05 May 2003 00:00 [Source: ICB Americas]The rise of GE Betz and Ondeo Nalco as the top players in the water treatment market has significantly changed the business model for that sector. A business model integrating products and services has become even more important as water treatment companies face a difficult economy, customer consolidation and the challenge of growing their market presence in developing geographic markets.
The global water treatment market for specialty chemicals and services is valued at $6.5 billion to $7.0 billion, according to Barry Friedfeld, engagement manager with the Little Falls, N.J.-based consultancy Kline & Company Inc. Global annual growth has been in the range of 3 percent. Real growth has been occurring in developing regions while growth has been relatively flat in the more mature industrialized markets. "In recent times, dollar growth has been slowed by the economy in general, world events, and the industry (customer consolidations) that put downward pressure on prices," Mr. Friedfeld notes.
John Goin of Lake View Associates, a Manhattan, Kan.-based consultancy, places global demand for specialty water treatment chemical products and services at $5.6 billion, based on 2000 estimates (see chart, FR 6). North America is the largest regional market, followed by the Western Pacific, Central and South America, and Europe. Annual growth is estimated at about 3.6 percent, and Mr. Goin expects the market to reach $6.7 billion in 2005. Growth will rise slightly to 3.8 percent annually through 2010, he says, at which point the market will reach a value of $8.1 billion.
Water treatment, especially for the heavy industry segment, has been evolving from a pure specialty chemical market to a more competitive business model, observes Kline's Mr. Friedfeld. "Water service companies have had to 're-invent' themselves to be more responsive to their customers. Real growth is coming from providing more services (like outsourcing of water treatment) rather than selling more pounds of chemicals," he adds. The industrial market is by far the largest segment, followed by municipal applications at roughly half the size, according to Mr. Goin. The commercial/residential segment is a very distant third.
Most water treatment chemicals fall in the category of formulated products that primarily go into the industrial market. Other types of specialty chemicals are sold largely into municipal and commercial/residential applications. Of these, organic flocculants are the largest category, and activated carbon and ion exchange resins make up a much smaller portion.
Ion exchange resins and activated carbon are used widely for municipal water treatment. Activated carbon demand (see chart, FR 6) was estimated at $396 million in 2000, according to Mr. Goin. Growing at 3.5 percent per year, it will reach $447 million in 2005. From 2005 to 2010, demand for activated carbon will slow to only 1.6 percent per year. The ion exchange resins market (see chart, FR 6) in 2000 was valued at $312 million, notes Mr. Goin. Growth of 2.6 percent per year is expected through 2005, and of 3.2 percent from 2005 to 2010, when the market for ion exchange resins is expected to reach $415 million.
Growth in these segments will diminish because new technology has made activated carbon products and ion exchange resins far more robust. Material needs to be replaced much less often, and users are capable of regenerating higher and higher percentages of the material. There are also fewer and fewer start-up plants requiring all new material, says Mr. Goin. As a result, growth will continue to fall in these segments, until it is tied directly to population growth.
Ian Barbour, global business director at Dow Liquid Separations, sounds a similar note. "The continuing growth of water purification technology is due in large part to the economic development in many regions, especially Asia-Pacific," he says. "While demand in North America and Europe continues to grow steadily, we have seen an extraordinary amount of growth in Asia."
Organic flocculants are also used widely in municipal water treatment. Mr. Goin pegs the market for these materials in 2000 at roughly $1.2 billion, growing at 4.3 percent to nearly $1.5 billion in 2005 (see chart, FR 6). Again, growth will fall slightly to 4.1 percent through 2010, when the market will reach almost $1.8 billion.
Formulated products and services, the largest portion of the specialty water treatment market, are targeted largely at the industrial sector. Mr. Goin puts the value of this segment in 2000 at slightly over $3.7 billion, growing at 3.6 percent per year through 2005 (see chart, FR 6). He believes the market will then grow more quickly, at 4.0 percent, to reach $5.4 billion in 2010.
In the US alone, the water treatment chemical market surpassed $2.2 billion in 2002, according to a recent report by Business Communications Company Inc. (BCC). Average annual growth is projected at 4.1 percent through 2007, when the market will exceed $2.7 billion.
