In end-March, Tata Chemicals got US regulatory approval for acquiring General Chemicals Industrial Products, a large American producer of soda ash and other chemicals. Detergents maker Nirma snapped up another key player, Searles Valley Minerals. These acquisitions would be just one among many others, but for the events of a decade ago.
The Indian and US soda ash industry have been in a face-off since 1996, when the US export cartel American Natural Soda Ash Corp (Ansac) attempted to enter India. Intense lobbying efforts by Indian producers succeeded in keeping Ansac out. The domestic alkali association lists three legal cases against Ansac as pending at various stages. Though imports of soda ash have been increasing since then, the US is a marginal player, with most of the exports coming from Kenya, Bulgaria, China and Romania.
Hunting the hunter
India has played for the high stakes in the US market. Tata Chemicals paid about $1 billion (Rs 4,000 crore) to acquire GCIP, whose subsidiary makes 2.5 million tonnes of soda ash year. Nirma���s acquisition gave it access to nearly 1.5 million tonnes. The focus on the US is chiefly attributable to its unique and large natural soda ash reserves. ���Indian companies are primarily benefiting by gaining access to trona reserves,��� said Cindy Werneth, director of ratings services at S&P.
The US industry has become more competitive, especially due to rising energy costs and a stronger dollar. ���There is a focus on identifying opportunities of access to natural soda ash where manufacturing costs are significantly lower as compared to the synthetic variety,��� said PK Ghose, CFO of Tata Chemicals.
But this cost advantage is not new. What has stoked India���s interest is the sharp rise in demand in its home market. Imports are steadily increasing (with Indian players themselves importing to meet demand) as soda ash prices have steadily risen in recent years. This means cost competitiveness will become key to survival. And China���s position as the largest producer (it raced past the US in 2003-04) and consumer of soda ash is a big a threat. The other reasons are growing demand for dense soda ash (bulk of Indian production is of the light variety), rain-related production stoppages in India, and the country���s better port infrastructure.
Where the story begins In some parts of the world (like the US), you can simply scoop soda ash from lake beds, almost. In most other markets like India, it���s not that easy: salt made from seawater, limestone and ammonia are processed chemically to get soda ash. If synthetic soda ash is still sold in larger quantities, that���s because natural soda ash is not enough to meet the demand. Of the global production of 43 million tonnes of soda ash, only 11 million tonnes are natural.
In India, soda ash is made by a few players and the list includes Tata Chemicals, Nirma, GHCL, DCW and Saurashtra Chemicals (now owned by the Nirma group) whose plants are located along the Gujarat coast, and Tuticorin Alkali in the South. Indian capacity is moving on, from largely meeting domestic demand, to becoming global in size and reach.
India���s soda ash consumption is rapidly increasing, growing at 5% compared with a 2% global growth. In India, only a quarter of soda ash is used by glass makers, while four-fifth is consumed by detergent makers. That equation is changing fast due to rapid growth in automobiles and real estate ��� both major consumers of glass. Also, India���s produces more of light soda ash (used for detergents ) rather than dense soda ash (used for glass). Demand from glass makers is estimated to grow at 10%.
Indian soda ash capacity is expected to grow by 34% to 4.3 million tonnes in 2009. But greenfield sites are expensive: a 4,00,000 tonnes capacity could cost about $225 million to set up. Tata Chemicals���s acquisition cost for GCIP is 30% cheaper, that too for a natural soda ash facility. Being concentrated in Gujarat makes the industry vulnerable too. The past few years have seen rains wreak havoc. FY08, too, saw unseasonal rains affect production in the first half. Plus, stiff inland freight costs from Gujarat make it difficult to serve the southern and eastern markets, where imports have an edge.
Going global
India���s soda ash market is attracting global players, too, so scale is essential to remain competitive. Solvay���s capacity is twice that of the entire Indian capacity. In FY06, Tata Chemicals acquired European soda ash maker Brunner Mond, getting European synthetic soda ash capacity and a natural soda ash facility in Kenya. GHCL, too, acquired two companies in Romania. Thus, Tata Chemicals got 3.2 million tonnes of capacity (including 2 million tonnes overseas) and GHCL 1.15 million tonnes (0.3 million tonnes overseas).
