Gujarat Fluorochemicals: A hidden fluorine story

2500 Cr investment in FY23 and FY24 - More granular Capex details here from Indian Chemical News

There is perhaps more “Opportunity” in the constantly evolving Supply/Demand situation for a nimble player like Gujarat Fluorochem (?), provided we can strive to understand the Industry/BusinessCanvas better!

Selected Excerpts. Not sure these have been shared publicly before (?)

Cyclicality concerns (in 1-2 years) in some Key GFL products like LiPF6 and PVDF are valid. Equally there are big opportunities in LiFSI, HFPs and Refrigerants (?).
One direction we could work on understanding/establishing *Changes" global supply/demand scenarios for Gujarat Fluorochem Product Pipeline.

  • R-22 >> HFP >>High performance FP route products including FKM, FEP, PFA, HFE, PFPE, R127
  • LiPF6 supply glut expected in 2 years vs LiFSI ramp up
  • Industrial PVDF glut in 2 years vs battery grade PVDF
  • Domestic Supply cornering vs Exports (especially new FPs, battery chemicals)
  • China+1 Competitive Position for US and EU markets, Non-China
  • Refrigerants biggest Opportunity in next 2-3 years (post dec 2023 quota freeze) (?)
  • Timeline for starting on Class III Refrigerants like R-32 and R 410A critical for Gujarat Fluorochem as Quotas will be decided based on production achieved till Dec '23 end? GFL is unlikely to have production ramp up/dumping route scope available like the Chinese have? vs Country Quotas ?
  • Easy/Difficult Fungibility of Capacities (between HFPs, other FPs, Refrigerant classes). This is a key understanding required.

If we all can put energies into taking this forward, I think GFL Q3FY23 Concall interaction/ questioning can be qualitatively that much better.


Study Direction 1
HFP: the rising star of fluorine chemicals (Global Supply Deficit situation 2023-2025 (?)
HFP (hexafluoropropylene), produced from pyrolysis reaction of R22 (Class II refrigerant), is the
most important monomer within the fluorine chemical family.

HFP is one of the building blocks of high-performance materials in the fluorochemical space. In terms of total number of end products, HFP triumphs among fluorine chemical monomers. Leading fluorochemical companies in the world including 3M, Dupont and Daikin have specialized in HFP derivative product R&D.

Different from other fluorine chemicals like PVDF and LiPF6 which are downstream products, HFP is a fluoro-monomer which is used as an intermediary for the production of multiple high performance
fluoropolymers including PFA (perfluoro-alkoxy polymer) for proton exchange membrane of hydrogen fuel cells, HFE (hydro-fluoro-ether) for semiconductor chillers and IDC immersion coolants, and FKM (fluoro-elastomers) which is a type of special rubber used in sealing and piping for aerospace and high-end vehicles.

Chinese companies are new to the field of HFP derivatives?
Gujarat Fluorochem key (HFP and TFE) derivative products are FKM, FEP and PFA

Production for R22 as a Class II refrigerant is likely to drop to 32.5% of its respective baseline in 2025E, from 65% level currently. Reduction in supply of refrigerants should increase the average sales price (ASP) for R22 for both feedstock and refrigerant uses, offering support for future HFP ASP increases (?)

Recent changes in ASPs are a great indication of the supply situation. Both LiPF6 and PVDF are showing downward pressure while price for HFP stays resilient. [Source: Credit Suisse Fluorochemicals Report 6 Dec, 2022]

China+1 may drive significant change non-china (US/EU/India) and govt discounting and ADDs may keep coming (?)


Study Direction 2
Refrigerants: Class III bigger Opportunity (?)

Most of battery Energy Storage Systems (ESS) adopt Class III refrigerants such as R32 or R410a (blended refrigerant of R32 and R125). Total consumption of refrigerants will increase with respect to rising installation of renewable capacity and increasing penetration of ESS incorporation in the installed capacities of renewables.

Total new capacities of battery ESS is growing exponentially at 82% CAGR in 2022-2025E and 38% in 2025-2030E which will lead to drastic increase in demand for Class III refrigerants. Demand from ESS thermal management might be the leading driver in refrigerant consumption for the upcoming years (?)

