PTFE Pricing – Is volatility making a comeback?

An introduction to PTFE Pricing

Being a niche industry, PTFE doesn’t exactly get a lot of press even when large shock waves surge through it, disrupting the operations of manufacturers and end-users alike.

In 2010-11, the price of virgin PTFE began climbing, after having dipped consistently over the preceding 5 years. What started out as an understandable correction soon turned into an all-out crisis, as the price nearly quintupled over the next 8-10 months.

Imagine that scenario in any other industry. If the steel price to see a 5x increase in less than a year, what horrors would that unleash into the broader market? That the PTFE industry survived is a testament to the incredible properties of the material, that make it so difficult to substitute using other polymers.

To make matters worse, since the industry is small, there was no one to really make sense of the economic factors driving the price increases.

We stepped in at that time, partly driven by our own need to analyse the situation, but also because the information we collected seemed like it would be useful to other industry players.

Many articles were released between 2011 and 2013 that charted the various drivers of PTFE pricing and made sense of the driver that would play out going forward.

April 2011 – What’s the matter with PTFE prices?

May 2011 – The mysterious relationship between Fluorspar and PTFE prices

August 2011 – Mapping the PTFE Price Increase

December 2011 – PTFE Pricing Again – is there another price hike in the offing?

March 2012 – PTFE Prices – taking a step back to leap forward?

February 2013 – Mapping the PTFE Price Increase – An Update

Over the past few months, there have been murmurs of a return to the high pricing seen in 2011. Resin suppliers have offered ample warning that a price revision was imminent. So far, this has translated into 2 price corrections to the extent of 10-15% and 8-10% in the months of April and May respectively.

We need to compare this with the escalations seen in 2011-12 and understand that the rise is not quite so sharp. Nonetheless, we also need to compare the cost drivers and ensure that the same pattern is not repeating.

Key Drivers of PTFE Price

Unlike other polymers – such as polythene, polypropylene and polycarbonates, PTFE does not result as a by-product of the oil refining process. This comes as a shock to many, who assume that our fates are tied to oil prices and that we should therefore be benchmarking our final rates accordingly.

PTFE is made from the polymerisation of R22 gas – a refrigerant that finds its use mainly in the air conditioning and refrigerator industries. As a result, PTFE prices are driven by the demand and supply of R22.

When prices started increasing in 2011, the key driver was thought to be Fluorspar – a mineral that is critical to the manufacture of R22. In conjunction with this, a spike in demand from the AC and refrigerator markets in China along with a general crackdown on R22 usage (as it is not an environmentally friendly gas) caused prices to shoot up.

Today, the scenario is slightly different.

For one – we’re over halfway through the summer, so we’re not likely to see any shocks due to AC and refrigerator demand. Furthermore, Fluorspar supply has also regularised. A key effect of the price increase in 2011 was that idle Fluorspar mines in South Africa were reopened, offering an easing of supply to the market that was otherwise dominated by China.

If industry insiders are to be believed, the key driver this time around is environmental. China has been actively seeking to clamp down on R22 usage and has, in the process, shut down two PTFE plants that were not adhering to the standards. It is from here than the supply constraint has originated, driving up PTFE raw material prices within China. Obviously, as the China price is usually the floor price for most goods in the world, this has allowed resin manufacturers around the world to increase rates accordingly.

Where the prices go from here depend on three factors:

1. Whether the shut-down plants will be coming back on line after making the necessary changes
   
   It is yet unclear if the plants have been permanently shut down or are only undergoing an overhaul to make them compliant with the environmental codes. If they do come back online within the next 6-8 months, we would see a return to lower prices
2. Whether the move to phase out R22 will go as scheduled
   
   R22 is being phased out not only in China, but all over the world. India has also committed to stop using the gas completely by 2032. If this phase out continues, it could result in a supply surplus to the PTFE industry, driving down prices. However, if the use of R22 in PTFE is itself restricted, then it would require a shift to alternatives of R22, which would be
   
   expensive.Currently, as there is no talk of restricting R22 in PTFE specifically, it is likely that the former would result
3. Price inelasticity of PTFE
   
   In 2011, one thing that was made clear was that even at 5x multiples, there was still demand for PTFE resins. This allowed the resin manufacturers to continue increasing prices well above the rates that would have resulted from purely economic factors.

