Refrigerant Quota Battle Ends, Who IS the Winner?

As fluorine refrigerants destroy the ozone layer, the previous generation has been completely eliminated and the

second generation is being eliminated. After three generations, the ozone layer is no longer destroyed, but the 

greenhouse effect potential (GWP) is high.

According to the Montreal Agreement (an international agreement dedicated to the protection of the ozone layer),

the production and sales of three generations of refrigerants in China are based on the average from 2020 to

2022,frozen in 2024, and then forced reduction on production will be regulated.

It means that after 2024, production quotas will be allocated according to the market share of each enterprise for

2020-2022. That's why three generations of capacity expanded wildly in the past few years.Companies want to get

more production quotas before the node.

Now, 2022 is about to turn over, and the battle for three-generation refrigerant quotas is nearing its end So, after

years of irrational expansion, what about the third-generation fluorine refrigerant industry?

At the corporate level, the head enterprise giant Juhua shares (600160) (FRIOFLOR), Sanmei shares (603379) in this

quota war, and what results have been achieved? After the three generations enter the elimination stage, what will

be the impact on the two leading leaders?

First of all, the third generation of fluorine refrigerants refers to a large category of hydrofluorocarbons (HFCs). There are

three types of representative products: R32, R125, R134a.

Among them, R32 is mainly used for air conditioner refrigerant, R125 is mainly used for mixing other refrigerants, and

R134a is mainly used for automobile market.

After the expansion of production in previous years, by September 2022, the capacity of R32, R125 and R134a has reached

502,000 tons, 342,000 tons and 335,000 tons respectively (data source: East Asia Qianhai Securities).

What's the concept?

In 2021, the domestic output of R32, R125 and R134a is 244,000 tons, 157,000 tons and 151,000 tons respectively (data

source: Huaan Securities). According to this calculation, this year's three mainstream products, the overall capacity

utilization rate is only about 45%.

And production is not equal to sales.

Over the past year, R32, R125 and R134a inventories have increased significantly while only 45% of capacity has been

utilized In particular, the R32, which is mainly oriented to the air conditioning market, has more than tripled its inventory

from less than 3,000 tons to around 8000 tons.

Admittedly, capacity expansion has come to an end as 2022 But the irrational expansion of the past few years has created a

lot of hidden dangers for the industry.

First, in the short term, the basis for price increases has been lost

Inventory digestion pressure, superimposed nearly twice the demand capacity, led to the third generation of fluorine

refrigerants in the absence of external forces (such as industry power limits) with little support for price increases.

Although the industry will be limited after 2024, production may match demand. But until then, at least for the next year,

 the industry's supply and demand landscape is unlikely to change much.

Second, in the long run, it will bear idle losses of capacity.

Production and sales frozen in 2024 are basically limited to industry demand. (The freezing baseline is 2020-2022

triennial average + second generation baseline * 65%). This means that half of the current frenzy of expansion capacity

may be idle. And as the quotas are cut, spare capacity will increase.

In the long run, this will be not a small loss for enterprises.

To some extent, there are no winners in the quota war.

It's just that some people lose less, some people lose more.

Sanmei shares, quota defeat

Sanmei shares are undoubtedly the greater loss

Over the past three years, the average annual sales of refrigerants in Juhua shares (FRIOFLOR) were about 291,500 tons,

while Sanmei shares were about 134,400 tons, accounting for 46% of Juhua Referring to this data, the production quota of

Sanmei shares, or only 46% of the giant.

At the same time, the production capacity dimension, as of the end of 2021, Juhua shares R32, R134a, R125 three

mainstream products, the total annual capacity of about 250,000 tons The total shares of Sanmei are about 157,000 tons,

accounting for 63% of Juhua.

Combined with the above two groups of data, the production quota of Sanmei shares is less than half of Juhua shares, but

the production capacity has reached Juhua 63%.

This means that Sanmei shares are not only small in business scale, but also low in capacity utilization, and are expected to

bear a higher proportion of idle losses

The year 2022 will be the last year for the three generations of refrigerants in our country This deterministic prospect has

prompted the industry to experience a period of irrational development, with enterprises expanding production while

losing money.

For enterprises, the expansion is to grab production quotas However, under the inevitable trend of limiting production, the

fate of new production capacity can only be idle and dismantled Conversely, the loss is borne by the enterprise itself

From the perspective of market scale and capacity utilization, the quota war, Juhua shares outperformed Sanmei shares

However, Juhua shares have the greatest advantage and often have the greatest risk

After future quota controls, even if one day, the actual demand for refrigerants exceeds the limit on production, resulting

in product prices. But compared with the three major categories of products, the R32, which has the greatest inventory

pressure and the slowest demand growth, probably makes the weakest profit.

Looking for prospects in a doomed industry has never been a smart choice The fourth generation of refrigerants will

eventually be replaced by three generations, but the current technical reserve is not mature.

Perhaps the real future is still new-edge technology of refrigerant gas.