 spot price decreased from around CNY 1,200/ton at the beginning of the year to around CNY 800/ton currently. The main reasons for this were the rapid growth in coal supply since the beginning of the year, with major domestic production areas resuming production first, while downstream chemical companies' demand remained weak, leading to a mismatch between supply and demand. Additionally, with the weather becoming warmer, heating demand weakened. Furthermore, the lifting of the ban on Australian coal imports, coupled with the continued policy of zero tariffs on imports, led to an increase in imported coal, which put continuous pressure on the profitability of domestic coal. Coal inventories at domestic ports remained at a high level of volatility. Although there were slight rebounds in coal prices due to safety incidents and production suspensions in major production areas in the first half of the year, the trend of oversupply remained unbroken. In mid-June, the Qinhuangdao Q5500 coal price temporarily dropped to around CNY 770/ton, even lower than the comprehensive import coal price. On this basis, the advantages of domestic coal prices became apparent. In addition, the El Niño phenomenon led to unusually high temperatures in northern China during the summer, supporting the expectations for peak summer electricity demand. The market's trading atmosphere improved slightly, and prices experienced a minor rebound. However, looking ahead, the long-term pressure of oversupply in the coal market remains, and it will take a long time for downstream demand to improve. In the short term, although coal prices are supported by summer electricity demand, for thermal power plants, market electricity prices are controlled, and they can only lower costs to maximize profits. Therefore, coal purchasing remains cautious to prevent a significant price increase. In recent times, power plants have started to show resistance to long-term contract prices, resulting in instances of breach of contract. It is precisely because of the reality of oversupply in the coal market that power plants have sufficient inventory and hold such a mentality. Therefore, in the short term, coal prices may continue to experience a slight weak and volatile trend.

In the first half of the year, it is worth mentioning the situation of soda ash imports and exports. According to the General Administration of Customs, soda ash imports totaled approximately 184,000 tons in the first half of the year, with a monthly import volume of 100,000 tons in May alone. The significant increase in imports in May resulted in an average import price of USD 343.36/ton. Considering the transportation time of 1-2 months for imported goods, these purchases were made from March to April. Based on the exchange rate at that time, the average import price was approximately CNY 2,335/ton. At the same time, the domestic spot market price was still around CNY 3,000/ton, indicating that glass companies found it more profitable to import soda ash, which explains the significant increase in import volume. In addition, exports totaled approximately 796,000 tons in the first half of the year, showing a higher growth rate compared to imports. Export volumes in the first half of the year remained relatively stable, with a slight decline due to the high base from the previous year. Considering the rapid decline in domestic market prices and the expectation of future excess capacity, export profits are relatively higher, and export volumes are expected to continue to increase slightly in the future. On the other hand, imports are expected to decrease as domestic prices continue to decline.

Glass Market Review

As one of the main downstream industries for soda ash, glass prices experienced significant fluctuations in the first half of the year. At the beginning of the year, glass prices were boosted by a series of real estate policies centered around "guaranteed delivery of completed buildings" at the end of last year, which boosted market confidence. As a finished product for completed buildings, glass was expected to be one of the first commodities to benefit. As a result, glass prices were supported and detached from their weak fundamentals, as market expectations focused on the completion of inventories of unfinished buildings. However, after the Spring Festival holiday, the overall commodity market entered an empirical period, and many gains that relied on expectations such as real estate recovery and post-pandemic recovery began to be partially or fully reversed. Since glass itself is a variety with weak fundamentals, the extent of the reversal was significant. It was not until the end of the first quarter that the operations of real estate companies, which had been supported by previous policies, began to improve. In mid-April, the National Bureau of Statistics released data for January to March, showing a 14.7% year-on-year increase in completed construction, indicating a strong recovery, with a rapid monthly increase in March. As a result, the "guaranteed delivery of completed buildings" projects was validated, providing a certain degree of assurance for glass demand expectations. Furthermore, by the end of the first quarter, sales data for real estate enterprises had rapidly rebounded, reaching a high level comparable to the same period in 2021. One of the reasons for this was the concentrated release of pent-up demand that had accumulated during the previous period of the COVID-19 pandemic. Additionally, at that time, housing prices were on the rise, and local governments were adjusting down payment ratios and mortgage interest rates to support home purchases. The improvement in real estate sales to some extent alleviated funding issues for real estate enterprises, ensuring the progress of construction and directly facilitating completion efforts. With the improvement in completion rates and the subsequent growth in demand for home decoration, the spot market for glass experienced a surge in transactions. Supported by various data and the actual improvement in glass demand, glass prices rose rapidly in late April, reaching a high point of around 1,900 yuan/ton in the futures market. However, this prosperity was short-lived as glass demand did not sustain its momentum in the second quarter. The repair of the terminal market weakened on a month-on-month basis, and the policy side maintained a wait-and-see attitude, resulting in a continuous decline in the glass market's production and sales. It was not until early June when new signals were released on the policy front that expectations for real estate policies were reignited, and glass prices began a wide-ranging pattern of volatility driven by market news.