BCC has identified seven sectors for their significance and potential for growth in the US: corrosion and scale inhibiting chemicals, biocides and disinfecting chemicals, coagulants and flocculants, filter media and adsorbent chemicals, softeners and pH adjusters, fluoridation agents, and antifoaming and defoaming agents (see chart, above). The largest of these is corrosion and scale inhibitors, with sales in 2002 greater than $615 million, according to BCC. However, this market is slowing. The US biocide market, which totaled $586 million in 2002, is currently growing briskly at about 7.8 percent. While chlorine growth is sluggish, hypochlorites have been growing at a healthy rate, and ozone has been growing at a phenomenal rate, according to the firm, which notes that as the population grows and clean water becomes more precious, consumption of biocides will only increase.
There has been little recent technology development in the chemicals and products used for industrial water treatment, notes Mr. Goin. Rather, advancements have been made in the services provided. In the mid-1980s, Nalco and BetzDearborn began providing services along with water treatment chemicals. As computer and telecommunication technology advanced, their service offerings advanced, as well, so that now these companies monitor customer systems from a central location. The two companies have built on their initial lead, so that they are the leaders by far and compete with each other for a majority position in the market.
"The business model then moved from one of technology to one of dollars," says Mr. Goin. "Suez is funding Ondeo Nalco, and first Hercules and now GE is funding BetzDearborn (as GE Betz)." In the future, says Mr. Goin, the water treatment market will operate on a geographically driven model. Activity in South America in the 1990s was the leading edge of this trend. "The two companies will compete in regions of the world that are modernizing," says Mr. Goin. "For the next several years the focus will be India and Pakistan, and then China will see attention."
Besides Ondeo Nalco and GE Betz, the top players in the market today are Kurita and the Drew Division of Ashland, according to Kline's Mr. Friedfeld. These four companies focus on providing products and services to the industrial users. There are many other players that target the industrial, municipal, commercial and residential segments of the market.
"Demand continues to grow in the water treatment industry for proprietary, value-added products and services with special features and technological advantages that offer measurable improvements and sustainable value in performance, cost reduction and environmental benefits," says Sean McKeon, general manager, global heavy industry with GE Betz.
"The water treatment market continues to be a key value contributor for customers in the industrial and commercial segments," adds Pascal Remy, senior vice president with Ondeo Nalco Company. He notes that water treatment for utility operations is a major opportunity for growth, both through the optimal deployment of cost-effective treatment programs, and the ability to increase reliability and performance.
In addition, many customers are relying more heavily on their water treatment suppliers for high-quality consultative services, in order to diagnose and troubleshoot problems with their systems, according to Mr. Remy. "Customers are increasingly looking for total solutions to their water treatment issues, including bundling chemistry, equipment, and service capabilities. Customers are also expecting the use of new information technologies to better monitor and control the performance of their water-based systems," she explains.
Consolidation among the major players in many industry segments has also created a need for large, global suppliers to meet the complex needs of these customers, through the consistent deployment of best practices and innovative business models across many applications and geographies, according to Mr. Remy.
"Customers, especially those with multiple locations, are increasingly favoring one-stop shopping from larger suppliers with a complete range of products and services, strong technological resources and worldwide geographical coverage," adds Mr. McKeon. Reducing the number of suppliers also simplifies procurement arrangements, allowing these customers to focus more closely on their manufacturing operations.
"Ever-increasing environmental standards and the use of quality processes, automation and other non-chemical services to lower overall operating costs are other key issues in the water treatment market," says Harold Moffat, vice president of marketing and specialty sales with Ashland Specialty Chemical Company's Drew Industrial business.
The use of automated chemical feed systems has increased as a way to improve control and enhance operator safety, notes GE Betz's Mr. Mc-Keon. The growth of recycling programs in response to water shortages and the rising costs for raw water and waste disposal is another key factor affecting the market, he adds.
Service Component Emphasized By Market Leaders
Since GE Specialty Materials' $1.8 billion acquisition of the BetzDearborn water treatment business from Her-cules Inc. in 2002, GE Betz has emerged as one of the top players in the water treatment market, and the company is employing the integrated service and product business model. "Becoming part of GE has expanded our customer reach and level of service, and accelerated our development of new products by providing access to the innovative technologies generated by GE's other business activities," says GE Betz's Mr. McKeon. GE Betz is the fifth component of GE Specialty Materials, which includes GE Sili-cones, GE Specialty Materials, GE Superabrasives and GE Quartz.
