Prices set to rise as regulations drive demand
By Christopher Reilly -- Purchasing, 10/7/1999
Solvent buyers have enjoyed a buyer's market for the past few years. Prices have been low and availability of materials has been plentiful due to oversupply conditions. But that picture is changing. Prices are bottoming out and beginning to increase, supply is in line with demand, and environmental regulations continue to determine the direction of the solvents market.The regulatory climate for solvent use is complex, and further regulatory changes are on the horizon. In the past few years, many solvent users have been forced to weigh their options and make decisions about reformulating to other solvents, changing to alternative technologies such as high-solids or water-borne products, or restructuring their processes to include closed systems designed to recover emissions. Industry sources expect this trend to continue.
Prices low--for now
While prices for most solvent materials are still relatively low, buyers will likely see upward movement of prices in the coming year. Rising raw-material costs, pressure on producer price margins, and the impact of stringent environmental regulations will begin to prompt some producers to call for price hikes, barring unforeseen changes in supply.
In general, buyers should look for prices for most solvent products to remain stable or increase slightly in the next six months to one year.
According to Purchasing's exclusive price index for chemicals used in solvents, prices have risen about a full point since January '99. The solvents index is currently at 68.33 points, up from 67.32 points in January. Buyers predict increasing prices as the index reaches 70.73 in January '00.
Solvents that will see the most upward price movement in the coming year include methanol, acetone, and butanol, according to buyers who responded to Purchasing's monthly chemical price transaction survey (see price charts). Buyers predict that methyl ethyl ketone, methylene chloride, and ethyl acetate will show relatively flat prices. Toluene and isopropanol buyers expect prices to drop in the first half of 2000.
A recent study by Cleveland, Ohio-based market analysis firm The Freedonia Group states that the overall value of solvent consumption will increase as lower-priced commodity solvents--especially chlorinated and hydrocarbon-based solvents--continue to be replaced with higher-value specialty products. Freedonia also predicts that average unit prices will continue to rise.
"The current picture has been a shift away from the traditional low-cost solvents toward more active solvents that are higher in solvency," says Greg Batterton, marketing manager for solvents at Shell Chemical Corp., Houston, Texas. "These are also generally more expensive."
Bob Young, a solvents analyst with Arthur D. Little Associates in Cambridge, Mass., says, "Right now, most solvents are on a bit of a knife edge in terms of supply and demand. To some extent, I think there is an expectation on the part of producers that margins will soon improve," he says.
One reason for increasing producer prices is the rising cost of feedstocks. "Many feedstocks cost much more than they did last year, especially for solvents made from oil," says Batterton. "Rising costs of crude oil, ethylene, and propylene have raised the capital requirements necessary to maintain operations."
Demand slightly declining
Overall, demand for solvents has been decreasing. However, according to the Freedonia study, consumption of solvents has bottomed out and will increase slightly through the year 2003 to 12.4 billion lb. Freedonia estimates total annual growth in the solvents market at 0.2%/yr.
Declines in demand for some solvents have created opportunities for growth in other areas. The market segment for "other solvents" will see the greatest growth rate through 2003. The "other" category of solvents is projected for annual growth of 4.7%, according to Freedonia.
"Due to environmental regulations, some 'environmentally friendly' solvents have seen growth as alternatives to hydrocarbon and hydrogen peroxide. This will continue, at least in the short term," says Steve Risotto, executive director of The Halogenated Solvents Industry Alliance, Inc. (HSIA), based in Washington, D.C.
One new product addresses these environmental and regulatory issues. Dimethyl sulfoxide (DMSO) is a low-toxicity, environmentally friendly, aprotic, water miscible, hydroscopic solvent developed by the Gaylord Chemical Co., based in Slidell, La. Other characteristics of DMSO include high polarity and a high boiling point. According to the company, DMSO dissolves most aromatic and unsaturated hydrocarbons, organic nitrogen compounds, organo-sulfur compounds, and many inorganic salts. It is miscible with most common organic solvents such as alcohols, esters, ketones, lower ethers, chlorinated solvents and aromatics.
The next largest area for growth is in esters solvents, which will grow at a 3.7%/yr clip, according to the Freedonia study.