The fundamental landscape of the glass industry

Looking at the glass market from the supply side, the glass industry is in the final stage of capacity reduction. Float glass companies have alternated between cold repairs and new production, with daily melting volume increasing from around 157,000 tons to approximately 165,000 tons. The overall capacity utilization rate fluctuated slightly around 79% in the first half of the year, with weekly production increasing from 1.11 million tons to 1.15 million tons. Despite the low supply base at the beginning of the year due to capacity reduction efforts, the glass supply is gradually recovering with support from the expectations of completing unfinished real estate projects. The recovery of glass production profitability has driven the addition of new production capacity. However, as glass prices declined, profitability was compressed. In the future, the growth rate of glass supply will be based on glass price trends. On the other hand, downstream deep processing companies remain cautious in their purchasing attitude due to uncertainties in the recovery of the terminal market. If the terminal demand does not improve, the growth rate of glass supply may continue to slow down.

The current plans for ignition and resumption of glass production in the year are optimistic, at around 16,000 tons. However, given the downward cycle of the real estate industry, which is currently focused on destocking and deleveraging, the willingness and capacity of real estate companies to acquire land and initiate new construction are weak. This situation does not provide strong assurance for glass demand in the next two years. Considering that float glass companies need to maintain production for 8-10 years after ignition, it is risky to significantly increase new glass production capacity based on the short-term recovery of profitability. From a rational perspective, it is premature to predict a significant increase in glass production capacity based on the current inventory of unfinished real estate projects and existing profitability. The plans for additional glass production capacity may gradually materialize after improvements in land acquisition and new construction data.

Regarding glass inventory, there has been a trend of initial increase followed by a decrease in the first half of the year. From the beginning of the year until early March, inventory levels increased from around 61.5 million weight boxes to a peak of approximately 82.2 million weight boxes. During this period, while downstream deep processing companies had weak production and the recovery of the terminal market was slow after the Chinese New Year holiday, glass production continued, leading to a deterioration in the supply-demand balance and rapid inventory accumulation. However, from March onwards, with the improvement in the terminal market and the release of demand, glass inventory pressure rapidly eased, falling to a low of 45 million weight boxes. Due to the poor performance of the entire real estate industry chain, all sectors maintained a cautious attitude towards procurement, focusing on demand-driven purchasing. This applied to deep processing companies in the glass industry as well, resulting in the weakening of terminal market demand being quickly reflected in the inventory of glass raw materials. With the onset of the rainy season, construction activities in various regions were affected to varying degrees, leading to an increase in inventory to around 55.73 million weight boxes. Among the regions, the inventory decrease in North China was the most significant. This is mainly because Shahe City, a major production and sales area for glass in North China, has strong advantages in both domestic and external markets. After the rapid improvement in production and sales in the Shahe area, the overall inventory in North China decreased. Another region with noticeable inventory growth is East China. The region has a developed economy, large-scale high-quality real estate companies, and relatively high purchasing power among residents, resulting in a strong demand for glass. However, inventory accumulated to high levels due to the price differentials between the region and other areas. For example, in Central China, where terminal market recovery was relatively weak and glass demand was insufficient, prices were lower than those in East China, and the comprehensive cost, including transportation, remained lower than the local prices in East China. This led to the continuous accumulation of inventory by local companies in East China, while inventory levels in other major production and sales areas remained relatively low. In the future, substantial demand in the terminal market will continue to be the main variable affecting glass inventory. While unfinished real estate projects provide some support, a long-term improvement in demand requires more data support. In the short term, market expectations for real estate policies continue to provide a certain degree of support for glass price production and sales.

