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The refrigerant gas markets have taken a new shape after the entry of a new player in United Arab Emirates (UAE) with a capacity of 36,000 tpa for R32 (plans to expand it further for R134a and R125). This capacity has come on stream in Q1FY24, and we have seen huge imports from this capacity in the U.S. over the past few months, partially replacing Chinese imports (~2,300 tons in three months – Jul-23 to Sep-23 vs. overall imports in the U.S. in CY22 at ~5,000 tons from all countries). This capacity is a JV between IGas Holdings (IGas) in U.S. and Juhua Group in China; IGas has the fourth-highest quota in U.S. after Honeywell, Chemours, and Arkema. We believe this capacity will largely serve U.S. markets first, depending on the quota available and balance gases will be sold in the Gulf/European market. Thus, in our view, Indian players will shift more towards Gulf/domestic markets for their new capacity additions (~20,000 tpa of R32) and compete with/replace Chinese imports, reducing the pricing benefit they were getting in U.S. over FY22-23.

New capacity addition in UAE for R32

This new capacity is owned by IGas in a JV with Juhua Group in China. The capacity for R32 is 36,000 tpa with further plans to expand it for R134a and R125. The company is importing methylene dichloride (MDC) and Hydrofluoric Acid (HF) from China and manufacturing refrigerant gases in UAE (the plant is running at full capacity). IGas has the fourth-highest quota allocation (~10% of the overall quota in U.S., larger than some of the domestic manufacturers) to sell refrigerant gases in the U.S. In our view, this capacity has been set up with the purpose of serving the U.S. market, surpassing the anti-dumping duty (ADD) on Chinese refrigerant gases and serving the growing markets in the Middle East (further IGas is selling in European markets as well).

New capacity addition in the U.S. for HFO-1233zd

Last year, Arkema announced the start-up of HFO-1233zd production at its partner’s site – Aofan in China (5,000tpa), and the construction of a new line at its Calvert City plant in the U.S. (15,000tpa to retrofit its R134a plant, which was shut down). This is largely to meet the rising demand for low GWP refrigerant gases and will come on stream by CY23-end or early CY24. NFIL has a production capacity of ~10,000tpa under a contract with Honeywell, as this HFO is still under application patent. With Arkema plant going live in H1CY24, we expect significant supply additions in HFO-1233zd.

Phase-down in HFCs in the U.S. starting Jan-24

We have seen a significant jump in refrigerant gas prices over FY22-23, particularly in the U.S. on (a) stocking by dealers to utilize their quota before the first major phase down in HFC consumption/production in the U.S. starting Jan-24, (b) surge in rawmaterial prices; and (c) higher cost curve for imported refrigerant gases in the U.S. due to ADD on China. However, in FY24, prices are tapering off partially due to the slowdown in demand (as most buyers have finished their CY23 quota) and normalization of rawmaterial prices. Indian demand is relatively stable but is characterized by Chinese dumping impacting the realizations in FY24. We believe Indian companies will have to strategize on optimizing between volumes and price and turn cautious on the refrigerant gas business. We maintain BUY on SRF and Anupam, HOLD on NFIL, and SELL on GFL.

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