As oversupply intensifies, soda ash cost support is "unable to support alone"
Based on the current production policy, photovoltaic glass is still expected to be cold, and the daily dumping will only shrink further. However, with fewer soda-ash maintenance programs, the capacity utilization rate continues to be high; new capacity is released constantly, and output has continued to be at its highest historic level for the season. In the future, the alternative supply will be more serious.
"Since the end of October, soda ash futures have entered a phase of oscillation oscillating price fall of less than 150 yuan/ton for a price drop of about 50 yuan/ton. As a highly liquid commodity, why has the volatility of soda ash futures declined sharply? The root cause is simple-it is an oversupplied and cost-supported commodity with no driving force for an uptick and reversal supported by strong cost support could bring down price fluctuations. However, under amplifying oversupply, cost support will be unable to handle the situation all alone."
High output
According to Steel Union data, as of Nov 29, 2024, soda ash plants' inventory stood at 1.655 million tons, which is the greatest level recorded for the same period in history. Soda ash now finds itself in the supply-side condition where supply continues expanding, even while demand keeps contracting, and inventories may go up further into the future. As viewed from the hand of heavy alkali demand, up to Nov 29, the average daily melting capacity of float glass was 159,100 tons, while the photovoltaic glass was 86,300 tons, aggregating to 245,400 tons in total. The demand for heavy alkali is in a manner dependent on the glass being prepared that consumes about 0.2 tons of soda ash for every ton of glass produced, is somewhere around 49,100 tons per day, or 343,700 tons in a week. Heavy alkali production by domestic enterprises in excess of demand for daily melting of glass in that week, as contained in Steel Union data, was as much as 422,300 tons which was in excess of 78,600 tons of the total demand of glass.
From the current production plan, photovoltaic glass is still expected to be cold repaired, and the daily melting capacity is expected to decline further. However, there are fewer maintenance plans for soda ash, the capacity utilization rate remains high, the new capacity is still being released, and the output continues to hit a historical high for the same period. The situation of oversupply will be more severe in the future, limiting the room for price increases.
Cost support may weaken
There are three main production processes for domestic soda ash: ammonia soda method, joint soda method and natural soda method. According to data from Steel Union, after the sharp drop in soda ash prices, both the ammonia-soda process and the combined soda process have fallen into losses, with the combined soda process suffering losses for the first time since January 2016. Under such circumstances, the willingness of alkali plants to maintain prices has increased significantly, and the market price of heavy soda ash in Shahe area has remained around 1,500 yuan/ton since the end of October, with little change.
As for natural soda, the ex-factory spot exchange rate of Yuanxing Energy's Alxa natural soda in early December was 1,080 yuan/ton. It was transported from the production site of Alxa League, Inner Mongolia to the benchmark delivery site of soda ash futures in Shahe, Hebei, with a freight of 350 to 400 yuan/ton, and the delivery price was estimated to be 1,430 to 1,480 yuan/ton. Since mid-October, the price of the 2501 futures contract has basically remained above 1,410 yuan/ton, with strong cost support. However, in December, soda ash began to increase its positions and move downward, and cost support may weaken.
Monthly spreads and basis enter low volatility
In addition to absolute prices, monthly spreads and basis of soda ash futures have also entered a narrow range of low volatility: since November, the monthly spread of soda ash has been maintained between 10 and 40 yuan/ton for most of the time, and the basis is in the range of -40 to 40 yuan/ton. According to the exchange regulations, the storage fee of soda ash delivery warehouse is 15 yuan/ton/month. If the storage fee of 25 yuan/ton (car storage) is added, the monthly cost of buying and selling positive arbitrage is about 40 yuan/ton (other costs are less, temporarily ignored). From this, it can be seen that the monthly spread and basis of soda ash futures generally fluctuate in the range of storage costs and delivery costs, which makes it difficult to find opportunities for both monthly arbitrage and futures and spot arbitrage, and the willingness of funds to participate has obviously decreased.
Market Outlook
In the state of affairs where oversupply prevents price increases and cost support limits price declines, the volatility of soda ash futures prices has decreased compared to previous years in an important way; unraveling arbitrage possibilities and continual erosion in trading volume iteration thus far. As per Steel Union data, on November 29, 2024, the unilateral trading volume of soda ash futures was 1.189 million lots, showing a decrease of 76.8% from 5.1223 million lots observed around mid-October, and this lessens market activity compared to what was exhibited in prior times.
This year's Spring Festival is at the end of January, which is relatively early. Glass factories generally replenish soda ash before the Spring Festival to avoid holidays and logistics problems during the Spring Festival affecting glass production. In the future, there may be a wave of year-end stocking that will cause soda ash companies to destock, but the oversupply of soda ash is difficult to reverse, and the hidden inventory problem has always plagued the market. In the medium and long term, it is expected that the problem of oversupply will dominate prices, cost support will weaken, and the era of high profits for soda ash companies will become a thing of the past.