But they are still small compared to the US and China. China has been consuming vast quantities of glass, producing about 17 million tonnes, mainly for glass used in property construction and automobiles. If China were to turn into a net exporter, it could play havoc with world soda ash prices. And, the US is consuming lesser soda ash. ���In developed countries, there is a risk of demand decreasing: a switch to liquid detergents, where soda ash is not needed. Glass containers are being replaced by plastic increasingly. The decline has played out in the US,��� says Ms Werneth.
The US industry hence is on the lookout for newer markets and exports nearly half its production. That���s where Ansac, an export cooperative, comes in. It provides a common marketing and logistics��� platform used to sell US soda ash to distant corners of the world. A US-legislation, the Webb-Pomerene Act gives legality to Ansac���s cartel-like operations.
At present, when international demand and prices are rising, imports are not a big threat. Tata Chemicals told analysts in a conference call that there is no surplus material in the US markets, ���everything is being mopped up by developing countries���. But they pose a risk when commodities will take a breather. Rising soda ash prices means that it can absorb freight costs more easily and move across the world, said Homi Khusrokhan, MD, Tata Chemicals, in a conference call to analysts. Soda ash prices have nearly doubled in the past few years.
In India, protection from duties has eroded, customs duty is at 7.5% compared to 30% in 2001. Imports have risen from 1.6 lakh tonnes in FY02 to 6.5 lakh tonnes in FY06. Lack of dense soda ash capacity is a reason too. ���Domestic capacity does fall short of demand in the case of dense soda ash. This shortfall is catered to by imports largely from our operations in Kenya,��� said Mr Ghose of Tata Chemicals.
The biggest threat from US imports are to synthetic soda ash makers, whose cost of production is about 40% higher compared to natural soda ash. Having a mix of synthetic and natural soda ash thus provides a hedge, a strategy followed by the No. 1 player Solvay. Tata Chemicals and Nirma now own about a quarter of US soda ash nameplate capacity, giving them size and influence.
End game
There still remains the matter of Ansac. An Ansac official said it views these acquisitions positively, and augurs well for the companies, industry and Ansac itself. Imports from the US don���t seem likely yet though. ���Imports are mainly from Africa and to some extent Bulgaria where more competitive freight rates make it viable. We believe that it is not competitive for other geographies to export to India,��� said Mr Ghose. Exports to India will depend on the growth in India for imported ash, said the official. If US imports to India do begin in the next few years, Indian companies may have their cake and eat it too. And then the tiff with Ansac may just fade into the background.
The Indian and US soda ash industry have been in a face-off since 1996, when the US export cartel American Natural Soda Ash Corp (Ansac) attempted to enter India. Intense lobbying efforts by Indian producers succeeded in keeping Ansac out. The domestic alkali association lists three legal cases against Ansac as pending at various stages. Though imports of soda ash have been increasing since then, the US is a marginal player, with most of the exports coming from Kenya, Bulgaria, China and Romania.
Hunting the hunter
India has played for the high stakes in the US market. Tata Chemicals paid about $1 billion (Rs 4,000 crore) to acquire GCIP, whose subsidiary makes 2.5 million tonnes of soda ash year. Nirma���s acquisition gave it access to nearly 1.5 million tonnes. The focus on the US is chiefly attributable to its unique and large natural soda ash reserves. ���Indian companies are primarily benefiting by gaining access to trona reserves,��� said Cindy Werneth, director of ratings services at S&P.
The US industry has become more competitive, especially due to rising energy costs and a stronger dollar. ���There is a focus on identifying opportunities of access to natural soda ash where manufacturing costs are significantly lower as compared to the synthetic variety,��� said PK Ghose, CFO of Tata Chemicals.
But this cost advantage is not new. What has stoked India���s interest is the sharp rise in demand in its home market. Imports are steadily increasing (with Indian players themselves importing to meet demand) as soda ash prices have steadily risen in recent years. This means cost competitiveness will become key to survival. And China���s position as the largest producer (it raced past the US in 2003-04) and consumer of soda ash is a big a threat. The other reasons are growing demand for dense soda ash (bulk of Indian production is of the light variety), rain-related production stoppages in India, and the country���s better port infrastructure.
Where the story begins In some parts of the world (like the US), you can simply scoop soda ash from lake beds, almost. In most other markets like India, it���s not that easy: salt made from seawater, limestone and ammonia are processed chemically to get soda ash. If synthetic soda ash is still sold in larger quantities, that���s because natural soda ash is not enough to meet the demand. Of the global production of 43 million tonnes of soda ash, only 11 million tonnes are natural.