Refrigerants Classification

Likely 2023-2025 Cyclicality (Surplus/Deficit) Picture (?)
LiPF6 ↓↓
LiFSI ↑↑
PVDF ↓
Refrigerants ↑↑
FKM/PTFE/PFA ↑

Disclosure: Invested

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Wanted a quick grip on differences in data-points/historical approach/investments on R32/Refrigerant Gases between the 3 major players in India.

Just some fun (productivity) stuff - may NOT be extremely relevant in our current Quest, but useful.
Attached “R32” document - compiled by me @needl.ai

R32_Navin_SRF_GFL-Needl.ai.pdf (3.0 MB)

Mostly auto-excerpts from Concall Transcripts, Investor presentations, Annual Reports
What was surprising was that Needl got me (very relevant) excerpts from websites like Hindu Business Line as well. Encouraged by this, tomorrow I am sure to add permissions (at Needle.ai) for my subscriptions from ET Prime, Bloomberg, and other places.

Some who actually download this document to check - will find that it showed results (for R32) from across my email, Drives, EverNote - going back to even 2016, which I did not even suspect - they existed. (Needl also does WA integration/extraction too - think my WA sync has gone wrong, so WA results haven’t come in)

Felt the Power of an Aggregated/Unified Data Repository !!

By the way guys, our own @pratyushmittal and @ayushmit have quietly provided a “barebones” facility (from exchange filed docs) at Screener.in too. Check that out at
https://www.screener.in/full-text-search/?q=“R32”

@KuntalShah - love the current version; have started using, and am pretty excited to try more. Saved me huge amounts of time - I would have otherwise taken to come to grips with R32 data points differences/approach/investments between fluorine players in India

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Revoking of 26.5% of CVD on granular PTFE resin: US Department of Commerce had placed 26.5% CVD on granular PTFE imports from India. The following are the timelines from the attached document:

On January 27, 2021, Daikin filed antidumping and countervailing duty petitions on imports of granular PTFE resin from India and Russia. Daikin Antidumping and Countervailing Duty Petitions, P.R. 1.

On February 23, 2021, Commerce initiated a countervailing duty investigation of imports of this product during a time period

Commerce issued a “Preliminary Determination” for the investigation on July 6, 2021

Commerce issued a countervailing duty order on PTFE resin from India. Granular Polytetrafluoroethylene Resin From India and the Russian Federation: Countervailing Duty Orders, 87 Fed. Reg. 14,509 (Int’l Trade Admin. Mar. 15, 2022).

The total import of this from India was between $22 mn, $31 mn, $25 mn as per these links in CY 18, 19, 20 respectively. CY 20 data is for India/Russia/China combined but as per prior data most of it must be coming from India

usa anti dumping gfl revoked.pdf (556.6 KB)

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Announced result date and,
I think the company is planning to issue bonds or debentures through private placement.

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From my reading until now, the highest incremental value creation in next 2-3 years will come from PVDF. So i want to analyze PVDF in this post as exhaustively as possible.

The molecule


This is the molecule. Polyvinylidene fluoride or polyvinylidene (PV) difluoride (DF) is a highly non-reactive thermoplastic fluoropolymer produced by the polymerization of vinylidene difluoride (VDF).

PVDF is sold under many brand names including KF (Kureha), Hylar (Solvay), Kynar (Arkema) and Solef (Solvay).

The word piezoelectricity means electricity resulting from pressure and latent heat. Piezoelectricity is one of the critical properties of PVDF which make it applicable in batteries.


https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7570857/#:~:text=PVDF%20is%20one%20of%20the,NGs%20[14%2C15].

PVDF has also been subjected to high-heat experiments to test its thermal stability. PVDF was held for 10 years at 302 °F (150 °C), measurements indicated no thermal or oxidative breakdown occurred. This also makes it ideal for EV battery applications. PVDF is a standard binder material used in the production of composite electrodes for lithium-ion batteries, PVDF is used because it is chemically inert over the potential range used and does not react with the electrolyte or lithium.

https://hal.science/hal-02557122/file/Ordonez2016.pdf is an interesting read to understand lithium batteries. PVDF is used as binder for both cathode & anode:
image