Ultimately, it was due to competition from China that forced prices back to normal levels.

In the short term, it is likely that resin suppliers will again try and test the market to see what levels they can sustain at. With the threat of China temporality removed, it remains to be seen how far they will push the market.

We only have snippets of information at this point to make sense of the situation. Clearly, with PTFE being used in so many fields, this poses some concern to many industries. We will be keeping our ears to the ground to see if anything else come up.

Mapping the PTFE Price Increase - An Update

 We have been receiving many mails asking us to map or at least project the PTFE price trend going forward. Since our last post on PTFE pricing was about a year ago (Feb 2012), it is a valid question to ask whether there has been any further volatility in this market and what that implies for prices as a whole.

To lay any suspense to rest right away – we can firmly say that prices have indeed been stable this past year and it is due to this stability that our own interest in analyzing the prices has dimmed somewhat. However, that is not to say that things would continue along this vein indefinitely. PTFE is a complex material and the dynamics involving its manufacture and sale are constantly in flux – meaning that the next shock may just be around the corner at any time. So we would like to look at some of the buzz surrounding the industry in a hope to at least demystify the future to some extent.

Prices are expected to remain stable throughout 2013

This is the general consensus as of now and is due to two primary factors:

1. There is a general slowdown in global demand (much in line with most other industries) that makes it risky for resin manufactures to experiment with pricing like was done early in the price escalation of 2010-11
2. There was a significant over supply of resins when prices were high and this led to huge inventories which manufacturers are still offloading

In some areas it is believed that there is still some scope for prices to fall further. However, it is most widely accepted that the current rates are stable and should be for the foreseeable future

China still a key player – but not the only price maker

Back in 2010, it was largely a price war between manufacturers that led to very low PTFE prices. Much of this was driven by China – where the abundance of fluorspar and the support from their government allowed Chinese PTFE manufacturers to scale up very quickly.

Although China remains a key player still, a few factors are affecting their economics and scale right now:

1. The government support has reduced for PTFE resin manufacturers in China. With the clamping down of R22 within China (for environmental reasons), there is a subsidy of US$0.5 per Kg of R22, which is no longer being offered by the Chinese government.  Owing to this, Chinese manufacturers have had to pass on this cost increase of about US$2 per Kg on to PTFE processors.
   
2. Due to quality issues with Chinese resins, many OEMs have started specifying that their parts be made from resins such as DuPont, Daikin or AGC. Many semi-finished PTFE processors have also shifted away from Chinese resins due to the instability of the material. It was long believed that China reserved the good quality resin for their domestic manufacture and preferred to dump the off spec grades into other countries (one of the reasons why the anti-dumping duty on Chinese resins was upheld by the Indian government). This has hit the volumes of Chinese resin manufacturers
   
3. Another key issue is repro material. While India earlier had significant imports of Chinese semi-finished PTFE materials, most of this was repro material but was being passed off as 100% pure virgin PTFE in the local market. This high intake of semi-finished PTFE was affecting the local semi-finished manufacturers as well as local resin suppliers. However – owing to the major quality issues with repro and the lack of accountability and transparency in the percentage of repro being incorporated, many companies have had to stop procuring semi-finished PTFE from China and have started buying domestically – where it is easier to monitor quality and also return material if found defective. This has led to a resurgence in domestic PTFE semi-finished goods production and also an increased off-take from local resin manufacturers.

With China on the back foot due to the reasons listed above, it may be safe to say that price manipulation and/or competition is for the time being not a threat – since it is usually with China that most of these issue do arise. Hence, the current view is that of stability – and we should enjoy that while it lasts.

