A steadily improving economy and strong demand in residential construction are giving a lift to the formaldehyde business, which suffered a serious slump during 2001 and first half 2002. As a result, say analysts, consumption of this commodity chemical in 2003 will likely return to the previous high it reached in 2000.

As the building sector—a prime outlet for formaldehyde—began to climb out of the recession early this year, formaldehyde demand showed a significant uptick, according to Dave McCaskill, director of methanol studies for Chemical Market Associates, Inc. (CMAI) in Houston, Texas.

Formaldehyde, which is manufactured by the catalytic oxidation of methanol, is a raw material for urea-formaldehyde, phenol-formaldehyde and melamine-formaldehyde resins. All three materials have wide uses in the construction industry. It also serves as a precursor to polyacetal resins, and to the polyurethane monomers 1,4-butanediol and methylene diphenyl diisocyanate (MDI). Another formaldehyde product is pentaerythritol, used to make coatings, inks and adhesives.

Leading producers of formaldehyde in North America include Borden Chemical, Celanese Chemical, Dynea and D. B. Western. BASF is the largest producer in Europe. Production of formaldehyde was running at about 85% capacity in 2000, 80% in 2001 and is currently about 74%, CMAI estimates. While this trend partly reflects the economic downturn, McCaskill explains, it also stems from recently added capacity that is not being fully utilized.

Markets for formaldehyde "tend to be highly swayed by general economic conditions," says Sebastian N. Bizzari, a senior market analyst at SRI Consulting in Menlo Park, Calif. The revival of the chemical in building this year, he notes, has been confined largely to residential rather than commercial construction. According to SRI, approximately 44% of the 2001 consumption of formaldehyde went into urea-formaldehyde resins, 11% went into phenol-formaldehyde resins and 9% was used for polyacetal resins. Melamine-formaldehyde resins made up 7% of the market, pentaerythritol 6%, 1,4-butanediol 5%, MDI 4%, and miscellaneous products another 14%. SRI forecasts that the average annual growth rate for formaldehyde between 2001 and 2006 will be 7.5% in Asia, 3.2% in North America and 2.5% in Western Europe.

Global consumption of formaldehyde reached a record high of 22.25 million metric tons in 2000, then dropped to "slightly under" 21 million metric tons in 2001, reports McCaskill. He predicts only slight upward movement in demand this year—to 21.6 million metric tons—but believes that consumption will rebound to 22.3 million metric tons in 2003.

Pricing of formaldehyde (see chart) is closely linked to that of its raw material, methanol. "Right now we have relatively high methanol prices," says McCaskill, "which is squeezing the margins of formaldehyde producers."