Rising demand fuels growth in India's caustic soda market

The Indian economy continues to be under the global spotlight owing to the growth it has recorded in the past few years.

Added to this is the fact that the government is trying to do everything possible to raise the growth rate higher.

This time, the focus is on the caustic soda industry in the country. The industry has been experiencing good times after some horrifying moments in early 2000.

The industry has been seeing a jump in demand coupled with high prices. The high price situation is prevalent both in the domestic as well as in the international market.

The caustic soda industry in India is different from the global caustic soda industry.

Globally, caustic soda is mostly used in the chemical industry (which is about 40 per cent of the total consumption) followed by the paper and pulp industry (which consumes about 18 per cent of the total consumption in the world).

In India, however, the major users of alkalies is the paper and pulp industry (about 30 per cent of the total demand), followed by the manmade fibre industry (about 25 per cent of the total demand in the country).

The other major users of caustic soda are the soap and detergent industry (it constitutes 14 per cent of the total demand) and the aluminum industry (it constitutes about 12 per cent of the demand in the country).

When caustic soda is produced, chlorine is a by-product. In fact, for every ton of caustic soda produced, 0.88 metric tonne of chlorine is produced as a by product.

Internationally, the demand for chlorine is much higher than caustic soda. So the prices are determined by the chlorine demand. In India, however, the situation is completely different, the demand for caustic soda determines the price of chlorine.

At the moment, however, the prices of both chlorine as well caustic soda are quite high in the international as well as the domestic market.

The reason for this high price is the high demand for caustic soda as well as chlorine. Another reason is that energy costs have gone up significantly around the globe due to the high crude oil prices.

In the manufacture of caustic soda, power and salt are the major input cost.

Power constitutes about 55-60 per cent of the total raw material cost of the industry.

In India, the power cost is high as compared to other countries of the world. In order to tackle this, companies have gone in for captive power plants based on natural gas which altogether does away with the crude oil prices.

Also, majority of the Indian companies (about 70 per cent) use the membrane cell technology which consumes a smaller amount of energy (about 2,400-2,700 kwh per metric tonne) compared to the membrane cell technology which uses 2,800-3,200 kwh per metric tonne.

This helps the companies maintain a tab on their cost and operate at higher margins.

Since caustic soda derives demand from other industries such as paper, manmade fibre, soaps and detergents etc, its demand is determined by the way these sectors perform.

These sectors are expected to see a growth of 5-10 per cent in the times ahead which augurs well for the caustic soda industry.

In India, there are about 40 companies operating in this sector but the important players here are Gujarat Alkalies (GACL), Grasim and Chemfab.

With high prices and high demand existing in this industry, this industry is one ot watch out for in the coming weeks.

The Indian markets continued to have a dream run last week. The Sensex closed at 7,210 gaining 62 points or nearly one per cent during the week.

The Indian markets are seeing a sustained rise due to strong FII inflows coming into the country.

IT stocks saw some good buying interest during the week.

This sector is expected to do well this year and is thus attracting a lot of interest. Stocks of this sector saw gains in the range of 1-2 per cent.

Banking stocks also saw a lot of interest lastg week as this sector is expected to gain due to buoyant credit offtake in the economy. Stocks of this sector saw gains in the region of 2-3 per cent last week.

FMCG stocks also saw smart gains during the week. These shares had not participated in the rally and are now doing a lot of catching up.

The week ahead is going to be an interesting one. The markets are at an all time high and the direction in which it will move further is anybody's guess.

The markets are currently seeing a lot of FII inflow. Reportedly, funds are being raised across the globe for investment in the Indian equity market.

In the coming week, the markets will continue to be volatile and trade in the range of 7,000-7,450.

The writer heads the Dubai office of Karvy Stock Broking Ltd.