In India, soda ash is made by a few players and the list includes Tata Chemicals, Nirma, GHCL, DCW and Saurashtra Chemicals (now owned by the Nirma group) whose plants are located along the Gujarat coast, and Tuticorin Alkali in the South. Indian capacity is moving on, from largely meeting domestic demand, to becoming global in size and reach.
India���s soda ash consumption is rapidly increasing, growing at 5% compared with a 2% global growth. In India, only a quarter of soda ash is used by glass makers, while four-fifth is consumed by detergent makers. That equation is changing fast due to rapid growth in automobiles and real estate ��� both major consumers of glass. Also, India���s produces more of light soda ash (used for detergents ) rather than dense soda ash (used for glass). Demand from glass makers is estimated to grow at 10%.
Indian soda ash capacity is expected to grow by 34% to 4.3 million tonnes in 2009. But greenfield sites are expensive: a 4,00,000 tonnes capacity could cost about $225 million to set up. Tata Chemicals���s acquisition cost for GCIP is 30% cheaper, that too for a natural soda ash facility. Being concentrated in Gujarat makes the industry vulnerable too. The past few years have seen rains wreak havoc. FY08, too, saw unseasonal rains affect production in the first half. Plus, stiff inland freight costs from Gujarat make it difficult to serve the southern and eastern markets, where imports have an edge.
Going global
India���s soda ash market is attracting global players, too, so scale is essential to remain competitive. Solvay���s capacity is twice that of the entire Indian capacity. In FY06, Tata Chemicals acquired European soda ash maker Brunner Mond, getting European synthetic soda ash capacity and a natural soda ash facility in Kenya. GHCL, too, acquired two companies in Romania. Thus, Tata Chemicals got 3.2 million tonnes of capacity (including 2 million tonnes overseas) and GHCL 1.15 million tonnes (0.3 million tonnes overseas).
But they are still small compared to the US and China. China has been consuming vast quantities of glass, producing about 17 million tonnes, mainly for glass used in property construction and automobiles. If China were to turn into a net exporter, it could play havoc with world soda ash prices. And, the US is consuming lesser soda ash. ���In developed countries, there is a risk of demand decreasing: a switch to liquid detergents, where soda ash is not needed. Glass containers are being replaced by plastic increasingly. The decline has played out in the US,��� says Ms Werneth.
The US industry hence is on the lookout for newer markets and exports nearly half its production. That���s where Ansac, an export cooperative, comes in. It provides a common marketing and logistics��� platform used to sell US soda ash to distant corners of the world. A US-legislation, the Webb-Pomerene Act gives legality to Ansac���s cartel-like operations.
At present, when international demand and prices are rising, imports are not a big threat. Tata Chemicals told analysts in a conference call that there is no surplus material in the US markets, ���everything is being mopped up by developing countries���. But they pose a risk when commodities will take a breather. Rising soda ash prices means that it can absorb freight costs more easily and move across the world, said Homi Khusrokhan, MD, Tata Chemicals, in a conference call to analysts. Soda ash prices have nearly doubled in the past few years.
In India, protection from duties has eroded, customs duty is at 7.5% compared to 30% in 2001. Imports have risen from 1.6 lakh tonnes in FY02 to 6.5 lakh tonnes in FY06. Lack of dense soda ash capacity is a reason too. ���Domestic capacity does fall short of demand in the case of dense soda ash. This shortfall is catered to by imports largely from our operations in Kenya,��� said Mr Ghose of Tata Chemicals.
The biggest threat from US imports are to synthetic soda ash makers, whose cost of production is about 40% higher compared to natural soda ash. Having a mix of synthetic and natural soda ash thus provides a hedge, a strategy followed by the No. 1 player Solvay. Tata Chemicals and Nirma now own about a quarter of US soda ash nameplate capacity, giving them size and influence.
End game
There still remains the matter of Ansac. An Ansac official said it views these acquisitions positively, and augurs well for the companies, industry and Ansac itself. Imports from the US don���t seem likely yet though. ���Imports are mainly from Africa and to some extent Bulgaria where more competitive freight rates make it viable. We believe that it is not competitive for other geographies to export to India,��� said Mr Ghose. Exports to India will depend on the growth in India for imported ash, said the official. If US imports to India do begin in the next few years, Indian companies may have their cake and eat it too. And then the tiff with Ansac may just fade into the background.
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