Memorandum submitted by Brunner Mond
1. SUMMARY
Brunner Mond is a leading manufacturer and supplier
of soda ash and associated alkaline products with manufacturing
plants in Northwich, Cheshire, where it has its Headquarters;
in Delfzijl, the Netherlands; and at Lake Magadi in Kenya. Brunner
Mond is the UK's sole producer of soda ash and sodium bicarbonate
which are essential raw materials in a range of key industries
such as glass, detergents, food and pharmaceuticals and water
purification. In the UK the Company directly employs nearly 500
people in its Cheshire-based operations with around another 1,500
jobs dependent on the company in the regional supplier and support
service industries.
The recent strong economic growth in China has
caused significant changes in the global market for soda ash.
Dramatic increases in Chinese production and consumption of the
commodity have directly influenced the global supply-demand balance.
China's dominant position means that any future changes could
have huge influence on the global market.
The booming Chinese economy has also had important
indirect effects on the global soda ash market. In particular,
it has caused huge volatility in the market for coke, a major
raw material in soda ash production.
Both these direct and indirect influences have
the potential for a catastrophic impact on the UK, and European,
soda ash industry.
2. DIRECT IMPACTS
OF CHINA
ON THE
SODA ASH
INDUSTRY
2.1 Basic information about soda ash
Soda ash is the common name for anhydrous sodium
carbonate (chemical formula Na2CO3). For trade purposes, soda
ash falls within CN code 2836 20 00.
The most important use of soda ash is in the
manufacture of glass, accounting for about 50% of sales on a global
basis. The other main uses of the product are in the detergent,
chemical, paper and pulp, metal refining, food and water treatment
industries.
The global demand for soda ash in 2004 is estimated
to have been just over 40 million tonnes. Production closely matched
demand, although there are significant pockets of idled capacity
in certain parts of the world.
The two most important producing regions for
soda ash are the United States and China, each of which accounted
for around 30% of global production. Production in the European
Union was approximately 7.1 million tonnes or 18% of global production.
Brunner Mond produces 1.2 million tonnes of this capacity at its
plants in the UK (0.9 million tonnes) and the Netherlands (0.3
million tonnes). EU demand is estimated to have been 7.9 million
tonnes, ie slightly in excess of production.
There are two principal processes for soda ash
manufacture. Approximately two-thirds of the world's production
uses the ammonia-soda process, which requires calcium carbonate
(limestone), sodium chloride (brine) and coke as raw materials.
All European production of soda ash employs the ammonia soda process.
The remaining one third of the world's soda ash is produced by
mining and chemically processing trona and related mineral ores.
These ores are only available in a few parts of the world—the
Green River Basin in Wyoming, USA, Kenya, Botswana and, to a small
extent, China—and are remote from the majority of soda ash
users
Brunner Mond is the sole producer of soda ash
in the United Kingdom, based in Northwich, Cheshire.
2.2 Direct impact of China on the global soda
ash market
Production of soda ash in China has grown dramatically
in recent years to the point where China is now the world's largest
producer, accounting for around 30% of global production. However,
internal consumption has grown in parallel with production; China
is by some way the largest consumer of soda ash in the world and
in 2004 accounted for 28% of global soda ash consumption.
China is a net exporter of soda ash, and these
exports have also grown dramatically in recent years, predominantly
to the neighbouring markets of east and south-east Asia. Although
currently at relatively modest levels these exports have had a
profound effect on the global supply-demand balance in recent
years and it is clear that any shift in the balance of the Chinese
domestic market in the future could have a huge effect on the
global supply-demand position.
2.3 Chinese production
Production of soda ash in China has grown from
3.9 million tonnes in 1991 to an estimated 12.6 million tonnes
in 2004. This represents an average growth rate (CAGR) of 9% per
annum. Figure 1 shows the growth in Chinese production, compared
with the EU and USA for the same period.
The majority of Chinese production uses the
ammonia-soda process or derivatives of this process. A small proportion
(less than 10%) uses mined trona-based minerals.
In the early stages, much of the rapid growth
in China came from uncontrolled investment in relatively small
soda ash plants. However, a change in policy by the Chinese government
has meant that investment is now being concentrated on larger,
more economic plants. Investment controls introduced during 2004
have caused delays to or cancellation of some planned soda ash
capacity increases but some substantial capacity increases are
still expected to be commissioned in the coming 12-18 months.
There have been some indications that shortages
of energy and raw materials started to constrain the expansion
of Chinese soda ash production in 2004. In particular, it is believed
that some Chinese soda ash producers are being forced to import
salt, adding substantially to the cost of production. Nevertheless
it is estimated that China's 2004 production will be 14% above
the level of 2003.
2.4 Chinese consumption
Consumption of soda ash in China has grown from
3.8 million tonnes in 1991 to an estimated 11.4 million tonnes
in 2004. This represents an average growth rate (CAGR) of 9% per
annum. As with production, the dramatic nature of the consumption
growth can be best appreciated when it is compared with the relatively
static picture for the EU and USA in the same period (see Figure
2 below).
It is believed that the major driver for the
growth in consumption is the booming demand for flat glass by
the Chinese construction industry. Increased Chinese production
of detergents and chemicals is also important.