The longevity of Li batteries is guaranteed by the PVDF’s chemical resistance in the extremely harsh surroundings of the lithium-ion batteries, which contains a large amount of lithium salts. PVDF is also used as a dispersion agent in Lithium ion batteries to evenly distribute the active electrode material on the battery’s current collector, leading to improved battery performance. A dispersion agent in the context of Lithium ion batteries refers to a material that is added to the electrode mixture to distribute the active material evenly and prevent clumping or aggregation. The dispersion agent improves the uniformity of the electrode mixture and enhances the overall performance of the battery by ensuring a more efficient use of the active material and better electrical conductivity. In the context of Lithium ion batteries, the active material refers to the substance that participates in the electrochemical reaction taking place in the battery. The active material is typically a metal oxide or a polymeric material and can be either the cathode or the anode material. The active material determines the energy and power density of the battery and its overall performance.

Value chain for GFL

Let us also understand how GFL produces PVDF.


GFL goes from VCM => VDC => R142b => VDF => PVDF. This level of backward integration is one of the strong competitive positioning GFL has.

According to this market research: https://www.globenewswire.com/news-release/2022/06/13/2461457/0/en/Polyvinylidene-Fluoride-PVDF-Market-Growth-Trends-COVID-19-Impact-and-Forecasts-2022-2027.html#:~:text=The%20global%20Polyvinylidene%20Fluoride%20(PVDF)%20market%20is%20highly%20consolidated%2C,Dyneon%20LLC%20(3M%20Company)

The global PVDF market is highly consolidated. The top 4 players account have a marketshare of around 90% in 2021. The top players are: Arkema, Solvay, Kureha, & Dyneon LLC (3M Company).

According to this: Polyvinylidene Fluoride (PVDF) Market - Growth, Trends, COVID-19 Impact, and Forecasts (2022 - 2027) the PVDF market is growing at 20% CAGR in next 5 years. According to Global Polyvinylidene Fluoride (PVDF) Market Overview 2022: the asian PVDF maket will grow at 16%. Overall, we understand that this is a fast growing global market, primarily due to application of PVDF as binder for electrodes in batteries.

Competitor Analysis

While @rupeshtatiya sir’s post talks about technical requirements required from PVDF binders here:

I wanted to focus on the capacities, capex plans & extent of backward integration to gauge the extent of competitive advantage if any which Gujarat Fluoro might hope to enjoy.

Arkema

Sources:

Arkema has announced several capacity expansion projects in China & France
image
Arkema reports PVDF under brand Kynar under the ADVANCED MATERIALS segment. This segment has 22% EBITDA margins & 3B Euro sales. This segment will be 35-40% of arkema sales in 2024 so is important to them.

They expanded PVDF capacities by 50% in 2021 in both China & France

Arkema is also working on PVDF binders which consume 20% less carbon in the manufacturing process & are those more environmentally friendly.

In this segment, Arkema considers itself to be market leader & expects 10% annual growth. This means that their 50% capacity expansion should probably be good for next 4-5 years or so. Given that they have a plant in France, we have to very closely understand why any european customer would prefer Gujarat fluoro’s PVDF over Arkema’s which has been produced in France & is also environmentally sustainable.
We know from Foranext®: fluorinated monomers gas for fluoropolymer synthesis- Arkema Group | Arkema Global
that arkema manufactures HCFC-142b so it is at least partially backward integrated for sure.

One thing to note here is that arkema did close its R134a plant in 2016.


This means that it is possible that they might find it difficult to expand R142b capacities too (need to work more to validate or invalidate this).
A 50% expansion of Arkema’s capacity in Pierre-Bénite, France, is due on line early in 2023. I havent been able to find Arkema’s total PVDF capacities.

Solvay

Solvay is also doing capacity expansion for PVDF.


Solvay will in fact have largest PVDF capacities in Europe at 35,000 ton (doing capacity expansion for 300 M euro). Solvay is also doubling capacity in china: Solvay doubles PVDF capacity in China ahead of schedule to meet growing demand for EV batteries
Solvay concall:

image
Solvay is Also targeting NA market. Solvay also has access to Fluorspar mines similar to GFL. Solvay’s complex in France is fully integrated.
Solvay is also going to produce PVDF in North America

I also learned why these cos do not disclose capacities. They consider it to be a competitive advantage/secret (which makes sense)


Their investments in USA will make them the undisputed leader for USA.

