Honeywell And Chemours Seize Climate Change Deal Opportunity

| About: The Chemours (CC)

Summary

International agreement by almost 200 countries reached to cut HFC by 85% by 2045 to avoid “super” greenhouse gas emissions from refrigerants.

Phaseout of HFCs from cooling appliances to start 2019-2028 (depending on country).

Agreement results from initial US and Chinese efforts to agree to exit HFCs. India had critical role in final negotiations.

Large corporations have provided the solution to closing down HFC use.

Honeywell and Chemours Company both well positioned with new refrigerants on the market.

Source: Chemours Company

In an overlooked development that is of big significance to controlling global warming, the Kigali conference in Rwanda has just concluded a binding agreement, with real teeth, that it is estimated will avoid ~0.5 C warming.

In an "out of the frying pan into the fire" process, the original Montreal protocol successfully led to the phase out of chlorofluorocarbons (CFCs) for use in refrigerants to reverse the hole in the ozone layer. They were replaced by hydrofluorocarbons (HFCs), which while starting to fix the ozone hole, turned out to be super greenhouse gas emitters, being thousands of times more potent than CO2.

So began a protracted process to find refrigerants that were not major greenhouse gas emitters and which didn't make the ozone hole worse. This process has lasted almost a decade, but this month, a major international agreement has been reached.

The Kigali HFC phase-out

The Kigali phase-out agreement, which is an amendment to the Montreal protocol, involves a three-step approach. Wealthy nations are required to start wind-down in 2019, reaching 85% reduction (2011-2013 base) by 2036. Africa, Latin America and China are required to start phase out by 2024, reaching 80% reduction of 2020-2022 levels by 2045. India, Pakistan and 8 West African countries have agreed to start the exit from HFCs in 2028 and reach 80% reduction (2024-2026 baseline) by 2047.

India had a significant role in getting developed countries to increase their ambition in reducing HFCs in return for increasing its own ambitions. India also agreed to eliminate, with immediate effect, emissions of HFC-23, which has 14,800 times greenhouse warming compared with CO2. China and the US then agreed to eliminate HFC-23 with effect by 2020. Developed countries agreed to reduce HFC use by 70% by 2029 and by 85% by 2036.

There is an incentive for developing nations to accelerate the timeline. A Public-Private initiative to speed up the transit from HFCs to more efficient and less environmentally damaging coolants already has $80 million pledged from Governments and 19 philanthropy groups.

This agreement has a history going back to 2008. It is no coincidence that in 2008, Honeywell (NYSE:HON) and DuPont Chemicals had developed an alternative to HFCs, which they patented. This provided a strong commercial incentive to phase out HFCs. The US (biggest user) and China (biggest producer) agreed to phase out HFCs in 2013. The chemical industries of both China and the US were engaged to find HFC replacements and scale up production.

There are several important aspects of the Kigali agreement that might end up being relevant to the COP21 Paris agreement on greenhouse gas emission reductions.

Firstly, the US, China and India each had key roles in negotiating the agreement. With these three countries playing a constructive role, a major segment of the problem was at the negotiating table in formulating the agreement.

Given the problems of the US Senate, the Kigali Agreement (which is an amendment to the Montreal Protocol), like the COP21 Paris climate agreement, has been entered into by Presidential decree leveraging off the Montreal Protocol which was approved by the Senate in 1988.

Secondly, an interesting thing about this agreement is the role played by the corporations, which have been involved with the problem, in helping solve it. The later entry by India in HFC reduction seems to be related to date of expiry of key early patents by Honeywell and DuPont (DD) (now Chemours Company), and also presumably a lot of experience in scale up cost reductions.

The companies, which will benefit from the Kigali agreement

While the Kigali agreement has been years in the making and no doubt its success comes from constructive negotiations among key governments (notably the US, China and India), there are two corporations that have been working on the technical side, building new intellectual property, and scale up to capitalise on international agreement.

Two companies, Honeywell and Chemours Company, stand out as being interesting from an investment perspective in relation the HFC phase-out, as they have key patents on new HydroFluoroOlefin (HFO) chemistry. New low greenhouse emissions products are significant new market opportunities for these companies and this business will grow rapidly.

Chemours Company (NYSE:CC), the recent spinout of the DuPont Co. Chemicals Business, is aggressively commercialising Opteon YF, a HFO refrigerant with 99.9% reduction in greenhouse gas emissions compared to the current HFC-134a used in the automotive industry. Opteon is a significant part of the growth story of Chemours Company and it expects to roll out Opteon YF in more than 24 million vehicles by the end of 2016. The Kigali agreement has come at an excellent time to accelerate the growth of this market opportunity.

There are four more Opteon products released, which expands the HFO chemistry beyond automotive use to stationary & transport container refrigeration water chillers (Opteon XP10), supermarkets & cold storage (Opteon XP40), refrigerated trucks & trailers (Opteon XP44) and air conditioning heat pumps & water chillers (Opteon XL55). The reduction of greenhouse gas emissions in the four new Opteon products (51-67% lower) is not as dramatic as for Opteon YF for automotive air conditioning (99.9% lower), but it is clear that these products are part of the exit from HFC use.

Chemours Company manufactures its Opteon products in China.

Honeywell

Honeywell has a series of HFO products, which parallel those from Chemours Company.

Honeywell considers its "Solstice" line of refrigerants is ready to be a $1 billion business. The plan is to use "Solstice" products as "drop-ins" to replace existing HFC coolant products. Honeywell already has $3.4 billion of long-term agreements with car companies and appliance manufacturers.

Just as Chemours has targeted versions of its products, so too does Honeywell.

Conclusion

The Kigali agreement to phase out HFCs is a major step forward in efforts to prevent acceleration of global warming, and it is also an interesting example of how the industry can speed up change. Here I've highlighted two significant chemical manufacturers who have invested heavily in finding alternatives to HFCs well ahead of agreement being reached to phase them out. With the strong Kigali agreement, I suggest that these developments are likely to provide major new profit centers for both Chemours Company and Honeywell.

Both companies have HFC replacement products that will receive a major boost with the completion of the Kigali agreement. This is a good example of a specific product area where action on greenhouse gas emissions will have a major positive impact. Worth a look if you are revising your investment portfolio to include emerging products addressing climate change.

Chemours Company has had a strong 2016, starting from a low of $3.30 in mid-January to closure at $16.79 in the latest trading. Honeywell has recently experienced close to a 10% correction from a year high of $120.02, on news of profit guidance. It may be starting to recover at $108.96 in latest trading, perhaps due to the announcement about the HFC agreement?

I am not a financial advisor. I research business opportunities in the energy/climate change area. If my commentary is helpful, please consider following me.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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