In the photovoltaic glass sector, the capacity increased from 80,060 tons at the beginning of the year to the current 88,110 tons in the first half of the year. Compared to the explosive growth last year, the growth rate this year has significantly slowed down. The main reason is that glass companies aggressively entered the new energy field due to weak demand for architectural glass last year, but the installed capacity of photovoltaics did not meet expectations, resulting in a relative oversupply of photovoltaic glass and continuous price declines. In the short term, there is still expected support for photovoltaic installations during the summer peak electricity consumption period, and the increase in silicon material prices may boost installations, driven by the destocking of photovoltaic modules. For photovoltaic glass, the changes in the short term are limited, with capacity maintaining steady slow growth and prices remaining stable. In the long term, renewable energy generation will be a steadfast development path, and the growth in demand for photovoltaic glass is only a matter of time.

External market influencing factor

The fundamental market factors are undoubtedly the main drivers of price trends, but changes in the external market environment also play a supporting role. In the first quarter, as the domestic pandemic policies shifted and were coupled with real estate policies, the market rapidly rose under the expectation of a "strong recovery". However, after the Chinese New Year holiday, when the strong expectations entered the empirical phase, the market performance was disappointing, and the market entered a weak and volatile phase. In the second quarter, the market completely abandoned the expectation of a "strong recovery" and began to accept the reality of a "weak recovery". The policy side remained in a vacuum period without stimulating policies to boost the market. As a result, overall market confidence was shaken, and there were even instances of confidence trampling, with a continuous overshadowing of pessimistic expectations. One of the important reasons for this was the slowdown in the recovery of the real estate industry. Since the beginning of the year, supported by previous policies such as "completed delivery of buildings," the "16 measures for the financial sector," and the "three arrows" of real estate policies, there has been strong anticipation for the recovery of the real estate sector. However, as time passed, the specific implementation fell short of expectations due to various practical problems restricting policy transmission. According to the National Bureau of Statistics, from January to May, investment in real estate development nationwide decreased by 7.2% year-on-year, housing construction area by real estate developers decreased by 6.2%, new housing construction area decreased by 22.6%, and completed housing area increased by 19.6%. Among them, the completion date was relatively impressive, benefiting from various special policies such as "completed delivery of buildings," but other data showed weakness. The main reason was that real estate developers still faced difficulties in financing. Looking at the inflow of development funds for real estate developers in the first half of the year, they were affected by credit problems, which limited bank credit issuance and more funds were required to be self-raised through the recovery of project funds. However, the growth rate of self-raised funds in the first half of the year continued to decline. This was mainly reflected in the sales end, where real estate developers' sales data sharply declined after the second quarter, accompanied by a decrease in the rate of funds such as down payments, prepayments, and individual mortgage loans. As a result, overall construction activity by real estate developers continued to weaken, and there was no significant improvement in demand throughout the industry chain.

Until early June, pessimistic expectations took a turn. The period from June to July is when policies are implemented, and in a situation where the market economy's recovery speed fell short of expectations, there was an increase in market expectations for policy support. Since then, there have been frequent instances of market speculation. Under the logic of the bottom line, market risk appetite increased, leading to strong market reactions. The market was also influenced by the repeated impact of "true and false news," and prices began to fluctuate widely. A typical example was the release of new real estate policies in Qingdao on June 1, with relaxations in restrictions on home purchases and down payment requirements. This sparked hopes in the market for a series of real estate policies to be gradually implemented at the local and central levels. In addition, in mid-June, the expectation of continued monetary policy easing began with a 10 basis point reduction in reverse repo rates. However, when monetary policy was transmitted to the end of the Loan Prime Rate (LPR), it was found that the 5-year LPR reduction announced (10 basis points) was slightly lower than expected (15 basis points). The highly discussed expectation of the "State Council meeting discussing new real estate policies and issuing special government bonds" also temporarily fell through, leading to a subsequent decline in the market that had been encouraged by such expectations. However, the implemented policies are still concrete positive factors, and the market trend remains relatively strong compared to the previous period. Looking ahead, there is still strong support for the improvement in macroeconomic expectations, and the market's expectation for new policies to be released at the end of July by the Politburo remains high. Even without strong stimulating policies, a combination of small policies to support the market will be gradually implemented, and market confidence will remain strong in the short term.

