By Tian Jing, Sublime China Information
In 2022, the production capacity of China’s formaldehyde industry continued to increase. With the improved operation stability of large-scale enterprises, the market supply was relatively abundant. From the demand side, nearly half of the downstream consumer sectors were still concentrated in the adhesive (sheet) industry. However, the growth of the demand of the formaldehyde industry was slower than that of the supply in general, so the market was in a state of oversupply. Looking ahead to 2023, based on the price drop of the raw material and the lack of highlights on the demand, it is expected that the price will fluctuate and go down.
Supply: domestic production capacity continues to grow, and the industry's production capacity will be gradually concentrated
In the past five years, the production capacity of formaldehyde in China had a trend of first decreasing and then increasing. According to incomplete statistics, the production capacity of formaldehyde in China was about 33.4 million t/a in 2022, a year-on-year increase of 9.15% (see Figure 1). From the perspective of production capacity changes, in 2022, there was approximately 2.8 million t/a of newly-added production capacity in Shandong, Hebei, Henan and Northwest China. Although the formaldehyde is oversupplied, its production capacity is still growing due to the advancement of the formaldehyde units into parks, the relatively low investment, and some enterprises demand of extending the industrial chain. At the same time, the concentration of industrial production capacity has increased to more than 10%. With the improved operation stability of large-scale enterprises, the supply of the industry is relatively abundant.
Figure 1 The production capacity of China's formaldehyde and the change of the growth rate from 2018 to 2022
From the perspective of regional distribution, more than 30% of the domestic production capacity is concentrated in East China, represented by Shandong, Jiangsu and Zhejiang, basically in accordance with the consumption area, showing the characteristics of consistent production and sales. In recent years, the new production capacity of formaldehyde has been concentrated in industrial parks in consumption areas, and the industry is developing into large-scale and intensive.
For a long time, the production capacity of China's formaldehyde has shown a state of many enterprises but small units, and most enterprises’ units have the production capacity of below 200 000 t/a. With the changes in the external environment in recent years, some regional units have been merged and reorganized for capacity replacement. In 2022, China's formaldehyde CR4 was 11.38%, an increase of 3.21 percentage points compared with 2021. In the future, it is expected that the production capacity of the industry will be more concentrated, and leading enterprises will make use of their scale effect and enhance market competitiveness through capacity mergers and replacements.
Demand: Adhesives (sheets) industry is the most important consumption field and East China is the main consumption area
In 2022, calculated from the sample, the growth rate of downstream consumption of formaldehyde was slower than that of supply so the industry was still oversupplied, as a result, the demand dragged the price. From 2018 to 2022, the consumption of formaldehyde calculated by the sample showed a trend of first decreasing and then increasing, with a compound growth rate of -0.42% in the past five years. Among them, the downward trend in 2018-2020 was obvious, and the growth rate in 2021-2022 had a large increase after it became positive. The adhesive (board factory) industry, formaldehyde's main downstream, has the characteristics of large scale and low standardization. In recent years, production capacity has been upgraded and some backward production capacity has been eliminated, and the consumption of formaldehyde has declined to a certain extent. However, with the acceleration of the process of entering the park, the stable production of large-scale enterprises, and the good demand in the polyol and fine chemical industry, there is support for rigid demand, so the total demand calculated from the sample will increase and will be basically in accordance with the change of supply.
In recent years, the downstream consumption of formaldehyde is stable but not dynamic, and the main downstream is still adhesives (sheets), accounting for about half of the consumption; the polyol industry accounts for more than 20%, and there is still a certain development potential in the future (see Figure 2). In 2022, the demand for adhesives (sheets) accounted for about 50%. Adhesives produced by three adhesives (urea-formaldehyde resin adhesive, phenolic resin adhesive, melamine resin adhesive)were mainly used in the wood processing industry, followed by molded parts, coatings, textile and paper treatment agents, etc. Formaldehyde, as one of the main raw materials for adhesive production, has certain advantages in price. Considering the sluggish growth in terminal demand, the proportion of adhesives (sheets) may decline slightly in the later stage. The polyols represented by BDO and neopentyl glycol have a strong development momentum. Increased demand and higher profit are the main reasons for the increase in the output of the polyol industry, and the increased output of polyols has led to an increase in its proportion in the formaldehyde consumption.
Figure 2 Downstream consumption structure of formaldehyde in 2022
From the perspective of downstream consumption areas, nearly half of them are concentrated in East China represented by Shandong and Jiangsu and Zhejiang; the proportion of South China represented by Guangdong and Guangxi is gradually increasing, and the proportions of Northwest, North China and Central China are relatively low. East China, represented by Shandong, Jiangsu and Zhejiang, has a diversified consumption structure, and adhesives (board factories) are widely distributed, and the demand is large. South China is rich in natural resources, the production capacity of plywood occupies the first place in the south, and the development potential is still being released.
Price: The price has a downward trend, showing certain seasonal characteristics
The formaldehyde price is the result of a multi-factor game. In 2022, the formaldehyde price in China roughly showed an "M"-shaped trend (see Figure 3). Taking the Shandong market as an example, the average annual price of formaldehyde products was RMB1 274 per ton, a year-on-year decrease of 3.78%. The highest of daily average price appeared at the end of March, the highest price was RMB1 515 per ton and the lowest price appeared at the end of December, being RMB1 095 per ton, with the maximum fluctuation of RMB420 per ton. The main reason for the decline of the annual average price of formaldehyde was the abundant supply. In addition, the growth of the demand was slower than that of the supply side, dragging down the market price. Although the cost of raw materials has risen, the boosting effect was relatively limited, resulting in a decline in the profitability of the industry.
Figure 3 Comparison of formaldehyde price trend in 2022-2023
Cost profit: strong linkage with raw material prices, theoretical profit decline
In terms of cost, methanol is the single upstream raw material of formaldehyde. In 2022, the price trend of raw material methanol was consistent with formaldehyde, but at the same time, affected by the supply and demand, the price of formaldehyde did not rise as much as that of raw materials sometimes, and the theoretical profit declined (see Figure 4). At the beginning of 2023, the theoretical profit of the formaldehyde industry has not improved significantly, with an average loss of RMB5 per ton from January to February.
Figure 4 Comparison of the price and theoretical gross profit of formaldehyde and raw material methanol 2022-2023
Outlook
Looking forward into 2023, the supply and demand of the formaldehyde market will continue to have a slow growth trend, the production capacity of the industry will keep expanding, and the production capacity will be more concentrated. In terms of downstream demand, adhesives (sheets) will still be the mainstay in China, but the recovery of terminal applications such as real estate will be slow, and this part of demand is expected to grow slowly. On the whole, the growth rate of supply will be still faster than that of demand, and the supply will be still under pressure. Considering the profitability, it is expected that the trend of formaldehyde will remain highly consistent with the trend of raw material methanol in 2023. Considering that the price of raw materials is expected to loosen, the support from the cost side may weaken, and the market competition is fierce, the average price of the domestic formaldehyde market may fluctuate and go down in 2023, and the overall price will still linger around the cost line.
