By Stephen J. Hoffmann

       Chemicals have long been a basic component of water and wastewater treatment methods. Corresponding to the surge of technology-driven research in the water industry, however, chemicals are recognized as having a growing role in an increasingly complex technical and regulatory environment.
       Few segments within the water industry have undergone the number of ownership changes that the chemicals segment has experienced. While there is a dwindling supply of pure play public companies in water treatment chemicals, there are a number of companies that stand to gain from specialty market positions or the addition of chemicals to their business mix.
       According to the American Chemical Society, the demand for water treatment chemicals in the United States is expected to grow 4.5% annually rate through 2007. Much of the opportunity, however, results from worldwide demand. For example, China's demand for water treatment chemicals is projected to grow at an annual rate of 13% through the end of 2007. By the end of the decade the global water treatment chemicals industry is projected to be at over $7 billion. The market for water treatment chemicals is influenced by global population growth, increasingly stringent regulatory mandates, industrial recycling initiatives and multi-barrier approaches to drinking water treatment. The major applications of chemicals in water treatment include (1) coagulants and flocculants, (2) biocides and disinfecting chemicals, (3) corrosion and scale inhibiting chemicals, (4) filter media, adsorbent chemicals and resins, (5) softeners and pH adjusters, (6) antifoaming agents and (7) fluoridation agents.
       The most common type of treatment for surface water used for drinking supplies includes clarification and disinfection. Clarification is usually accomplished by a combination of coagulation, flocculation, sedimentation, and filtration. Coagulation and flocculation are two liquid/solid separation processes that are heavily dependent on the use of chemical additives. Suspended particles cannot be completely removed from water by plain settling, even when they are given very long detention times and low overflow rates. One of the properties of very small turbidity-causing colloidal particles that keep them in suspension is the small electrostatic charge they each carry. Coagulation takes place when the energy barrier between suspended particles is lowered and effectively eliminated. Coagulant chemicals neutralize the effect of the colloidal charges.
       Flocculation refers to the successful collisions that occur when the destabilized particles are driven toward each other. Agglomerates of a few very tiny colloidal particles then quickly bridge together to form larger and heavier particles or flocs. After the initial flash-mix of the coagulant with the water, a gentle agitation caused by slow stirring further enhances the growth of flocs by increasing the number of particle collisions and enabling removal in a sedimentation tank.
       Coagulation or flocculation is enhanced by the addition of chemicals to wastewater to aid gravity settling of suspended or colloidal materials. There are several different chemicals that can be used for coagulation. The most common coagulant is aluminum sulfate (alum); it has become the major coagulant for treating surface water. At the same time aluminum compounds produce an aluminum hydroxide sludge that is difficult to dewater. The mounting regulation of biosolids (sludge) has led to the greater use of polymeric compounds. Polymeric flocculants (synthetic organic chemicals) are long-chain, high-molecular-weight compounds that help the formation of larger, heavier floc particles.
       There are several reasons for the increased demand for water soluble polymers, including regulations and environmental concerns regarding volatile organic compounds in paints, adhesives and cosmetics; the phosphate components in detergents, municipal and industrial water treatment; and the need for paper recycling. Other factors include the growth of the processed food market, changes in paper processing technology, and the highly versatile nature of these compounds in terms of end uses and applications. Worldwide trends toward water reuse, waste minimization, stricter discharge regulations, equipment life extension, and productivity improvement also place a high demand on industrial water and process treatment chemicals. Interestingly, the current market breakdown for the U.S. shows that manufacturing industries account for almost 50% of shipments, followed by municipalities, electricity generators, commercial and residential users.
       In addition to the burgeoning industrial applications for wastewater treatment, chemicals used in clarifying drinking water have been found to be effective solutions for a growing list of contamination problems. In potable water treatment, slightly over two-thirds of polymer consumption goes for clarification. Enhanced coagulation, proposed as a best available technology in Stage 1 of the Disinfectants/Disinfection By-Products Rule, is capable of controlling disinfection by-products by removing natural organic matter precursors. The list of complex issues mitigated by water treatment chemicals in conventional unit processes continues to expand as research progresses: arsenic removal, reduction of hazardous sludge, enhanced filter performance, improved dewatering of sludges, and increased effluent quality.
