Oil field applications are an important end use for WSPs, but demand from this sector can be volatile.

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1 The term water-soluble polymer (WSP) encompasses a wide range of synthetic, semisynthetic, and natural materials. WSPs differ in molecular structure, but they share an important attribute: all are soluble in water under some conditions. For WSPs as a group, the range of applications is broad, but individual polymers typically have a smaller set of end uses. Water treatment is the single most important end use for WSPs, especially synthetic materials such as polyacrylamide. In North America, Western Europe, and Japan, municipal and industrial water treatment markets are large and well-established, and the outlook for consumption growth is moderate. In contrast, demand growth in China will be robust because of the government s growing attention to water pollution and industrial effluents. Food applications another major end use are dominated by natural WSPs, including casein, gelatin, xanthan gum, guar gum, carrageenan, and pectin. These polymers serve as thickeners and stabilizers in yogurt, salad dressings, almond milk, and other foods. Demand for natural WSPs will benefit from major trends in the food market, including consumer demand for natural ingredients and foods that promote health and wellness. Building products are another important end use for WSPs, notably polyethylene glycols (PEGs) and cellulose ethers. PEGs are starting materials for polycarboxylate ethers (PCEs), a family of concrete additives. PCEs function as superplasticizers, improving concrete s workability and strength. Demand for PCEs (and their PEG precursors) will see above-average growth, especially in Asia, as PCEs replace first- and second-generation concrete plasticizers. Oil field applications are an important end use for WSPs, but demand from this sector can be volatile. 1

2 In the past few years, comparatively low crude oil prices have reduced hydraulic fracturing (fracking) activity in the United States, depressing demand for guar gum and derivatives. In contrast, demand for polyacrylamide widely used in enhanced oil recovery (EOR) operations in China remains strong. Individual WSPs face market challenges, but the outlook for WSPs as a group is positive because of their broad utility. 1

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4 A Swiss army knife has a tool for every application. Similarly, there s a water-soluble polymer (WSP) for almost every end use. These broadly useful materials are employed in a range of applications, including water treatment, food and beverages, building products, oil field chemicals, and papermaking. In addition, they serve as suspension aids in polymerization reactions, dispersants in laundry detergents, excipients in pharmaceuticals, sizes in textile production, and thickeners in toothpaste and other personal care products. 3

5 Synthetic polymers dominate the WSP market, accounting for 68% of consumption (on a volume basis) in Natural polymers were second, responsible for 21% of demand. 4

6 Synthetic WSPs are derived from petrochemical feedstocks like acrylamide and ethylene oxide. Polyacrylamides, polyethylene glycols, polyvinyl alcohol, and polyacrylic acid are among the most important synthetic WSPs. Scale is a key source of competitive advantage. In general, the leading players operate large-scale plants, are back integrated to monomer production, and have a global manufacturing footprint. Many are horizontally integrated, offering a portfolio of synthetic WSPs for specific end use markets such as water-treatment. Important producers of synthetic WSPs include SNF, Kemira, Kuraray, and Dow Chemical. 5

7 Semisynthetic WSPs are produced by the chemical modification of natural materials like wood pulp and cotton linters. Carboxymethylcellulose, methyl cellulose, and related polymers such as hydroxypropylmethyl cellulose are among the most important semisynthetic WSPs. Proprietary technology is an important source of competitive advantage, enabling the production of higher margin semisynthetic WSPs such as hydroxyethylcellulose. Most of the leading players are not back integrated to monomer production; they rely on purchased raw materials (wood pulp and cotton linters). Major players have a global manufacturing footprint and are horizontally integrated, offering a portfolio of semisynthetic WSPs for specific end use markets such as building products and coatings. Important producers of semisynthetic WSPs include CP Kelco (part of JM Huber) and Dow Chemical. 6

8 Natural WSPs (hydrocolloids) are derived from plant and animal materials or produced in fermentation reactions. Important natural WSPs include gelatin (derived from bones and hides), casein and caseinates (derived from milk proteins), guar gum (derived from guar seeds), xanthan gum (a fermentation product), gum arabic (a tree exudate), and carrageenan (derived from seaweed). Access to raw materials is critical to success. Leading producers generally have processing facilities in raw-material producing regions. For example, Cargill, FMC, and CP Kelco produce refined carrageenan in the Philippines, which is a major source of cultivated red seaweed (Eucheuma). Supply-chain management expertise (the ability to source high-quality raw materials at competitive prices and conditions) is an important source of competitive advantage. The ability to carry out industrial-scale fermentation reactions is essential for the production of xanthan gum, gellan gum, and other natural polymers. Major multinational producers of natural WSPs include Gelita, Cargill, DuPont Danisco, CP Kelco, and FMC. There are many additional participants, some focusing on local or regional markets only. 7

