This article is based on a GCiS multi-client market research report: China Blowing Agent Market Research Report.
As part of the Montreal Protocol, China's has already begun in 2013 to phase out its usage and consumption of Hydro-chlorofluorocarbons (HCFCs). Hence, HCFC consumption and production quotas will continue to shrink from now until the complete phase-out timeline in 2030. According to a study by GCiS China Strategic Research, HCFC is still the second largest segment in China's blowing agent market in 2016, with an estimated market value of RMB 1.4 Bn. And, about 91% of China's HCFC blowing agents are sold to its building materials industry.
Figure 1: China's Blowing Agent Market by Product & HCFC Segment Breakdown by Application Market (2016)
Source: GCiS, Blowing Agent Limited Publication Study 2016
As the largest application industry of HCFCs in China, the building materials industry consumed some 78,000 tons or around RMB 1.3 Bn (US$190Mn) worth of HCFCs in 2016. HCFCs are mainly used by plastic foam manufacturers as blowing agents to manufacture a variety of rigid and flexible block foams like polyurethane (PU), extruded polystyrene (XPS) and expanded polystyrene (EPS) foams. These foams then go into the production of structural insulated panels or sandwich panels which are commonly used in building envelopes or architectural structures. Based on another GCiS study, PU foams alone account for more than 50% of China's rigid insulation market. With the HCFC phase out deadline looming, how will China's insulation foam manufacturers respond?
Some common substitutes of HCFCs used by the industry include hydrocarbon (HC), CO2 and HFC. But these are far from ideal substitutes for HCFC. Take HFCs as an example; even though they result in foams of comparable insulation properties, HFCs are pricier. And in the long run, HFCs might also be slowly phased on as it has high global warming potential. This kind of regulation has already been implemented in many EU countries. For other blowing agents like HC and CO2, there are significant technical limitations because they produce foams that are of lower insulation properties. HCs are flammable and not fire retardant hence its usage would likely not conform to the prevailing fire safety provisions. In addition, companies would need to procure explosion proof equipment, which means extra costs. Hydrocarbon blowing agents are currently being used predominantly by larger foam manufacturers as they have the financial muscle to bear the upfront capital costs. Smaller scale foam manufacturers in China continue to rely on HCFCs as their main source of blowing agent.
According to China's Ministry of Environment Protection, the first part of the HCFC phase out plan had targeted mostly users in the home appliance or commercial heating/cooling equipment sectors. This has already prompted many prominent players like Hisense and Haier to switch from HCFC to other blowing agents like hydro-fluorocarbons (HFC), hydrocarbons (HC) or an even newer generation of blowing agents called hydrofluoroolefin (HFO). Some companies like Midea are already reported to be using a blend of HC, HFC and HFO. In the next steps of China's HCFC phase out schedule, the building materials industry will increasingly be targeted. But, would they follow in the footsteps of the home appliance companies and switch to using more of HFC and HC?
In Aug 2016, China's Foreign Economic Cooperation Office of the Ministry of Environment Protection (FECO) published a suggested list of possible substitutes for HCFCs. As shown below, building material manufacturers are advised to use either, water or HFO in place of HCFCs. Hydrocarbons (HC) and hydro-fluorocarbons (HFC) are not even on this list. According to industry players, even though the official list does not include HC or HFCs, these 2 products are still the 2 most common substitutes used.
Figure 2: List of Official Substitutes for HCFC
The average price for HCFC is somewhere around RMB 18,000 per ton. HC blowing agent costs RMB 6,000 per ton but users have to incur an upfront equipment costs. By comparison, the average price for HFC is around RMB 51,000 per ton but is expected to fall. Since Honeywell's patent expired in 2015, more Chinese suppliers have already been entering the HFC market and this will create downward pressure on HFC prices in general. Separately, HFO blowing agents are still not available in the Chinese market, but when they do, it will cost around RMB 85,000 per ton. According to representatives from Honeywell, they will be launching their HFO product in China under the Solstice brand name sometime in 2017. Given that China's building materials industry is often characterized as having low concentration, they are likely to be more price elastic. Would they switch to a blowing agent that is at least 4 times more expensive?
In all likelihood, some of China's larger PU foam manufacturers may still follow the official recommendation of adopting HFO and bear the steep costs associated with it. This could be supported by government grants. But for the majority of the smaller players, they will still look for cheaper alternatives. While it is difficult to accurately predict how Chinese foam manufacturers would respond, it is clear that there would be a rather sizable market (around RMB 1,443 Mn) for substitute blowing agents in the near future. For newer product types like HFOs, because of its high prices, demand will come mainly from a few niche players in the short to medium term. HFCs will see greater demand as prices are expected to fall. Foam insulation manufacturers cited price and technical feasibility as the 2 most important factors influencing their decision when choosing a blowing agent product.
This article was originally published on the May 2017 issue of Global Insulation magazine.