On pricing they basically point out that they are able to sustain margins & pass cost increases to customers

3M

I guess this is the one with most recent news. As @spatel sir posted:

3M will stop manufacturing all fluoropolymers:

3M will discontinue manufacturing all fluoropolymers, fluorinated fluids, and PFAS-based additive products. We will help facilitate an orderly transition for customers. 3M intends to fulfill current contractual obligations during the transition period.

The interesting thing i learned while studying 3M’s production stop is that it was based on " Shareholders have also called for production of the chemicals to stop. Investors managing $8 trillion in assets earlier this year wrote to 54 companies urging them to phase out their use." Which made me curious about which 54 companies investors asked to stop producing PFAS. We already know from sandeep sir’s post that Gujarat Fluoro does not / will not use PFAS in making its FP.I could not find 3M’s pvdf capacity although we do know that 3M sells PVDF: https://www.3m.com/3M/en_US/p/d/b40070223/

This would result in some supply vaccum. However given that 3M plants are primarily in USA, given that solvay intends to become largest PVDF manufacturer in USA, 3m’s loss might be solvay’s gain & GFL might only benefit indirectly through a demand-supply mismatch, if any.

Kureha

Kureha had 11000 ton PVDF capacity. Kureha is also increasing (tripling) PVDF capacities in China.
https://www.kureha.co.jp/en/newsrelease/docs/20210720en.pdf with a focus on battery binders for LiB.
PVDF sales has been supporting kureha’s sales growth

PVDF is highly profitable for kureha


Kureha reports this under the advanced plastics segment & it is growing quite fast, also improving overall profitability for kureha

Kureha will go 3000 cr or so of PVDF sales in FY22. Economic slowdown remains a key risk specially since all PVDF makers are expanding capacities so aggresively.

Overall conclusions

  1. In my assessment it might be difficult for GFL to break into USA due to localization requirements which incentivize local production heavily. The Inflation Reduction Act (IRA) requires that EV manufacturers source 40% of critical battery minerals domestically or with free trade partners by 2024 . That percentage increases to 80% in 2026. And mines and battery material processing plants don’t come on at the flip of a switch. We know that PVDF binders are not a large part of the value of the battery but solvay has 1st mover advantage in USA so might be difficult for GFL to break through in NA market.
  2. Demand supply situation seems delicately balanced. All leading players understand the explosion of demand & most are setting up factories in China. Even if production stops in europe, it is not clear why or how GFL might be able to compete successfully against Solvay, Kureha or Arkema’s China plants given low power costs in China (power is one of largest raw material for FP).
  3. Perhaps In my understanding the best market GFL might be able to target is the domestic market which supported by high cost structure of European plants & some form of ADD on chinese plants, GFL might find itself in a near monopoly position for Domestic consumption. This space needs to be watched closely to see who is setting up lithium ion battery manufacturing in india & how.

Disclaimer: have a small position, but to be honest this is one of toughest companies to analyze & forecast for, each molecule is like a large industry in & of itself. I am not very confident GFL can create value without too many variables falling into the right place:

  1. ADD on chinese imports
  2. Domestic manufacturing picking up
  3. Realizations remaining favorable vs non-ADD imports
    Need to study a lot more to understand the value creation better.
    Ps: The reason i prioritised pvdf is that it seems the largest & fastest growing high realisation molecule. LiPF6 can be larger but also has threat of substitution by lifsi. PFA is much smaller market size. Ptfe is a slow growing market.
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Looks like the price of PCTFE and PFA continues to rise. Chemours and Daikin seems to have been increasing the prices for some grades of these Fluorochems. Need more evidence to confirm this further.

Afton Plastics who processes these resins further downstream into rods, sheets etc. seems to have taken 20% hike when processed using Daikin’s certain grade in short term.

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Hello VP members
Have been reading a lot on VP since last month & this is my first post in the forum.
I am extremely grateful to the forum and members for the learning I have had in such short duration and the breadth and depth of analysis that takes place on a thread is amazing to say the very least.
Also, I am relatively new to the world of self investing (since 2020) so forgive my ignorance on otherwise obvious matters.

