Welcome to Episode 108 of Special Situation Investing.
Six weeks ago, we wrote a piece titled Wisdom from the Swiss Alps. In it were nine quotes pulled from Grant Williams’ stellar interview with Anthony Deden. One quote stood out:
What you do is you learn about business, not about stocks, but about business.
This encapsulates Deden’s belief that successful investing over the long-term requires deep understanding of businesses and the industries within which they operate. The interview is chalk full of Deden describing details of the salmon farming business, the date farming business and the barrel making business. This intimate knowledge reveals the mindset of a business owner and not of a stock holder.
We agree with Deden that general investments, as opposed to workouts, require deep understanding of the business. The quote was convicting because it reminded us of a segment of one of our holdings of which we had only a shallow understanding.
Natural Resource Partners is covered extensively in our previous pieces. We understand its royalty-based business model and the coal, oil, and natural gas industries it’s a part of. But the production of soda ash—a secondary, but still material segment of NRP’s business—was largely a mystery. The research behind this piece was an attempt to demystify this industry.
What the Heck is Soda Ash?
Soda Ash got its name from the original method of obtaining this chemical—burning plants from sodium-rich soils and collecting their ashes. It goes by many names today including soda crystals and washing soda, as well as its scientific name, sodium carbonate (Na2CO3). All forms of this compound are white, odorless solids under normal conditions, are water-soluble and create a slightly alkaline solution when dissolved. It can be subdivided further between “light” and ‘dense” which delineates between a powdery form and large particulate form, respectively.
In 2022, the U.S. produced thirteen mineral commodities valued at more than $1 billion each. In descending order, they were: crushed stone, cement, copper, construction sand and gravel, gold, industrial sand and gravel, iron ore, zinc, salt, lime, phosphate rock, molybdenum, and soda ash. Although ranked dead last, soda ash’s presence on the list reveals how critical it is to the modern economy.
Today, soda ash has a wide range of industrial uses. According to the U.S. government 2023 Mineral Commodity Summary, the estimated breakdown of soda ash by end use was glass production, 48%; chemicals, 28%; miscellaneous uses, 8%; distributors, 5%; soap and detergents, 5%; flue gas desulfurization, 4%; pulp and paper, 1%; and water treatment, also 1%. A recent and more niche application is use in the production of lithium carbonate for lithium-ion batteries
Consuming nearly fifty percent of soda ash, the production of glass is its most important application. It’s used as a fluxing agent which reduces the melting point of silica during the glassmaking process. This simplifies the manufacturing process and increases the quality and durability of the final product and makes it easier to shape the glass into various forms.
We’ll have more to say about glass and the role it plays in the soda ash market later, but first, let’s explore the commodity’s methods of production.
How is it Produced?
Soda ash is both created synthetically and mined naturally.
While estimates vary, approximately three quarters of the world’s soda ash is created synthetically and the primary synthetic production method is the Solvay Process. Named after the nineteenth century chemist, Ernest Solvay, the process uses brine, limestone, coking coal, and ammonia. The process allows soda ash to be produced in locations that lack natural deposits but it is about twice as energy intensive and emits more greenhouse gases than natural extraction.
There are two general methods of mining soda ash naturally. The first, called solution mining, is a method which involves pumping a solution into well lines within sodium carbonate, also called trona ore, deposits. The trona ore is dissolved and pumped out. The solution is then processed and the soda ash is isolated. The second method for naturally procuring soda ash is through underground mining using room-and-pillar, longwall, and shortwall mining methods.
In terms of efficiency, underground mining has an average mining recovery rate of 45% compared to solution mining’s rate of 30%. But some companies are experimenting with horizontal drilling technology to improved solution mining in hopes of increasing its recovery rate and accessing deeper trona ore beds.
Obviously, soda ash can only be created naturally where deposits allow, and the locations are surprisingly scarce.
Who are the Major Market Players?
In 2022, global soda ash production reached 58 million tons. The chart below shows there’s been a steady increase in production from 46.7 million tons in 2010 up through the present day.
A breakdown by country reveals China is the world’s largest producer with 27 million tons, the vast majority of which was synthetically produced. The United States comes in second with about 11 million tons of largely natural production. Every other producing country comes in far behind the two leaders but the list includes Turkey, France, Germany, Italy, Poland, and Russia, all of which produced at least 1 million tons last year.
Focusing on the U.S. numbers, the country exported over half of its production in 2022, about 6.4 million tons, and it consumed the difference. That said, it still imported a small quantity of about 100,000 tons, mainly from Turkey.