Additionally, in the first half of the year, overseas risks continued to disturb the domestic market, with the specific manifestations being the high inflation and slow recession faced by the European and American economies. Taking the United States as an example, although the officially announced Consumer Price Index (CPI) has been on a monthly decline (from 6.4% to 4% since the beginning of the year), the decline rate has not significantly met expectations, and it is still a considerable distance from the target of 2%. Moreover, core CPI and employment data show resilience. Based on this, the Federal Reserve has continuously deviated from market expectations for the final value of interest rates (from 5.0%-5.25% at the beginning of the year to 5.5%-5.75% currently), and the expectation of rate cuts has been continuously pushed back (from an expectation of cuts within the year to around the second quarter of next year). Meanwhile, under the long-term high-interest rate environment, financial risks have continuously emerged. Bank failures, represented by Silicon Valley Bank, Credit Suisse, and First Republic Bank, have further intensified market panic. Subsequently, to prevent similar incidents from recurring, the U.S. banking industry began to tighten credit, thereby increasing downward pressure on the U.S. economy. For China, whether the United States' inflation remains high or gradually enters an economic recession, both pose strong constraints on expanding external demand, and the domestic financial market faces capital outflow pressure, which will also have a negative feedback effect on the domestic economy. Looking ahead, the dovish approach of the Federal Reserve's suspension of rate hikes in June and the hawkish comments by Federal Reserve Chair Powell (expecting two more rate hikes in July and September) may seem contradictory but are aimed at countering excessive unilateral trading in the market. For the domestic market, the impact from overseas has already weakened. Regardless of whether the Federal Reserve will raise interest rates in the future and how long the delay in rate cuts will be, excluding the influence of special circumstances, it can be reasonably concluded that the current round of interest rate hikes is nearing its end, and the pessimistic expectations in the overall direction have been fully traded. Compared to the progress of overseas monetary policies, what affects the domestic market more is the large fluctuations in exchange rates, and the current domestic market, the urgent need is to see rapid growth in domestic demand rather than expanding external demand.

Looking ahead to the future market prospect

Looking ahead from a macro perspective, the market has been boosted in the short term by expectations of policy support, and there is a positive trend in market sentiment. However, in the long term, the real situation has not effectively improved yet. The lessons from the beginning of the year have shown that price increases stimulated by economic growth expectations are likely to fall back once expectations are not met or follow-up actions are not fulfilled. On the international front, the actions of the Federal Reserve have generally met expectations, and the interest rate hike in July has already been factored in, which reduces the negative impact on domestic commodities from overseas monetary policies. In addition, the exchange rate has been significantly devalued due to the mismatch between the Chinese and US economic environments, which has a significant impact on import-export trade and capital outflows, and to some extent limits the space for accommodative domestic monetary policies. However, the central bank still has an attitude of stabilizing exchange rate fluctuations, which has been reflected in recent changes in the central parity rate. It is expected that the probability of a significant devaluation of the renminbi in the future is small, and the market should not excessively trade based on such expectations. Overall, in the short term, market confidence has been somewhat boosted, and risk appetite has increased. The positive response from the macro side will at least be maintained until the end of July after the conclusion of the Political Bureau meeting, and further consideration will be made. In the long term, on the weak foundation of reality, the recovery rate of economic growth still needs to be observed based on subsequent indicators.

Looking at the fundamentals, the current increase in production output of soda ash on the supply side is offset by the summer maintenance, but glass companies have no intention of changing their purchasing patterns and may even continue to reduce raw material inventory. In the short term, soda ash prices will continue to fluctuate, with moderate adjustments in response to macro improvements. In the long term, as new supply capacity of soda ash is gradually released, there will be increasing pressure after September, resulting in strong price suppression. In the case of glass, the pressure from increased supply is relatively small, and the main factor affecting prices still lies on the demand side. The existing inventory of completed buildings can provide some support, but as the completion rate of projects increases and the remaining inventory of unfinished projects decreases, the demand cycle for glass is extended. As the saying goes, delays bring changes, and there may be uncertain risk events that affect the supply-demand relationship during this period.

In summary, both prices are currently supported by positive macro expectations, and their price trends are mainly characterized by volatility. Whether they can continue to rise will depend on the strength of subsequent policy measures. However, once the speculation on policy expectations subsides, both will return to a weaker trend based on fundamentals. In the case of soda ash, due to strong supply pressure, the purchasing intention from the demand side may continue to decline, leading to further price declines. As for glass prices, the main contradiction lies in the demand side, and it will be necessary to observe the extent of the recovery in the end-user market to make a definitive judgment. If the recovery of the end-user market remains slow during the highly anticipated "Golden September and Silver October" period, then glass prices may also struggle to avoid a downward trend, especially with the weakening of soda ash prices.