China's water problems offer growth to multinationals

The China opportunity

21 July 2009 00:00  [Source: ICB]

Scarcity and quality issues are driving the Chinese water treatment market
Cynthia Challener/Vermont

CHINA FACES severe water shortages and increasing demand for improved water management systems, and international water treatment chemical and equipment providers are responding by investing in R&D and manufacturing capabilities.

"The demand for water is simply exceeding availability of this resource in the region, and water treatment chemicals help alleviate the pressure on fresh water sources and improve wastewater effluent quality," says Glen Messina, CEO of Chemicals and Monitoring Solutions at GE Water.

Valued at $1bn (€71m) in 2008, China's water treatment chemical market is growing at a compound annual growth rate of 14%, and will reach $2.5bn by 2015, according to Vivian Chen, research manager for the environmental and chemical practice at consultancy Frost & Sullivan.

And investment to provide safer, purer water through treatment is a priority for the government, states Specialty Chemicals for Water Treatment: The Global Market, a November 2008 report by US-based market research firm BCC Research.

"Strong environmental protection laws and sharp government focus on developing water treatment infrastructure is boosting the construction of new water treatment plants and the water treatment chemicals market on the whole," the report observes.

China's 11th Five-Year Plan (2006-2010) includes numerous actions for improving water quality, plus a yuan (CNY) 18bn ($2.6bn) investment in seawater desalination. The government also announced in June 2008 further measures for reducing pollution, including water contamination, with more than 60 new quality-related standards and regulations in development.

Dramatically reduced water consumption allowances have already been set for several high-consumption industries, and the government is strongly emphasizing the use of recycling. For example, Beijing has implemented a goal of increasing wastewater reuse by 100% by 2013. Finally, price hikes for industrial water and increasing water tariffs in major cities have been implemented.

Water treatment companies also view the encouragement for consolidation within many major industries as beneficial.

"The more technically sophisticated companies will devote the necessary resources for investing in the right chemicals, equipment and technology to lower water consumption and improve water quality," says Paul Raymond, president of Ashland Hercules Water Technologies.

Frost & Sullivan divides the Chinese water treatment chemical market into five product categories: coagulants and flocculants; ion-exchange resins; corrosion and scale inhibitors; biocides; and activated carbon, pH adjusters and other inorganic commodities.

Corrosion and scale inhibitors account for more than 30% of revenue, says the firm, while ion-exchange resins make up the second-largest category at 10%. Competition from membrane technologies and other alternatives is rising, though. The more traditional activated carbon sector is close to maturity and suffers from shrinking profit margins due to excessive competition.

The greatest opportunities for growth, according to Chen, include environmentally friendly products such as water-soluble starch derivatives and polysaccharide modified flocculants as well as non or low-phosphorous formulations. High-tech biocides also present a potential opportunity.

Filters and membranes will be the fastest-growing equipment, according to BCC.

The industrial sector will remain the largest end-use market, but its growth will be outpaced by municipal and other end uses, according to BCC. Within the industrial segment, power generation is growing fastest, with sales of water treatment chemicals doubling over the next 10 years. China plans additional coal-fired capacity of 300,000MW.

"This growth will create the largest power plant chemicals market in the world," states BCC.

A FIERCE BATTLE IN THE WORKS
The overall water treatment market in the country is highly fragmented and dominated by price competition. "There are a large number of small- and medium-sized participants in this market, with no clear established branded ones," says BCC.

Chen predicts that the increasing presence of multinationals will culminate in a fierce battle. "An inevitable shake-out will change the market forever, leaving only a few dominant brands," she says.

At the same time, R&D is increasingly crucial. More diversified product lines will help companies remain competitive. End users are raising requirements for water treatment chemical suppliers, according to Chen. "Those manufacturers that are able to provide ad hoc solutions and services instead of merely products will be much preferred... in the long term," she says.

Major multinationals competing in China include Ashland, BASF (following the acquisition of Ciba), Buckman Laboratories, Dow (with the acquisition of Rohm and Haas), GE, Hakuto, Kemira, Kurita, Mitsui Chemicals, Nalco, SNF and Toray.

Investment activity by these international firms has been increasing over the past years, including the establishment of technical centers and manufacturing capabilities, often through acquisition or joint ventures with domestic players.

GE Water has been working very closely with the Chinese government, business partners and its customers. In 2005, the company established an R&D team at GE's China Technology Center in Shanghai. An expanded facility in Wuxi will manufacture and assemble products that meet the unique requirements for China. Products in development include packaged wastewater membrane bioreactor systems that allow for rapid deployment and ultra-low energy reverse-osmosis systems.

"Key factors to stay competitive in the market include bringing advanced technologies for tough-to-treat waters and targeted solutions designed for the China market," asserts Messina.

Ashland Hercules Water Technologies has also made several investments in China. In 2006, the company purchased water treatment chemical producer Nanjing Clear Environmental, acquired Degussa's water treatment business, which included a polyacrylamide industrial plant in Beijing, and bought out the domestic JV partner in a Shanghai plant. These moves were followed in 2007 with an increase of capacity at the Beijing site and the building of a technical center in Shanghai. Currently Ashland is expanding manufacturing capacity at the Shanghai plant.

"It is part of our strategy to invest in both manufacturing capabilities and technical know-how in China," stresses Raymond. "The goal is to balance local capabilities over the entire business profile and support local production and service ability with our global R&D capability and scale."

Both GE Water and Ashland see the emphasis on recycling as a major opportunity. Recycling poses challenges with increased scaling, corrosion and biocontamination. Growing demand for municipal waste water treatment systems is creating potential for liquid/solid separation tech-nology as well.

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