Chemicals Update—From Bricks to Boxes: The Caustic Soda Connection

In today’s complex and globalised world it may be difficult to spot the connections between seemingly random and unrelated parts of our lives. If you want a proof, look no further than the cement production in China and home appliances sales in the US.

Chinese Cement Production and US Home Appliances Sales

So, what is the common between these two and why they matter to chemical tanker shipping?

The short answer: they are both indicators for the health of the caustic soda market. Here is why.

Cement production in China (or any country for that matter) can be used as a proxy measure of the construction industry. Cement, steel, glass and aluminum are major materials used in modern buildings. Thus, growing cement production means growing construction activity and vice versa. But besides cement, there is another important material in the construction industry nowadays and it is polyvinyl chloride (PVC). The construction industry is the biggest user of PVC, absorbing almost 65% of the produced quantities worldwide. This is primarily due to its use in pipes, profiles, films, and sheets for various building applications.

One of the ingredients for PVC is chlorine. But producing chlorine itself requires applying electricity to brine (i.e. high-concentration solution of salt in water) in the so-called brine electrolysis process, which gives as a byproduct sodium hydroxide, more commonly known as caustic soda.

Referring back to our example, it is now (hopefully) easy to see why cement production matters – because it is a proxy measure for construction activity, which is a proxy measure for PVC demand, which in turn is a proxy measure of caustic soda supply. To shorten this logical chain, growing cement production means higher caustic soda supply.

Now, what about the home appliances sales in the US? While it can also be used to gain an idea about the level of construction activity (usually new home buyers need home appliances), the volume of home appliances sales conveys also information about the packaging demand and more specifically the demand for cardboard boxes. But in the production of cardboard (and paper in general), however, caustic soda plays a key part in both the pulping and adhesive processes. Thus, high sales of home appliances can be correlated with high cardboard boxes demand and by extension – high demand for caustic soda.

What Do These Indicators Tells US About the Caustic Soda Market Today?

The last couple of years of property slump in China have resulted in the persistent decline in cement production. From a peak of 2.4 – 2.5 billion mt, reached in 2014 and then again in 2020-21, it has recorded declines in every year since then. For this year and at the current rate, the projected production will reach 1.7 billion mt – a level last seen in 2009. The malaise in the construction industry has been accompanied by challenging conditions in the PVC industry, as it struggles with oversupply and low profit margins. China already has the world’s biggest PVC capacity with about 31 million mt. This lower domestic demand leaves Chinese PVC producers relying more on overseas markets – the biggest of which is probably India where construction is still going strong. In 2024 China exported about 2.5 million mt of PVC. At the same time, other countries such as India, Thailand, Qatar, the UAE, the US are planning PVC capacity additions of their own.

 

So, perhaps considering these market conditions and the expected oversupply for the next couple of years, the Chinese government has recently announced a review of old chemical capacity which will be shut down by 2030. About 15% of the PVC production capacity is older than 20 years and potentially candidate for shutting down by 2030, which works out to be roughly around 4.5M mt. However, the country will still add another 2.5 million mt by end of 2025, so the net effect will be much smaller.

When it comes to caustic soda, China is already the largest producer with over 50% of the world’s capacity. New additions are coming here as well – another 5-6M dmt in 2025-26, thus bringing the total capacity to about 56M dmt. Major new additions In Indonesia, Thailand, India, Korea, UAE and other countries will add to the caustic soda glut worldwide.

And while China will have plenty of caustic soda capacity, demand for it may be getting softer. Since April when trade tensions were ratcheted up, total monthly exports to the US have declined on average by -25% compared to a year ago, pointing to lower need for packaging and thus lower demand for caustic soda from the paper and cardboard industry. This is partly offset by growth in Chinese exports to SE Asia, so the net loss of demand for caustic soda is smaller. In the US itself, cardboard boxes demand has dropped to the second-lowest level since 2015, spelling trouble for the caustic soda demand there as well.

The other big consumer of caustic soda, aluminum production, may also be coming under pressure with the high import tariffs announced by the US which threaten to reduce global trade in the metal. Slower Chinese and European economies will also need less aluminum. But it is not all doom and gloom in the aluminum industry. As the world moves towards more renewable energy sources and decarbonization, demand for caustic soda will grow in places like Indonesia (in the medium-term) or Congo (in the longer term) where it will be needed in the mining of nickel and cobalt.

In the shorter term, however, the caustic soda oversupply is real, especially in China. Thus, it is likely that Chinse caustic soda exporters will continue to be very competitive, pushing volumes to India (as a major growing market) and SE Asia, but possibly more and more to Europe and South America where they will compete with product from the US. As a result, chemical tanker shipping will stand to benefit from this continuous export push. If so, this would be a boon for the MR segment of the tanker fleet where a strong newbuilding program has brought the order book to above 25% of the existing fleet in terms of deadweight capacity.

By Plamen Aleksandrov, Head of Research, Chemicals, SSY.