Q4 Spot Prices Rise, Optimistic on Refrigerant High Demand

Minsheng Securities published a research report stating that on the supply side, in the second half of 2024, the country newly allocated an additional 35,000 tons of R32 quota, which is only valid for the year. However, as the fourth quarter begins, mainstream refrigerant manufacturers plan to enter the maintenance period, thus the production and supply capacity of the industry in the fourth quarter is relatively limited compared to other quarters. Leading companies have joined hands to investigate and crack down on illegal production and sales of HFCs, which will further clear illegal capacity and promote the healthy development of the industry, preventing illegal capacity from entering the market and disrupting it during the maintenance period. The export market is relatively strong, partly due to the restocking demand in the European and American markets, and partly because of the hot weather in Europe this summer, leading to a strong demand for air conditioner inventory. Domestic sales have turned positive year-on-year, partly due to domestic policy support, such as the "trade-in" policy that has stimulated domestic consumer demand, and partly because after a period of domestic trade destocking, the domestic market has returned to the procurement and consumption rhythm.

Event: Entering the fourth quarter of 2024, the prices of some third-generation refrigerant products continue to rise. As of October 11, 2024, the domestic trade price of R32 reached 38,000-39,000 yuan/ton, an increase of 1.99% compared to the median on September 30, and the order situation of enterprises has significantly improved, with some actual orders even rising to 40,000 yuan/ton; the price of R143a reached 33,000-34,000 yuan/ton, an increase of 4.69% compared to the median on September 30.

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The industry's supply capacity is limited during the maintenance period, and leading companies have joined hands to investigate and crack down on illegal capacity. On the supply side, in the second half of 2024, the country newly allocated an additional 35,000 tons of R32 quota, which is only valid for the year. However, as the fourth quarter begins, mainstream refrigerant manufacturers plan to enter the maintenance period, such as Juhua Stock, which is expected to undergo an annual system overhaul in the fourth quarter, and Dongyue Chemical, which is also expected to be out of service for maintenance for 10-15 days in the fourth quarter. Therefore, the production and supply capacity of the industry in the fourth quarter is relatively limited compared to other quarters. In September, leading refrigerant companies jointly signed and issued the "Initiative on Establishing a Special Fund for Investigating and Cracking Down on Illegal Production and Sales of HFCs," aiming to investigate and crack down on illegal production and sales of HFCs, which will further clear illegal capacity and promote the healthy development of the industry, preventing illegal capacity from entering the market and disrupting it during the maintenance period.

External demand remains strong, and domestic demand in the fourth quarter began to grow year-on-year. On the demand side, according to data from Aowei Yun Network, the global air conditioner shipment scale for the 2024 cold year reached 196 million units, a year-on-year increase of 10.75%, maintaining a high growth rate. As the world's main air conditioner producing country, China produced 178 million air conditioners in the 2024 cold year, a year-on-year increase of 10.5%; sold 173 million air conditioners, a year-on-year increase of 11.4%. In terms of sales structure, the export market remains strong, with a total of 82 million air conditioners sold, a year-on-year increase of 30.9%, and the domestic sales volume was 91 million air conditioners, a year-on-year decrease of 1.8%. The export market is relatively strong, partly due to the restocking demand in the European and American markets, and partly because of the hot weather in Europe this summer, leading to a strong demand for air conditioner inventory. The domestic demand for air conditioners has turned positive year-on-year in the fourth quarter, according to data from Industry Online. The domestic sales production growth rate of air conditioners in China for October, November, and December is 5.2%, 8.0%, and 10.4%, respectively. Domestic sales growth turned positive, partly due to domestic policy support, such as the "trade-in" policy that has stimulated domestic consumer demand, and partly because after a period of domestic trade destocking, the domestic market has returned to the procurement and consumption rhythm. Therefore, the year-on-year growth of the domestic trade market is expected to be maintained. So, with certain supply restrictions on the supply side and year-on-year growth on the demand side, the prices of refrigerants for domestic and foreign trade have begun to rise steadily.

In 2025, the total quota of HCFCs will be reduced as planned, and it is expected that the newly added R32 quota will have a minimal impact on market prices. In 2025, the second-generation refrigerants will continue to be reduced as planned. According to the "2025 Annual Ozone-Depleting Substances Quota Total Setting and Allocation Plan (Draft for Comments)" issued by the Ministry of Ecology and Environment, the production and use of HCFCs in China will be reduced by 67.5% and 73.2% of the baseline value, respectively. Among the varieties with larger usage, such as R22, R141b, and R142b, the production quotas for 2025 will be reduced by 32,779, 11,938, and 5,995 tons, respectively, compared to 2024, and the domestic use quotas will be reduced by 31,044, 7,354, and 4,559 tons, respectively. On the third-generation refrigerants, according to the "2025 Annual Hydrofluorocarbon Quota Total Setting and Allocation Plan (Draft for Comments)" issued by the Ministry of Ecology and Environment, on the basis of the 2024 quota, an additional 45,000 tons of R32 production quota will be issued in 2025, all for domestic use, to avoid the potential risk of R32 market supply and demand imbalance. On the one hand, the 45,000 tons of R32 quota issued in 2025 is lower than the 35,000 tons of temporary quota issued in the second half of 2024 (i.e., 70,000 tons on an annualized basis), which can also reduce the sudden risk of the temporary quota issued by the Ministry of Ecology and Environment to a certain extent; on the other hand, assuming that the quota for next year is sufficient, leading companies can also release and arrange reasonable maintenance to maintain market price stability.

Investment advice: Considering that the prosperity of refrigerants is expected to continue, the profits of refrigerant companies may continue to increase with the rise in transaction prices. It is recommended to focus on (1) Sanmei Stock (603379.SH), with a high proportion of refrigerant business; (2) Juhua Stock (600160.SH), a leading refrigerant company; (3) Yonghe Stock (605020.SH), with the refrigerant and polymer segments advancing side by side; (4) Haohua Technology (600378.SH), with a large refrigerant capacity of its subsidiary Sinochem Blue Sky.