GE Betz added to its portfolio earlier this year with the acquisition of Osmonics Inc., a manufacturer and marketer of high-technology water purification, filtration and water-handling systems. The integration with GE Osmonics and GE Water Technologies has strengthened the company's position as a total provider of engineered chemical and mechanical solutions by broadening its portfolio of products and services for industrial applications, says Mr. McKeon. It has also taken GE Betz into the residential water market, and expanded its services for institutional, commercial and municipal facilities. GE Betz hopes to leverage technologies developed from other GE companies, such as non-destructive testing and telemetry systems from GE Medical Systems and GE Aircraft Engines
GE Betz plans to commercially launch several technology innovations later in 2003, says Mr. McKeon. Recent additions include RediFeed, a compact, controlled solid-chemical feeding system for delivering GE Betz water treatment products to smaller commercial and institutional cooling and boiler systems. A second offering is Shear Resistant Polymer, a centrifuge additive that the company says resists shear stress for improved dehydration in sludge dewatering.
Other new offerings include APES, a new co-polymer for deposit control in open recirculating cooling systems with high hardness, soluble iron, elevated temperatures and suspended solids. PY-COAT is a coke inhibitor technology for use in ethylene plant cracking furnaces. In 2001, BetzDearborn and SK Corp. formed a strategic alliance for the coke inhibition program. Permatreat RPT 1903 is a chrome-free surface pretreatment program for improving lacquer adhesion on aluminum beverage can ends that replaces chrome phosphate, thereby eliminating the effluent disposal issues and other environmental problems associated with toxic chromium chemicals. Also, last year, GE Betz opened a facility for regenerating membrane separation elements at its production complex in Bakersfield, Calif.
Running neck-and-neck with GE Betz, Ondeo Nalco Company has also embraced the integrated product and service model. Suez Lyonnaise des Eaux acquired Nalco Chemical for $4.5 billion in 1999. Renamed Ondeo Nalco, it now operates as subsidiary of the Suez Environment Industrial Services division, part of the global energy, water and waste services group Suez. In 1999, Suez also acquired the water treatment company Calgon Corp. for $425 million.
In 2001, Suez united its water-related companies under a single name, Ondeo. Ondeo includes Ondeo Nalco (water treatment and process chemicals for industrial markets), Ondeo Services (formerly Lyonnaise des Eaux- municipal markets for drinking water, wastewater, resource management and storm drainage), Ondeo Degr'mont (design, building, maintenance and operation of water and wastewater plants) and Ondeo Industrial Services (a specialized business unit focused on industrial customers that combines engineering support from Ondeo Degr'mont and technical and services support from Ondeo Nalco).
As part of the focused service approach, Ondeo recently formed two alliances. Earlier this year, Ondeo Nalco and Ecolochem Inc., a Norfolk, Va.-based mobile and outsourced high-purity water treatment service provider, formed a new joint venture for outsourced high-purity water solutions, Process Water One. The new entity will design, build, own, operate and maintain industrial water production facilities under long-term contracts, and combine equipment, chemical treatment and operating services. Typical technologies used include clarification, membrane or media filtration, disinfection, reverse osmosis, ion exchange, gas transfer membranes, electrodeionization and final polishing.
For a specialized offering to the semiconductor market, Ondeo Nalco last year formed a strategic alliance with Cabot Microelectronics Corp., a provider of chemical mechanical planarization (CMP) slurries, to offer flexible strategic sourcing of wastewater management and water recycle (WWM/WR) to CMP customers in defined segments of the electronics industry. Cabot brings its knowledge of CMP consumables and the CMP process, and Ondeo Nalco is delivering the WWM/WR strategic sourcing packages directly to customers.
"Ondeo Nalco considers new technology as the key value driver of the water treatment industry and is continuously introducing new chemical programs to the market and is investing heavily in automation and control," says Ondeo Nalco's Mr. Remy. For example, the company plans to introduce a new platform-changing technology that will include an automated monitor and control system for cooling tower operations. This technology independently senses the onset of corrosion, scale, and biofilm and automatically takes action to prevent their build-up in controlling in real-time chemical dosage.