While China claims the top spot as a producer, the U.S. has the largest natural reserves by a long shot. Out of 25 billion tons of global reserves, 23 billion are located in the United States. The bulk of these reserves, about ninety percent, are found in Green River, Wyoming. Searles Lake and Owens Lake in California contain the second largest deposits in the country with an estimated 810 million tons of reserves.
Just as there are only a few major soda ash producing countries, the number of companies in the industry is also small. Here are a few of the top names.
Solvay SA is a Belgium-based producer of chemicals, plastics, and composites with exposure to European, North American, and Asian markets. Interestingly, even after scanning its annual report multiple times, we failed to find how much soda ash Solvay produces annually. What was plastered all over its report, and what we found telling, was the company’s claim that it created a new synthetic process for creating soda ash that is more environmentally friendly. Here’s a summary direct from the report:
[Solvay] developed a new method for producing soda ash, which introduces three revolutionary improvements: 50% less CO2 emissions; a 20% reduction in water and salt usage and a 30% reduction in limestone consumption; as well as significantly less limestone residues.
Nowhere did we see that this new process is supposed to be more efficient. We wish them best of luck.
Ciner Group is a Turkish-based company with international operations. Its core mine facility is located in Ankara, Turkey, over the world’s largest natural reserves outside of America.
Tata Chemicals Limited is a multinational corporation headquartered in Mumbai, India with operations in India, Europe, North America and Africa. It produces soda ash both synthetically and naturally. In 2022, the company produced 3.8 million tons. We were interested to read that Tata Chemicals plans to double its soda ash capacities in the near future in response to growing demand.
CIECH SA is a Polish international chemical group which acts as an umbrella company for dozens of companies largely domiciled in Europe. It is the second largest European manufacturer of sodium carbonate and sodium bicarbonate.
Genesis Energy LP is an U.S.-based limited partnership involved in the midstream segment of the crude oil and natural gas industry. One of its five operational segments is soda ash. They own two mines in Green River Wyoming and have the capacity to produce 4.3 million tons per year. If you’re interested in digging more into this company, we suggest you take Mohnish Pabrai’s advice and start with this Value Investors Club write-up.
Asia Chemical and Shandong Haihua Group are examples of the many synthetic soda ash producers in China. In 2020, the synthetic soda ash industry in China consumed about 70 million tons of coal and 140 billion kWh of electricity. Because of this energy intensity, China is looking to increase its production of natural soda ash. One company taking steps is Inner Mongolia Berun Group which earlier this year began production at its new soda ash facility. This plant is projected to produce 5 million tons in 2023 with a potential to increase capacity to 7.8 million tons.
Şişecam is a Turkish company and a global player in flat glass, glass packaging and glass fiber as well as soda ash and chromium chemicals. The company has production facilities in four continents and fourteen countries including Turkey, Germany, Italy, Bulgaria, Romania, Slovakia, Hungary, Russia, Georgia, Ukraine, Egypt, India and the United States.
Sisecam Chemicals Resources LLC, a subsidiary of Şişecam, is the 51% owner of Sisecam Wyoming LLC, the company of which Natural Resource Partners owns 49%.
What is the Future of Supply and Demand?
Future supply and demand dynamics of the soda ash market are unknowable. As a result, the price of soda ash is also unknowable. The chart below shows the price can be quite volatile.
What we can say is, for the time being, the future of soda ash and its price is dependent on China. This is because China is both the largest producer and consumer of the product.
China is committed to bringing on new supply, as are other suppliers worldwide, in response to forecasts for a decade or more of demand growth. During our research, we saw forecasts ranging from CAGR of 3% to 7.5% on the back of global population growth, industrialization of the global south, and further investment in new energy technologies. Since 50% of global soda ash is consumed in glass production, these forecasts largely mirror similar growth predictions for the glass industry.
A curveball that could affect the soda ash market was in the news earlier this year, also out of China, of a sodium-ion battery. The new battery is supposedly an order of magnitude cheaper than batteries made of traditional metals such as iron and nickel. CATL of China was reported to have started production of these batteries back in October. As the world looks for ever cheaper ways to building energy storage, a soda ash-based solution could radically increase demand for the commodity. The future of this development is anything but clear, but it is fascinating.
All we do know is, we are happy owning companies that produce high-demand commodities.
Conclusion
With that, we’ve wrapped up another episode of Special Situation Investing. The best part about putting out research out there is the feedback you guys give us, so please hit up the comments or send us an email! We’ll see you all next Saturday on with another episode.
The Soda Ash Business