Coming to the company, a lot has already been discussed in the thread covering several dimensions of the company and I will try to limit my discussion to the points where I am unable to understand what is actually happening. Senior VP members may please delete the post if they feel that there is a lot of repeatability and little value addition.

It is clear that the company makes a range of products (caustic, chloromethanes, Ref gas, PTFE, FPs & FSCs) which are mostly fluorine related chemicals & polymers. A significant portion (~50%) of the revenue comes from exports to US and Europe. Originally the company was mainly into ref. gases & chemicals. Later it ventured into PTFE and from 2007 into FPs. As has been shown by @Anant sir at the start of the thread as one of the key concerns, this followed a period of roughly 10y where significant CapEx was done for not so impressive sales growth. However, as a chemical engineer working in an even complex (although unrelated) industry, I know that for a greenfield project it can easily take anywhere between 3 y to 5y for first product routing from the moment the first dime of capex is spent on the project. Fine tuning of the product takes few more years.

After that initial period of slow growth, the company picked up its pace & since then the R&D has churned out product after product that have turned out to be very profitable for the company. From the chart below it can be seen that the company has had both strategic intent and ability to continue to develop products that make sales and further increase future sales potential

Note: other products include FEP, FKM, PFA, PVDF & FSCs.

With an intent of Identifying new product lines to increase future sales potential the company planned fresh capex (600 cr FY22, 1150 cr FY23 & 1000 cr FY24) towards the “new age products” which are battery chemicals (LiPF6, PVDF for cathode binder) & PVDF for solar panel back films. Some of that (~300 cr) will be used for backward integration. Further, technology development for PEM & some other products is in progress but it will take time & lets not get into that at this point.

Most of this is already known as it has been discussed in the thread in quite detail. However, this background was necessary for the question i want to ask and the answer to which I have but am unsure of and want the valuable opinion of VP members

What i want to understand is what will make the “new age products” sell. Those for which the capex is being done and which are being identified as the next lever of growth for 5-10y.

As @sahil_vi sir mentioned a few posts back that it might be difficult for GFL to break into USA due to localization requirements and also in europe as there are bigger players with better products available.
The answer can not be “technically superior” product as again due to my chemical industry background i know that most of the chemical research work (industrial or otherwise) in India is derivative in nature. Our production plant & R&D labs are set up by foreign licensors and the tech is sometimes (or mostly?) outdated before it reaches us.
Therefore I have no doubt in believing that Arkema (for eg) will almost always have a better product that GFL for the similar use scenario (at what cost though?).
GFL itself has said in the concalls that it was never competing with china (overlap with china was 10-15% of generic grade PTFE only) and it was seeing significant potential in sales of battery chemicals as other western major players are not expanding capacity which is not entirely true (as a lot of them are expanding capacities. See @sahil_vi sir post). The market in india will only come after H2CY24 -2025

Could the answer be that the newly formed capacity of all companies combined will still be lower than the demand? That can be a scenario where GFL can get its share of the EV market. However is it really possible for us to predict the future demand to such accuracy as to map it against the capacities coming up. Maybe for someone who is working in the industry and having in depth knowledge. However most of these people will be working at very high posts in one of these companies itself and will be inaccessible to an average investor like me.

It is at this point that I realize that the complexity in analyzing GFL as a potential investment lies in my inability to properly understand the sales organization of the company and its sector.

So what has made me invest in GFL even after all the doubts i have just listed (& some more)

  • I believe that even today the company has products (exclluding new age products) that have sales potential for several years to come. Considering that additional capacities are coming in these new products; the company can continue to utilize the current sales channel (which i have no idea about however sales are still occuring).

  • I believe that these new age products (battery chemicals, PVDF, FSCs) will provide additional sales and not only in india but in US and Europe also. Their product may be inferior to solvay’s or arkema’s latest invention however it will still get the job done. Not everyone (customer) is looking for the best product; some are looking to cut the costs and with huge margins (>30%), low labor costs and less severe environment control norms, GFL can provide products at cheaper costs (i may be wrong and more financial analysis may be required.) The products may sell for entirely different reasons which I am not aware of. But I think the management has done its homework before foraying into these new products.

