In my last post I promised to discuss the reasons behind the price increase of Caustic Soda & Soda Ash. Let me devote this post to the price hike of Caustic Soda. Caustic Soda is NaOH, Somebody suggested why don't we just take an aqueous solution of Common Salt (NaCl) & electrolyse it and produce NaOH. Ofcourse this seems to be a logical process. As I browsed through web pages I found that NaOH is actully produced in the way described above. However, the main product is not NaOH but Chlorine. Caustic Soda is a byproduct of the chlor-alkali process. Therefore, the supply of Caustic soda is dependent on the demand of Chlorine.
The price of Caustic Soda is supposed (actually)to have gone up due to the non availability of the product. It is the supply- demand game that is playing out. If the supply of Caustic Soda has gone down, it is assumed that the demand of chlorine must have gone down. The demand of chlorine is supposed to have gone down due to the subprime crisis.
The obvious question is, What is the subprime crisis ? The answer to this is beyond the scope of this post. However, we will be discussing the same in the next post. For now briefly; The crisis is evolved due to Mr. Bush exhorting the American public to spend their way out of the recession of 2002. Banks started giving loans, housing loans to the general public who carried a credit risk i.e those who may not be able to repay the loan due to unstable incomes, low income or a host of other factors. These were the subprime guys. When the real estate prices crashed due to oversupply of houses, these people found that the net repayment was higher than the market rate of the houses. Therefore there was a mass default of the loans. Meanwhile the banks had bundled the subprime loans and started selling the same to different financial institutions, as instruments. The defaults led to a revaluation of the price of the instruments which pulled the value of the instruments down. (Keep watching for the next post for a detailed discussion). The cascading effect was both a drop in demand for houses or new projects as well as huge losses creeping into the books of the financial institutions.
Going back to the second paragraph, Chlorine produced from the chlor alkali process described is primarily used in the manufacture of polyvinyl chloride resin which is again primarily used by the housing industry. With demand for housing falling, consequently demand for polyvinyl chloride resin fell and consequently the demand for chlorine. This led to a drop in the operating rates of the chlor alkali plants leading to a drop in the supply of caustic soda and with it the hike in prices of caustic soda. Phew... that was one hell of a chain reaction...
The price of Caustic Soda is supposed (actually)to have gone up due to the non availability of the product. It is the supply- demand game that is playing out. If the supply of Caustic Soda has gone down, it is assumed that the demand of chlorine must have gone down. The demand of chlorine is supposed to have gone down due to the subprime crisis.
The obvious question is, What is the subprime crisis ? The answer to this is beyond the scope of this post. However, we will be discussing the same in the next post. For now briefly; The crisis is evolved due to Mr. Bush exhorting the American public to spend their way out of the recession of 2002. Banks started giving loans, housing loans to the general public who carried a credit risk i.e those who may not be able to repay the loan due to unstable incomes, low income or a host of other factors. These were the subprime guys. When the real estate prices crashed due to oversupply of houses, these people found that the net repayment was higher than the market rate of the houses. Therefore there was a mass default of the loans. Meanwhile the banks had bundled the subprime loans and started selling the same to different financial institutions, as instruments. The defaults led to a revaluation of the price of the instruments which pulled the value of the instruments down. (Keep watching for the next post for a detailed discussion). The cascading effect was both a drop in demand for houses or new projects as well as huge losses creeping into the books of the financial institutions.
Going back to the second paragraph, Chlorine produced from the chlor alkali process described is primarily used in the manufacture of polyvinyl chloride resin which is again primarily used by the housing industry. With demand for housing falling, consequently demand for polyvinyl chloride resin fell and consequently the demand for chlorine. This led to a drop in the operating rates of the chlor alkali plants leading to a drop in the supply of caustic soda and with it the hike in prices of caustic soda. Phew... that was one hell of a chain reaction...
3 comments:
Hi,
How do you think indian caustic soda industry will be positively affected due to problems in US. Do you think we can export our caustic soda?
I see lot of companies are putting up /expanding capacities, but it looks like they are getting hit due to higher power costs presently.
Historically in your career, have you seen tighter conditions in CS mkt in India, or do u think things will get tight?
Regards
Jagpreet
Hi Jagpreet,
I have not seen such a tight market in my career. India is a net importer of caustic soda, Also CS is a byproduct, therefore I believe that capacity expansion would require expansion in demand of poly vinyl, which I do not see happening very soon. The demand for polyvinyl has to outstrip the demand for CS for India to become a net exporter. Alternatively polyvinyl demand in US has to increase.
what is the outlook of prices of caustic soda & bye product industry.
kukku
kukkuster@gmail.com
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