The mysterious relationship between Fluorspar and PTFE prices

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It is strange that despite the excessive and unprecedented hike in PTFE prices, so many processors and end-users remain considerably in the dark with regards to where the problem originates. Even the more technically inclined processors with whom I have interacted have more or less thrown their hands in the air and decided to just take things as they come.

When we embarked on our own journey to understand the factors driving higher PTFE prices, we too felt fairly defeated by the complete lack of transparency into the workings of the PTFE industry higher up the value chain. All we had to go with was one word, which has been tossed around from the beginning as a sort of cover-all explanation for the predicament we are in.

“Fluorspar”

Understanding the Fluorspar situation is essential to answering the question of why PTFE prices have reached such highs.

We are going to look at the fluorspar issue in the following steps:

1. What is fluorspar?
2. How much fluorspar is used in PTFE resin manufacturing?
3. How has the price of fluorspar changed over the past year?
4. What is the supply side scenario?
5. How have pricing and supply combined to influence the current situation?
6. What are the implications – short and long term – based on what we know now?

What is Fluorspar?

We have looked at Fluorspar earlier. It is a naturally occurring mineral, used in a multitude of industries ranging from metallurgy, ceramics, glass, aluminium and yes – fluoropolymers.

Fluorspar (also commonly called Fluorite) is divided into 2 principal grades based on the concentration of Calcium Fluoride (CaF2) in the material.

· Metspar: Metallurgical grade fluorspar, which contains less than 97% CaF2

· Acidspar: acid grade fluorspar, which contains more than 97% CaF2

Acidspar – which comprises about 60% of the total – is the raw material for hydrofluoric acid (HF) and by extension for all fluorochemicals. A significant amount of acidspar is used in the aluminium industry, with about 55-60% used for fluoro chemicals. We are told that of this 55-60%, a bulk of the material is used in PTFE manufacture.

From here on when we refer to fluorspar, we will be referring to this grade only and the economics surrounding it, which have played such a huge role in the PTFE industry.

Converting Fluorspar to PTFE

While the practical conversion of fluorspar to PTFE is a proprietary technology (and by no means easy to fit into one blog article!) – we have looked at the theoretical formulae and corroborated this with available information to arrive at some basic ratios. These ratios can be used to calculate the impact of a rise in fluorspar prices on the cost of manufacturing PTFE.

In the first process, fluorspar is reacted with Hydrogen Sulphide to give Hydrogen Fluoride (HF). HF is then reacted with Chloroform to give Chlorodifluoromethane (more commonly known as HCFC 22 or R22). R22 is a well-known refrigerant – used not only in PTFE manufacture, but in refrigeration and air conditioning as well (although it is being phased out slowly in these industries – we will look into that later). Finally, R22 undergoes polymerization to give the TFE chains, which become PTFE during the sintering process.

Theoretically (as per the molecular weights of each substance), it would require 1.95 Kgs of fluorspar to manufacture 1 Kg of HF. Practically, we are told this ratio is more like 2.25:1 – implying an inefficiency factor of about 15% in conversion.

Similarly, a theoretical calculation would suggest 0.8 Kgs of HF required for 1Kg of TFE. If we apply a more strict inefficiency factor of 40%, it suggests a ratio of 1.15 Kgs of HF for 1 Kg of TFE.

So putting this together gives us a ratio of 2.6 Kgs of fluorspar as the input for 1 Kg of TFE.

In other words, a $1/Kg increase in the price of fluorspar increases the cost of TFE by $2.6/Kg.

We will come back to this ratio later – as it is critical in assessing the scenario at present.

The price of fluorspar

It would not be inaccurate to say that there has indeed been a significant price increase in fluorspar. The graph below shows the price increases in China and in Mexico. Although Mexico is cheaper, China’s volumes are much higher – implying the global price more closely follows their price trend.