  • Even in the past, GFL has been able to capture market share for its products in US & EU markets even though western & chinese players were present. Understanding its limitations, it steered away from direct competition with china. Initially GFL had generic PTFE but gradually shifted to 60:40 mix of value added grade to generic realizing that china had huge capacities for commodity grade PTFE. How it managed to capture market share from western players i am not sure. Might be cost or better sales service or something entirely else but it did manage to carve out a piece for itself. I am betting that even in the future, it will be able to do so provided management does not make a blunder.

  • Management has almost always been able to walk the talk in concalls and ARs. Most capex implementations since demerger have been on time (except FSCs capacity expansion where in the project was initially delayed from target of Q4FY22 to Q2FY23 and was further delayed due to fire incident). Management has reasonably good cost analysis and accounting controls for individual products (they were quick to identify that 2 of the 11 FSCs developed were not going to give enough margin and decided to stop the production). They have been successfully able to identify future growth products and have shown timely commercialization of products (note that commercial channels are vaguely established even before production of new products start).

I believe that as long as the current management is present and a blunder is not committed through a fault of their own, plans are in place for decent amount of growth for several years. The price has corrected the previous highs of ~4000 and the valuations have become attractive (although not as attractive as were 2 y back when the thread was started) & it is a good company to hold for mid-long term.

Comments and criticism are highly solicited.

Disclosure: Invested. Transaction in last 30 days
Please do your own due diligence before investing

21 Likes

From SRF concall:- Decides to enter FKM, PVDF, FEP

Fluorochemical business (ref gas+polymers)- strong traction of reg gas in domestic business.

Outlook for domestic demand of HFC’s in India and US remains strong. PTFE plant slightly delayed due to logistics issue.

PVDF, Fep, FKM space we are going to enter at 595 crore capex. In 24months project will be commissioned. Used in EV batteries, Solar back sheet, auto etc etc.

Announced 1900 crores of capex in chemical business in last 9 months. (Capex for new age fluoropolymers is 595 crore)

Capex comes on stream in 24 months for new age fluoropolymers and post that customer approvals will take time. Points to market vacuum the at exists. Possibly due to Demand outpacing the supply in New age fluoropolymers. Gives a more complete perspective with srf also announcing a smaller capacity in the space

Capacity will be at4500 tonnes per annum for new age fluoropolymers vs 18ktpa for Gfl post expansion.

Seems like a market where Gfl has taken the lead and western players are suffering from higher Rm costs or inability to completely fulfill the demand as capex takes 2-3 years to complete. Given GFL has set up a large R142 B plant, expansion will be much shorter in time- My thoughts

Srf capacity moreover will be with PFAS tech and GFL has already develop non pfas tech to manufacture.

Srf will have to go through pain period of customer approvals and long gestation of new age fluoropolymers just like what GFL had to go through

In commodity grade Ptfe, Srf is expecting ramp up faster as in a past management meet they indicated that is majorly for domestic markets.

Thus,

Assuming both GFL and Srf hit full capacity utilisation on expanded capacities.

Gfl will be doing revenue of 4500+ crores in both new age fluoropolymers and Ptfe on current realisations.

Srf will be doing 600 crore in Ptfe and 500-550 in new age fluoropolymers.

Srf investments just confirm the thesis for GFL and make it much more solid in my view.

As GfL has more grades and has spent more time in Learning curve here, time period will be shorter vs SRF.

Disc: Invested in Kama hold co and Gujarat fluoro.

Full concall notes:- posting if any references can be taken for GFL fluoropolymers business and ref gas realisations.

SRF Concall: Q3FY23 &9M Concall

  1. Technical textile and Packaging business witnessing a difficult environment. Chemical business is doing well.

  2. Rs 3.6 of dividend approved this Quarter. Similar dividend was announced last Quarter.

  3. Spechem delivered a record performance due to new products being introduced and ramp up of MPP4 at Dahej.

  4. High level of engagement with global innovators remains and pharma intermediate plant going low. Capex announced worth more than 1000+ crores in last 2 Q’s in this division.

  5. All projects will go live within 1 year in spechem.

  6. Fluorochemical business (ref gas+polymers)- strong traction of reg gas in domestic business.

  7. Outlook for domestic demand of HFC’s in India and US remains strong. PTFE plant slightly delayed due to logistics issue.