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10 WSPs are an important part of the water treatment toolkit, which also includes inorganic chemicals and physical processes (e.g., nanofiltration, reverse osmosis). Applications for WSPs include municipal water treatment (drinking water, wastewater treatment) and industrial end uses (raw water treatment, process water treatment, sludge dewatering). 9

11 Polyacrylamides (PAMs) are the workhorses of the water treatment industry. They serve as flocculants, facilitating the separation of solids from liquids. Polyacrylamides are used for the clarification of wastewater, process water, cooling circuit water, and potable water, and for thickening and dewatering solid suspensions, including municipal effluent and sewage sludge. Quaternary ammonium polymers such as poly(diallyldimethyl ammonium chloride) (polydadmac) and polyamines such as poly(epichlorohydrin dimethylamine) (poly[epi DMA]) serve as coagulants, primarily in the production of drinking water. Polyacrylic acid (polycarboxylate) functions as an antiscalant and dispersant, inhibiting scale deposition in boilers, heat exchangers, and cooling towers. SNF is the global leader in polyacrylamides; its strengths include scale, back integration to acrylamide monomer, broad geographic reach, and horizontal integration (the company also produces quaternary ammonium polymers and polyamines). Other important participants include Kemira, Nalco (part of Ecolab), and BASF. Participants rely on different strategies for success. SNF is the low-cost leader in this industry. Other participants, including Nalco, compete by offering a high level of service and tailored solutions, especially to industrial customers. Municipal markets tend to be driven almost entirely by cost. 10

12 Growth drivers for the water treatment industry include regulation, industrialization, and urbanization. Robust municipal water treatment systems are essential for city living. The Chinese wastewater treatment market will grow as a result of regulations that took effect January 1, There will be growth opportunities in Mexico and Brazil as local governments set goals to increase access to potable water and build sewage treatment infrastructure. Water treatment markets in North America, Western Europe, and Japan are mature, and per capita consumption of WSPs for water treatment is high. North American per capita consumption is especially high; in Canada, the remediation of oil sands tailings consumes large amounts of polyacrylamide. 11

13 WSPs function as thickeners and stabilizers in food and beverages. As thickeners, they influence flow and mouth feel; as stabilizers, they prevent phase separation. For example, WSPs suppress the formation of ice crystals in ice cream and prevent cocoa powder from settling out of chocolate milk. Other end uses include yogurt, cream cheese, salad dressings. jams, jellies, and jelly candies. 12

14 The great majority (93%) of WSPs used in food and beverage applications are natural materials. Casein (from milk) and gelatin (from animal bones and hides) accounted for slightly more than half of consumption in Several other polymers made up the remainder. There are many participants in this segment of the WSP market. Some companies focus on a single WSP, such as casein or gelatin. Others offer a portfolio of related materials, such as seaweed derivatives (carrageenan, alginates) or fermentation products (xanthan gum, gellan gum). Generally, there are a few to several strong players but no single dominant producer for each natural WSP. There is some regional dominance, however, as in the case of guar gum (which comes primarily from India) and xanthan gum (which is produced mainly in China). 13

15 Raw materials for some natural WSPs come only from certain parts of the world. Poor harvests or political unrest in those regions can lead to raw material shortages and increased prices. Food producers often deal with price volatility by reformulating their products, substituting a less expensive food grade WSP. The prices of locust bean gum and pectin have been volatile in recent years. Locust bean gum is derived from the seed of the carob tree, which grows in Mediterranean countries. Periodically, poor harvests result in raw material shortages and increased prices. When prices spike, ice cream producers replace locust bean gum with guar gum or tara gum. Pectin is derived from by products of the food processing industry (lemon, lime, and orange peel; apple pomace). In recent years, poor weather and citrus greening (a fatal bacterial disease) have devastated Central and South American citrus crops, leading to higher prices for citrus pectin. Pectin is difficult to replace because of its unique functionalities (it forms stable gels in high sugar products) and because standards of identity prohibit the use of thickeners other than pectin in most fruit butters, jellies, preserves, and jams. Food producers have more leeway to reformulation yogurt, gummy candies, fruit flavored juices, and carbonated drinks 14

