At end-March 2008, Tata Chemicals gained US regulatory approval to acquire General Chemicals Industrial Products (GCIP), a large American producer of soda ash and other chemicals. Detergents maker Nir…
At end-March 2008, Tata Chemicals gained US regulatory approval to acquire General Chemicals Industrial Products (GCIP), a large American producer of soda ash and other chemicals. Detergents maker Nirma recently bought another key producer, Searles Valley Minerals. These acquisitions would be just two among many, but for the events of a decade ago. The Indian and US soda ash industry have been in confrontation since 1996, when the US export cartel American Natural Soda Ash Corp (Ansac) attempted to enter India. Intense lobbying by Indian producers succeeded in keeping Ansac out. The domestic alkali association lists three 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 Indian exports coming from Kenya, Bulgaria, China and Romania. India has played for the high stakes in the US market. Tata Chemicals paid about USD 1 billion (INR 40 billion) 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 mainly 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. However, this cost advantage is not new. What has fuelled India“s interest is the sharp rise in demand in its home market. Imports are increasing steadily (with Indian players themselves importing to meet demand) as soda ash prices have steadily risen in recent years. This means cost competitiveness will become crucial to survival. China“s position as the largest producer (it overtook the US in 2003-04) and consumer of soda ash is as big a threat. The other reasons are growing demand for dense soda ash (most Indian production is light soda ash), rain-related stoppages in India, and the country“s better port infrastructure. The domestic Indian soda ash industry is dependent on synthetic soda ash production because of its lack of natural soda ash reserves. Natural soda ash is not abundant enough in the world to meet demand for soda ash: of the global production of 43 million tonnes, 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 increasing, from largely satisfying domestic demand, to becoming global in size and reach. India“s soda ash consumption is rapidly increasing, at 5% compared to a 2% global rate. In India, only a quarter of soda ash is used by glass makers but that is changing fast due to rapid growth in automobiles and real estate. Also, India produces more light soda ash (used for detergents ) than dense (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. However, greenfield sites are expensive: a 400,000 tonne-capacity could cost about USD 225 million to set up. Meanwhile, the concentration of the industry in Gujarat is a vulnerability: rains have caused chaos in recent years and unseasonal rains have again affected production in the 1H of fiscal 2008. In addition, high inland freight costs from Gujarat make it difficult to serve the southern and eastern markets, where imports have the advantage. India“s soda ash market is attracting global players, so scale is essential to remaining competitive. Solvay“s capacity is twice that of the entire Indian capacity. In fiscal year 2006, Tata Chemicals acquired European soda ash maker Brunner Mond, obtaining European synthetic soda ash capacity and a natural soda ash facility in Kenya. GHCL acquired two companies in Romania. Thus, Tata Chemicals gained 3.2 million tonnes of capacity (including 2 million tonnes overseas) and GHCL 1.15 million tonnes (0.3 million tonnes overseas). However, 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 construction and automobiles. If China were to become a net soda ash exporter, it could upset world prices. In contrast, the US is consuming less 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. Hence the US industry is on the lookout for newer markets and exports nearly half its production. Which is where Ansac, an export cooperative, comes in. It provides a common marketing and logistics platform used to sell US soda ash worldwide. A US-law, 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 to Indian firms. 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 commodity supplies loosen. Rising soda ash prices mean that Tata Chemicals can absorb freight costs more easily and move across the world, said managing director Homi Khusrokhan 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 160,000 tonnes in fiscal year 2002 to 650,000 tonnes in fiscal year 2006. 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 is 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 leading world producer, Solvay. Tata Chemicals and Nirma now own about a quarter of US soda ash nameplate capacity, giving them size and influence. 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 do not 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.