2.5 Exports
Prior to 1991, China was a net importer of soda
ash. Net exports have grown from 0.2 million tonnes in 1991 to
an estimated 1.4 million tonnes in 2004, an average growth rate
of 16% per annum. The majority of these exports are destined for
countries in the East and South-East Asian region.
2.6 Impact on the world market
The East and South East Asian markets have long
been established as core export markets by the US soda ash producers
(acting through ANSAC, their soda ash export cartel). ANSAC has
fought to maintain its share in the region by conducting a price
war with the Chinese producers. However, the US producers were
still left with surplus capacity and have offloaded this displaced
production by dumping it in the European market, driving down
prices to unsustainable levels and threatening the future viability
of European soda ash plants.
During 2004, demand growth and the closure of
a soda ash plant in Korea has allowed both US and Chinese producers
to increase their sales to the east/south-east Asian regions.
Chinese producers have sought to raise prices to cover their increased
costs, allowing US producers to do the same. US producers have
partially withdrawn from the European market, allowing European
producers to increase prices and compensate for recent increases
in costs.
The dramatic growth in Chinese production and
consumption has left producers worldwide uniquely vulnerable to
fluctuations in the Chinese economy. If Chinese consumption should
start to grow ahead of production this will rapidly lead to shortages
of soda ash worldwide. On the other hand, a sudden fall in Chinese
consumption, perhaps caused by a slowdown in the construction
industry, will lead to enormous volumes of Chinese product flooding
into the world market. In such an event US producers would again
be displaced from their key markets in east/south-east Asia and
their established pattern of behaviour over many trade cycles
in such circumstances is to dump their displaced product into
Europe—a pattern that has contributed significantly to a
number of European soda ash plant closures in the last two decades.
3. INDIRECT IMPACTS:
CHINA AND
COKE
3.1 Importance of coke for soda ash manufacture
Coke is an essential raw material for soda ash
manufacture by the ammonia-soda process used by all European producers.
When burnt in lime kilns it releases high-purity carbon dioxide
gas for use in the manufacturing process. Approximately one tonne
of coke is required for every 10 tonnes of soda ash manufactured
by the ammonia-soda process. Alternative fuels have been trialled
but these can only partially displace coke.
3.2 Chinese growth and the global coke market
In the late 1990s China dramatically increased
its coke capacity far in excess of domestic demand. The excess
product was dumped in western markets, forcing a number of US
and European producers out of business. Import prices hit a low
of $65/mt CIF Europe in early 1999. During this time China strengthened
its position in the global market to the point where it is now
responsible for about 60% of global supply.
Between 1999 and 2003, 17.2 million tonnes of
coke capacity closed worldwide (mainly in the US and Europe) whilst
only 5.7 million tonnes came on line. European coke capacity declined
by 8.5 million tonnes during this time. The EU imposed anti-dumping
duties on Chinese imports as a result of this activity between
2000 and 2004.
In the UK, two major coke plants closed during
this time. The coking plant associated with the Llanwern steel
works closed in 2001 and the independent CPL coke plant in Cwm
closed in 2002. The UK now has only one merchant coke producer,
the Monckton Coke and Chemical Company, based in Royston, near
Barnsley and operated by UK Coal.
From late 1999 onwards the availability of coke
from China started to fall. As Chinese economic growth took off
domestic demand for coke for steel production increased rapidly.
At the same time the Chinese government moved to close down the
primitive, environmentally damaging "beehive" coke ovens
that were responsible for a large proportion of Chinese production
(over half in 1997).
To ensure sufficient coke for domestic production
the Chinese government started to restrict the availability of
export licences in 2003 and particularly 2004 as a direct effect
of which international prices for traded coke soared to reach
highs of over $500/mt. This is illustrated by the graph in Figure
4.
The lack of availability of coke required some soda
ash producers to reduce their output rates. Soda ash producers
were forced to use coke from whatever source was available, harming
production efficiencies as they were unable to optimise their
operating conditions to a single coke type. The impact on soda
ash producers' cost base severely damaged the competitiveness
of many plants and this fact was cited by Solvay as one of the
reasons for the closure of their 160,000 tonne plant at Ebensee
in Austria which was announced in 2004.
After lobbying by key coke consumers, including
the European soda ash industry, the European Union threatened
to challenge China's export licence system at the World Trade
Organisation. China eventually reached an agreement with the EU
at the end of May 2004 by which it guaranteed to make available
the same quantity of coke to EU customers in 2004 as it had in
2003.
3.3 Current situation
Despite the agreement reached in May, coke prices
remain at around $250 per tonne, $100 above their level at the
start of 2003. This has added around $10 per tonne to the production
costs of European soda ash producers. China has yet to eliminate
its export licence system, so it is possible that the shortages
which occurred in the early part of 2004 could reoccur.
If this were to be the case then open market
prices for coke would soar once again and, even if European soda
ash producers could secure the tonnages they needed to sustain
production, their cost base would once again be pushed to unsustainable
levels. If this were to happen at a time when US producers had
surplus product displaced from other markets then the combined
effect would threaten the continued existence of the European
soda ash industry and, as a minimum, would lead to a number of
plant closures.
17 January 2005
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