  8. PVDF, Fep, FKM space we are going to enter at 595 crore capex. In 24months project will be commissioned.

  9. Announced 1900 crores of capex in chemical business in last 9 months.

  10. New Timeline of commissioning for PTFE by the end of this FY or early in April it will be commissioned. In next 6 months it will be ramped up very swiftly.

  11. Supply outstrips demand in Packaging business. Going through headwinds.

  12. Overall capacity: 4500 tonnes or so will be total capacity of new age fluoropolymers. Technology will be using Fluorosurfactants.

  13. Majority of the margins has been led by the speciality chemicals space. There is a pricing benefit that has come in within spechem as contracts got renewed. Combination of all.

  14. Intent in chemical business is to go into higher value added products.

  15. Margin expansion might be sustained in chemical business. As of now looks in good shape.

  16. Next Quarter will be seasonally stronger for the chemical business.

  17. Will be fully integrated in Fluoropolymers. Customer acquisition: is probably still some way down the line. Once the product is in place only then you can talk about customer acquisition.

  18. Majority of chemical capex will commercialise in H1FY24 and H2FY24.

  19. Seeing strong traction in ref gases in domestic market in Q4 and Q1.

  20. Key customers in agro are global innovators.

  21. Speciality fluoropolymers: 25-28% IRR we are expecting. 4 year Payback. Asset turns to be 0.8-1.2x. This is a strategic investment. Will help to cater to larger fluorocarbon space.

  22. 2800-3000 crore capex is what they are targeting going forward.

EDIT

Technology that SRF is using for New age fluoropolymers is also PFOA free. I heard the call over and over again. And broker notes confirmed the same.

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I agree with you that most of the Chemical research in India is derivative in nature but this does not imply that Indian companies once having developed their process in non patented products cannot compete with the best of the world. There are multiple examples like Divis/Laurus/Deepak Nitrite etc. who have all done very well. The product is at par with the best and scale/operating costs etc. ensure business continuity. If we look at China one can clearly see significant growth in R&D, from being a mass producer of low complexity high volume chemicals Chinese company today are at par with their Western counterparts and far exceeds their volume. I think Indian companies too would take a similar path.

I doubt that ’ Arkema (for eg) will almost always have a better product’ and the answer to this is in the development of FP without using PFAS of concern. For example take a look at the response from GFL vs other players. Although the response was voluntary GFL/Chemours responded and the other didn’t. Chemours response seemed quite vague too.

Very difficult to answer this precisely but in general one could see significant demand supply gaps in most FP and PTFE. Further with 3M going out and Solvay’s Italy plant shutting down due to usage of PFAS of concern should help. Setting up FP capacities which have HFCs as RM will be very difficult in the West. The choices they have are limited. Do understand that GFL has been long in the markets developed hundreds of grades of various FPs and does carry significant experience. As far as battery chemicals are concerned what GFL does is yet to be seen but they have said multiple times they are initially looking at international markets.

https://www.solvay.com/en/news/solvay-discontinue-algoflon-ptfe-and-hyflon-perfluoropolymers-made-italy#:~:text=Solvay%2C%20a%20global%20market%20leader,stop%20by%20June%2030%2C%202023.

All investments carry risk, uncertainty, lack of clarity, probability etc. As investors we always deal with a limited understanding and use various models/patterns to extrpolate from past to come up with our own thesis. Even I don’t understand multiple functions including the sales organization at GFL.

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Let me elaborate on the PFAS RFI point touched by Anant in the previous post.

The Request for information (here) was from the Office of Science and Technology Policy (OSTP), department of the United States government. Published in July 2022. PFAS related. Response was voluntary. It has 8 questions (on page #2). Commenters can respond to one or many questions.

GFL responded to one of the important question #4. Response here. Ref: Page # 120.

No response from Solvay, Daikin, Arkema and the others. And Chemours responded to the question #7.


Snippet of the ChemService report (here) referred in the GFL response. Section 2.4 has an extensive detailed information about FP uses; worth reading in quality time.

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Kigali Ammendment

The Kigali Amendment to the Montreal Protocol is an international agreement to reduce the consumption & production of hydrofluorocarbons (HFCs). It is a legally binding agreement & has been signed by 190+ countries, All Major countries included.