16 In general, WSPs are on the right side of important trends in the food market. In developing nations, rising incomes, increased urbanization, and diet and lifestyle changes favor the growth of the packaged food industry (which is a major consumer of WSPs). Worldwide, consumer interest in healthy foods has led to increased consumption of good-for-you products like yogurt and almond milk (both use WSPs for thickening and stabilizing). Most of the WSPs used in food are plant- or animalbased, in line with the movement toward natural ingredients. 15

17 So what could possibly go wrong? Consumer perceptions can change rapidly often on the basis of incomplete or demonstrably false information resulting in lower demand. Carrageenan is a case in point. Carrageenan, a WSP derived from red seaweed, has a long history of safe use as a thickener in foods and beverages. The US Food and Drug Administration (FDA), the European Food Safety Authority (EFSA), and the Joint WHO/FAO Expert Committee on Food Additives (JECFA) consider carrageenan to be safe for human consumption. Recently, however, carrageenan has come under attack by activists who claim that carrageenan causes ulcerative colitis. As a result, several food producers (Stonyfield Organic, WhiteWave Foods, Califia Farms) voluntarily reformulated their products, replacing carrageenan with less controversial WSPs such as locust bean gum and gellan gum. In addition, the National Organic Standards Board voted to disallow carrageenan s use in foods that bear the USDA Organic label, in part because substitute thickeners are available. 16

18 Building products are important end uses for WSPs. WSPs are starting materials for polycarboxylate ethers (PCEs), which are concrete plasticizers. In addition, WSPs serve as thickeners for mortars, joint compounds, and grouts. WSPs are also used in coatings and adhesives. 17

19 Demand for polyethylene glycols (PEGs) for use in PCEs drives this segment of the WSP market. PCEs, which increase concrete s workability and strength, are steadily replacing other types of concrete plasticizers. Cellulose ethers such as hydroxypropylmethyl cellulose and hydroxyethyl cellulose are standard thickeners in mortars, joint compounds, grouts, and textured coatings. Major PEG producers benefit from economies of scale and back integration to monomer production. Leading cellulose ether manufacturers have proprietary technologies and offer higher-margin specialty semisynthetic WSPs. 18

20 In general, construction activity drives demand for these WSPs. Chinese consumption (and per capita consumption) is substantial due to the building booms of recent years. Western European per capita consumption is high because the region is a major manufacturer of PCEs. Japan is an important PCE producer as well. 19

21 Oil field applications are an important end use for WSPs. They serve as components of drilling muds, hydraulic fracturing (fracking) fluids, and enhanced oil recovery (EOR) systems. WSPs are the polymers in polymer flooding. 20

22 Polyacrylamides (PAMs) and guar gum are the most important WSPs in the oil field; together, they account for 85% of WSP use in this application. They serve as thickeners, drag (friction) reducers, and gellants in a variety of fluids. The bulk of polyacrylamides use is in China for enhanced oil recovery (EOR). The bulk of guar gum consumption is in the United States for fracking. Consumption of xanthan gum (which is used in drilling muds) is split between the United States and China; consumption of carboxymethylcellulose (also used in drilling muds) is split between Western Europe and the United States. (Western European users of CMC include international oil field service companies, which export the product as part of a service package to petroleum producing countries; final consumption occurs outside of Western Europe.) 21

23 The outlook for growth is mixed. In China, demand for polyacrylamides widely used in enhanced oil recovery (EOR) operations remains strong. In contrast, US demand for polyacrylamides, guar gum, and xanthan gum has been depressed in the past few years. Low crude oil prices have reduced drilling and hydraulic fracturing (fracking) activity in the United States, depressing demand for WSPs in oil field applications. 22

24 Guar gum prices have been volatile. U.S. demand for guar gum soared in 2010 as hydraulic fracking activity increased, leading to shortages and higher prices for guar gum. Manipulation of Indian commodity derivatives markets and stockpiling by oil service companies also contributed to the price bubble; prices peaked in (Almost all guar gum is sourced from India.) The bubble burst in late India s Forward Market Commission, which regulates commodity derivatives trading, cracked down on speculation and price rigging, oil service companies developed replacement products, and farmers in India increased guar seed production significantly. The result was a market glut and dramatically lower prices for guar gum in 2013 and Prices fell further in as the reduction in fracking activity led to lower demand for guar gum. 23

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26 Individual WSPs faces challenges, including overcapacity (xanthan gum, carboxymethylcellulose), swift changes in consumer preferences (carrageenan), and volatile demand from the oil field sector (polyacrylamide, guar gum). 25

27 The outlook for WSPs as a group is positive because of their broad utility. Positive factors include regulation-driven demand growth for WSPs in water treatment uses in China; steady growth in the large food and beverage markets; and the expansion of PCEs market share. 26