China’s high price is driven largely by a 15% export duty on fluorspar – which was put in place to ensure that the domestic market supply is adequate. It is not clear exactly why China has put this duty into place. Some feel it is a China dominance story as China tries to take over the PTFE industry, but our own sources estimate that close to 30% of the domestic PTFE processors in China have shut-down due to the price increases in PTFE resin. Hence, the China dominance story does not add up. We believe that it may be driven more by a nearly insatiable domestic demand for R22 as a refrigerant (fueled by China’s ever growing consumer base) coupled with China’s own moves to restrict R22 supply for environmental reasons. It does remain to be seen whether the passing of the summer months eases the domestic demand for R22 and gives some respite to fluorspar prices.

Whatever the reason, it does point to a price increase of about 53% in fluorspar over the past year – corroborating what many resin suppliers have indeed claimed.

It is interesting to note that the prices in Mexico have indeed fallen in the past 2 months, while reports indicate that there has been no movement in price in China between April and May. Nonetheless, industry experts do not see any significant easing of fluorspar prices within the next year.

Supply side dynamics of fluorspar

With regards to manufacturing fluorspar, China outstrips all other countries, as shown below:

However, when we look at global reserves, China’s dominance is clearly unsustainable.

In fact – unless China finds new reserves of fluorspar, at their current rate of extraction, they would run out of domestic supply within 7 years.

The recent crisis in fluorspar price and availability has led many countries to look into re-opening old mines, which had earlier shut down. We will look at the impact of this shortly.

Defragmenting our current predicament

Going by the price data given above, we can see there has been an increase of US$160/tonne – or US$0.16 per Kg - in the price of fluorspar from China. Taking our ratio of 2.6 – this would translate into a US$ 0.42 per Kg increase in the input cost to PTFE.

In an earlier article, we had outlined that the price for PTFE virgin resin had increased by 185% in the past year – or by about US$13.3 per Kg.

Clearly, the difference between these two figures cannot be explained by the price of fluorspar alone.

If we dig deeper – we would need to realize that it is not so much the price of fluorspar as the lack of availability that is driving the PTFE prices higher. PTFE resin manufacturing is a capital-intensive field, requiring a lot of infrastructure. With a restriction in their supply of fluorspar, resin manufacturers are constrained to supply quantities much below their installed capacities – meaning higher average costs per Kg and consequently a higher price for PTFE resin.

Hence, while it is not wrong to say that PTFE prices have been influenced by higher prices of fluorspar – it is on the supply of fluorspar that we need to focus to understand how and when this situation will get resolved.

Looking ahead to the short and long term

A few global trends have caught our attention with regards to the short and long term implications for fluorspar (and by extension – for PTFE).

In the short term, the only easing out that can be expected is if the passing of the summer months reduces China’s domestic appetite for refrigerants. If this is the case, we may see some price stability post June 2011.

In the medium to long term, there may be several factors, which may positively influence the PTFE industry.

For one, the scaling back of R22, as a refrigerant due to environmental reasons would bring focus back to fluoro polymers as the primary consumer of R22, boosting supplies of R22 to the PTFE resin manufacturers.

Secondly, as more countries look inward for fluorspar mining, it is likely that there will be an easing of supply. We have already shown that the bulk of the reserves are not with China. With Mexico showing initiative in increasing their supply of fluorspar and South Africa expected to follow suit, we may see a significant increase in global production – possibly in the next 2 years.

Finally, there are technological advancements looking into production of Hydrogen Fluoride without the use of Fluorspar. If this is successfully commercialized, the dependence on fluorspar for PTFE manufacturing will reduce considerably.

Right now, all we can be assured of is that with a 53% price hike, Fluorspar is certainly a very commercially attractive mineral to produce and countries with reserves would be putting efforts to turn them into profits. And since we know that the fluorspar price only marginally dictates the price of PTFE resin, once supplies ease out, it should bring stability back to PTFE prices.