Two other areas within the solvents market that are slated for growth include alcohol and ether solvents, which are both expected to see 1.6% annual growth through the year 2003, according to the Freedonia study.
Another area of growth is in the use of butyl acetates. According to an industry source, "Butyl acetates have gained marketshare as an oxygenated solvent replacement for ketones and aromatic hydrocarbons, which remain on the EPA's HAPs list." Moderate growth is expected for exports of this material, especially to the Asia/Pacific region, as economies there begin to build momentum.
Future growth is also anticipated in applications that use methyl ethyl ketone (MEK). The Chemical Manufacturers Association (CMA) recently submitted a petition to the EPA to have MEK delisted as a hazardous air pollutant, and some producers await its reintroduction.
"The petition looks favorable that MEK will be removed from the HAPs list," says Shell's Batterton. "Having MEK use back in the coatings market could be an area for substantial growth," he says.
But while some areas of the solvent markets grow, others are declining at a rapid pace. The study predicts negative growth for chlorinated solvents demand at minus 9.3%/yr through 2003. Demand for hydrocarbon solvents are also predicted to decline at a pace of minus 2.6%/yr.
For chlorinated solvents, demand has declined steadily in the past under regulatory concerns. But HSIA's Risotto says that use of perchloroethylene continues to be fairly strong in dry-cleaning applications. "A number of replacement processes are available--some solvent based, some water based--however, none have really penetrated the market due to shortcomings in the areas of solvency, volatility, or cost," Risotto says.
Regulatory issues
The primary factor affecting demand for solvents in the past decade has been the restrictive environmental climate, with national legislation mandating broad changes in solvent use. In many cases, this has caused solvent users to reduce emissions by reformulating coatings, adhesives, and printing inks to water-based, high-solids, radiation-curable and powdered formulations, which use little or no solvents. In addition, some manufacturers have replaced high-VOC solvents with other solvents and implemented solvent recovery and recycling systems.
Regulations affecting ozone-depleting substances (ODPs), VOCs, and HAPs are all part of the Clean Air Act and have made major changes in the formulation of solvents. These regulations are in various stages of implementation.
In the past, regulatory changes have resulted in several solvents being phased out due to ozone depletion. Limits were placed on the emissions of VOCs, which especially impacted the use of hydrocarbons, chlorinated solvents, and ketones.
Further regulatory changes will occur next April, with the adoption of national VOC limits for paints and coatings. Also, the EPA is in the process of drafting maximum achievable control technology standards for the coatings industry. Those regulations are scheduled to be promulgated by November of next year.
When the EPA's new maximum achievable control standards are implemented, some solvent producers feel that it will be the new benchmark for the industry in terms of solvent use in paints and coatings applications. "Once this standard is finalized, it will be a time for producers to reassess their direction for the future," says Shell's Batterton.
"There is continuous pressure on solvents to reduce VOC solvent levels across the board," says HSIA's Risotto. "Also, the Air Resources Board in California (which often is viewed as a model by federal and state agencies), has dropped its VOC limits on consumer and commercial products," which, Risotto says, "will have national repercussions."
Restrictions on the production of ozone-depleting chemicals are outlined in the Montreal Protocol, an international agreement that limits the production of ozone-damaging chemicals. These restrictions are designed to ensure that the threat posed by ozone-depleting substances diminishes over the next 50 years and will allow a return to "pre-ozone hole" levels sometime in the middle of the next century.
Supply balanced with demand
For most solvents, supply is currently balanced with demand. No new capacity is scheduled in the near term due to rising costs of business and tight producer price margins.
According to Shell's Batterton, "Manufacturers have spent much to comply with regulatory requirements and not much investment has been made in the last year on additional products and capacity."
Industry consolidation has been the most significant recent supplier news. Producers and buyers are keeping a close eye on the developments of the proposed acquisition of Union Carbide by Dow Chemical. Many feel this will have an interesting and significant impact on the solvents industry.
"Dow is currently a player in some solvent lines," says Batterton. "But they stand to gain a much more significant presence. Union Carbide's position is very strong in traditional solvents applications, such as paints and coatings," Batterton says.
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