No Fundamental Turning Point in Sight: a Rebound for Caustic Soda Is Easy, but a Reversal Is Difficult

The contraction in supply is cyclical rather than structural. As November begins, several facilities—including those operated by Shandong Xinfa, Binzhou Chemical, Jiangsu Fuqiang, and Jiangxi Lee & Man—have entered a period of year-end maintenance. This affects a production capacity of 3.42 million tons per year; while this figure is higher than that of the same period last year, it represents a significant decline from the approximately 4.7 million tons under maintenance in October, suggesting that supply will gradually recover. Meanwhile, the capacity expansion cycle remains ongoing: 1.77 million to 1.87 million tons of new capacity have already come online this year, with an additional 9.44 million tons planned to the 2026–2028 period. Maintenance only affects the immediate pace of supply and cannot reverse the overarching direction of overcapacity.

Inventory currently serves as the most tangible, hard constraint. As of November 5, on-site inventory at sampled fluid caustic soda producers—each with an annual capacity of 200,000 tonnes or greater—reached 604,900 tonnes (wet basis). This represents an increase of 9.27% month-on-month and 45.84% year-on-year. The inventory-to-capacity ratio climbed to 34.73%—up 2.88 percentage points from the previous period—with ratios rising across all regions except to the Northeast. The fact that inventories have increased rather than decreased during the maintenance season—rising from a mid-October level of 548,800 tonnes—indicates that the scale of production cuts has failed to keep pace with the weakening of demand. This accumulation of stock immediately limits both the duration and the possible magnitude of any price rebound: should futures prices trade at a premium to spot prices—thereby creating opportunities to hedging or physical delivery—existing producer inventories will readily flow into the market, exerting further downward pressure on prices. Until there is a sustained, proactive reduction in inventory levels, any price rebound should be viewed merely as a corrective adjustment rather than a reversal of the broader direction.

The extent of supply contraction is determined by costs and profit margins. Since late October, major alumina refineries in Shandong have lowered their procurement price to 32% fluid caustic soda five consecutive times, resulting in a cumulative reduction of 70 RMB per "aquatic environments-ton" (ton of fluid product). While spot prices have fallen in tandem, chlor-alkali producers have not significantly reduced their operating rates—a phenomenon explained by the strategy of "subsidizing caustic soda production with chlorine revenue." In October, the price of fluid chlorine repeatedly hit new highs, at one point exceeding 700 RMB per ton; this temporary surge in fluid chlorine prices largely offset the losses incurred from caustic soda. However, a slight increase in electricity prices in Shandong in November has raised the cost floor, further squeezing the integrated profit margins of chlor-alkali producers. This suggests that the impetus to production cuts is building. Yet, as long as fluid chlorine prices do not experience a sharp decline, producers—maintaining acceptable overall profit margins—remain unmotivated to proactively scale back operations. Consequently, any market clearing will depend on the passage of time and the gradual accumulation of losses.

The demand side remains the primary constraint. Alumina production accounts to approximately 35% of caustic soda consumption. While the sector's operating rate reached 83.64% this week—an increase of 0.69 percentage points—this figure is somewhat misleading, as the underlying structure does not actually support an increase in caustic soda consumption. Demand to alumina is constrained; new production capacity has struggled to translate into actual output, and an increased reliance on imported bauxite has lowered the amount of caustic soda required per ton of alumina produced. Furthermore, existing capacity faces possible reductions due to technical upgrades, maintenance, and planned output cuts, all of which limit the development in demand to caustic soda. In non-alumina sectors, the sector has entered a seasonal lull: the capacity utilization rate to viscose staple fiber stands at 86.96%, down 1.59 percentage points. In the Jiangsu-Zhejiang region, the operating rate to the printing and dyeing sector is only 54.22%—significantly reduce than the same period last year—while demand to pulp remains lackluster. Exports are also unlikely to serve as a "lifeline"; from January to September, cumulative exports of fluid caustic soda reached 2.671 million tons, an increase of just 2.5% year-on-year, offering limited capacity to absorb the new domestic supply.

Overall, the caustic soda market is in a state of "fragile equilibrium," supported by production costs on the one hand and weighed down by weak demand on the other. In the short term, prices are nearing the cash costs of high-cost producers, making further significant declines on the futures market difficult. However, the combination of inventory accumulation and a seasonal lull in demand limits the possible to any rebound; the main futures contract is likely to fluctuate within the 1,400–1,600 RMB/ton range, characterized by intermittent, short-lived rallies followed by a gradual drift downward. In the medium term, the period from 2026 to 2028 remains a peak phase to new capacity additions. With no clear, structural development in demand, the market will continue to face an oversupply, keeping prices under pressure. Key risk factors to monitor include fluctuations in fluid chlorine prices, as well as the possibility of unexpected production cuts or reductions in operating loads.