Ashland Specialty Chemical Company's Drew Industrial Division, the third largest player in the water treatment market, is likewise emphasizing a service-oriented approach. Drew Industrial's Onguard automation and control systems for water systems will soon be communicating with the company's new secure extranet system, Onguard On-Line electronic service. This system will collect and store a variety of water system controller and operational information in an Ashland server, fully accessible to customers or Drew sales representatives, and it will allow alarm and reports to be automatically sent to a custom contact list.
"Onguard On-Line electronic service establishes a system that maintains local measurement and control and also incorporates continuous alarming plus Internet monitoring and reporting. The system will provide our customers further improvements in efficiency and system management capability," Ash-land's Mr. Moffat notes.
The company has developed new generation cooling water products. These two product lines, Performax Millennium and Enviroplus cooling water treatments, incorporate biodegradable raw materials and other new chemistries that provide low impact while providing a new level of organic cooling water treatment performance, says Ashland's Mr. Moffat.
Chemical Suppliers Face Price Pressures
The emphasis on service is critical for water treatment companies and chemical suppliers as they face price pressures on the chemical side in water treatment. In January, Dow Liquid Separations announced plans to increase the global selling price of its Dowex ion exchange resins by an average of 6 percent across its range of products to reverse years of falling prices. Dow Liquid Separations produces both membrane and ion exchange products, including Filmtec membrane elements and Dowex ion exchange resins.
Although facing pricing pressures, Dow Liquid Separations, part of Dow's specialty polymers business, is one of the fastest growing divisions of the company, says Jim McIlvenny, business vice president with Dow Specialty Polymers. Dow Liquid Separations' most recent expansion was completed in April 2001, at a cost of $40 million. The expansion doubled capacity and completed several automation projects at the company's Minneapolis, Minn.-based FilmTec membranes plant.
Pricing pressures are also apparent at Calgon Carbon Corp., whose chairman chairman, president and CEO James A. Cederna resigned after the company posted a roughly $27 million loss in 2002 on revenues of $258.1 million. He had been president and CEO since 1999 and chairman since 2001. John Stanik was named president and CEO and Thomas A. McConomy was named chairman in late April.
Calgon Carbon has suffered from declining sales and earnings over the past three years. The company has had difficulty in raising prices of activated carbon, its largest revenue source. This resulted in a $4 million to $8 million negative impact on its operating income over a three-year period from 2000 to 2002. From 2000 to 2002 on an annual percentage rate basis, sales of activated carbon declined 10 percent. Sales from service, engineered solutions and consumer sales increased 1 percent, 4 percent and 6 percent, respectively.
Although Calgon Carbon posted some improvement in 2002 over 2001, the company is still under pressure. In 2002, sales from its activated carbon business were $109.3 million (+8.6 percent) year-over-year. Sales from services were $93.5 million (+1.3 percent), and sales in its consumer business were $23.9 million (+15 percent). However, sales in engineered solutions declined almost 17 percent to $40.1 million.
Through 2005, the company expects operating margins for carbon to remain unchanged, for the service business to decline, and for its engineered solutions and consumer business to improve. Calgon Carbon expects its core business of activated carbon will see slow growth, so it is banking on growth in certain geographic markets and in select areas.
To capture growth in Asia, last year, Calgon Carbon formed a joint venture with Mitsubishi Chemical Corp., the largest manufacturer of activated carbon in Japan. The new company, Calgon Mitsubishi Chemical started operations last October. Calgon Carbon also built a carbon manufacturing facility in China, which is in the start-up phase. In Europe, the company expects to increase charcoal sales, where it currently has a 20 percent market share, through alliances and to grow industrial service sales. In the Americas, sales growth is anticipated to result from the following: regional service growth, increases in activated carbon market share, sales of new systems and equipment, license fees from its process for inactivation of cryptosporidium in drinking water, and new consumer products.
The company is also continuing cost-cutting measures. It plans to discontinue operations of one of its three activated carbon lines at its Catletts-burg, Ky., facility in May because installing pollution control equipment would cost about $7 million. The activated carbon line and associated equipment has a net book value of roughly $3.0 million. The Catlettsburg facility is the company's largest activated carbon manufacturing and reactivation facility.
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