Many of the Ref Gases which serve as feedstock for FP (R22, R32, R125, R142a) are HFCs. Let us analyze how each Major geography is treating Kigali ammendment. This will have rammifications on 2 aspect of GFL business:

  1. Ref gas prices might go up as supply is reduced
  2. Integrated FP players might continue to do well due to structural reduction in supply of Ref gases.

Why production & consumption caps?

While HFCs are not damaging ozone layer, their green house warning potential is 12000-14000 times that of CO2.

Broad Picture


Src: https://www.downtoearth.org.in/news/climate-change/countries-adopt-kigali-amendment-to-phase-down-hfcs-56008
A2 is countries like Europe, USA
A5 Group 2 is countries like India
A5 Group 1 is countries like China.
We can see that developed world is reducing capacities much more aggressively than Developing world. Even in that bucket, India would reduce much more slowly than China.

India

India ratified in 2021 the Kigali ammendment:
https://pib.gov.in/PressReleasePage.aspx?PRID=1746946

Per this document:

India will complete its phase down of HFCs in 4 steps from 2032 onwards 
with cumulative reduction of 10% in 2032, 20% in 2037, 30% in 2042 and 85% in 2047.

This means, that indian producers can produce (as allowed by international law) fairly significant volume of HFC over next 15-20 years at least.

China

Compared to this China has planned more aggresive cuts in HFC production

Countries like China will have to cap their HFC use by 2024, while even poorer countries like India get until 2028

According to what I read in a report which is behind a paywall, China would cut HGC production in 2023 by 10% & then by 10% in 2024. China would reach 50% production capacity cuts by 2042, a much steeper production cut than India. This would have 2 effects. Incremental production & demand could shift to India (for both Ref Gases & FP).

Importantly Countries like China will have to cap their HFC use by 2024, while even poorer countries like India get until 2028. (From what I read in the report China is actually capping production to 2022 levels & reducing in 2023 & 2024). Meaning, Indian players like SRF, GFL can put up more capacities over next 5 years as they create & capture the market.

Developed world

While europe ratified & implemented Kigali amendment immediately (2016) so has already reduced capacities by > 50% for HFCs,

USA only ratified the Kigali amendment in 2022:

This means, that USA will have to ramp down production aggressively now onwards.

These revised targets have used a similar methodology to those behind plans to introduce a 10 per cent phasedown of HFCs up to 2023.
The US Government has committed via its American Innovation and Manufacturing (AIM) Act to reduce the production and consumption of HFCs by 85 per cent of baseline levels from 2036.

US EPA proposes schedule for major HFC reduction plan - Refrigeration and Air Conditioning.

Note that a similar phasedown also happened for generation 2 Ref gases (HCFC: Hydro Chloro Fluoro Carbons). The demand for HFC is not going anywhere because HFO (generation 4 ref gases) is not at the level of efficiency where it can replace HFCs.

The refrigerant-side overall heat transfer coefficient of HFO-1234yf is 18–21% lower than that of HFC-134a in the mini-channel heat exchanger in the same operating conditions

Source: A comparative study on the performance of HFO-1234yf and HFC-134a as an alternative in automotive air conditioning systems - ScienceDirect

R 1234YF ah HFO has price of around 10,000 / 5 KG

Vs that, check R32

Just check the price difference. It’ll take a while before HFO can substitute for HFC due to both efficiency & cost being much lower & higher respectively.

One open question

Since Kigali amendment talks about cutting down both production & consumption , what is not clear to me is whether it ok to produce it for non-emissive captive consumption like forward integration into FP like GFL does & SRF might do, or is that also to be phased out (what happens to FP production then? Would it have to be done via some other non-Ref-gas route?)

Conclusion

  1. The demand supply scenario for Ref gas looks quite interesting. I can understand now why donald sir said this in his post:
  1. In the FP space, each molecule might follow its own demand supply scenario (like we have discussed earlier, PVDF might see excess supply like others like FKM might see excess demand) but fully integrated players will do better than ones who convert Ref Gas into FP since it would incrementally become difficult to produce Ref Gases specially stand alone.

Disclaimer: Same as before.

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