       It is for precisely these reasons that the specialty chemicals business of the water and wastewater treatment industry holds so much promise for investors. Chemical companies are following the lead set by the large water purification and wastewater treatment systems suppliers in providing integrated solutions that maximize performance and minimize costs. This integrated approach is an established trend in the water industry but for water chemical marketers it is just unfolding. Because of the specificity of this concept and the fact that extensive knowledge of the industry is required to implement the strategy, several large players dominate the market for engineered water treatment chemicals.
       But there are challenges. The commodity component of water treatments chemicals has yet to recover from severe over-capacity associated with the last economic cycle and there is growing competition from non-chemical treatment options. Global economic conditions and deteriorating financial structures has led to a rather dramatic restructuring of the market. General Electric (GE) acquired BetzDearborn from Hercules and Nalco is an independent public company once again after being acquired from Suez by a private equity group and taken public.
       Nalco Holding (NYSE: NLC) is the world's largest marketer of specialty chemicals and services for water and industrial process treatment. Nalco engages in the research, development, manufacture, distribution and application of highly specialized chemicals in paper, chemical, steel, refining, mining, metalworking, electronics, municipalities, and food industries. Nalco epitomizes the integrated solutions approach by building value for customers through on-site expertise and innovative products supported by market focused applied research. It has also focused on the trend toward polymer technology with the introduction of ULTIMER, a water-soluble cationic polyacrylamide, that facilitates the separation of solids from liquids without the use of oils or surfactants. But, even as the largest independent water treatment chemicals play, the performance of Nalco has been mixed. The company went public at $15 per share late in 2004 and returned to that level just last month, recovering only recently to $17.45.
       GE Betz also produces and markets a wide range of specialty chemicals for treating water, wastewater and process systems with a particular emphasis on the chemical, petroleum refining, paper, automotive, electric utility and steel industries. Chemical treatment programs are applied for use in boilers, cooling towers, heat exchangers, paper and petroleum process streams, and influent and effluent systems. GE Betz monitors changing water, process and plant operating conditions so as to prescribe the appropriate treatment program to solve problems of clarification, scale, corrosion, deposit formation. The company's Novus polymers are advanced, cost-effective treatments for a wide variety of liquids/solids separations applications.
       There has been a great deal of consolidation in the water treatment chemicals business. With the addition of Ashland Inc. (NYSE: ASH), whose Drew Industrial subsidiary supplies specialty chemicals for industrial and institutional water treatment, these three firms hold about 35% of the U.S. market. And because this is a technology driven business further consolidation is likely (it will be informative to see who buys Sybron Chemical from Bayer). It will also be curious to see how Ashland uses its cash hoard from the sale of its Marathon oil interest; will it move deeper into specialty water treatment chemicals, integrate in water outside of chemicals, or choose an entirely unrelated path? But suffice it to say that consolidation leads to complementary technologies and capabilities that enhance the products and services that companies can offer to customers.
       There are more than 300 suppliers of water treatment chemicals in the U.S. alone; an eclectic mix of large and small, diversified and specialty firms. Several are public companies listed on U.S. exchanges including Chemtura/Great Lakes Chemical (NYSE: CEM), Ciba Specialty Chemicals (NYSE: CSB), Arch Chemicals (NYSE: ARJ), Albemarle Corporation (NYSE: ALB), Rhodia SA (NYSE: RHA), Air Products & Chemicals (NYSE: APD), Cytec Industries (NYSE: CYT), Olin (NYSE: OLN), Praxair (NYSE: PX), and Rohm & Haas (NYSE: ROH). A sample of private companies that engage in this sector include SNF Floerger of France, Eaglebrook, ChemTreat, GEO Specialty Chemicals, Kemiron, and Altivia Corporation. The water treatment chemicals business has historically been a fragmented, undercapitalized industry, vying to solve treatment problems with competing methodologies. That is changing with the consolidation of key water treatment chemical technologies and the emergence of integrated service chemical providers. The common characteristics of the companies that signify substantial opportunity are globalization, engineered chemical treatment, on-site innovation and in-depth technical service and support. Competition in these categories is likely to lead to further consolidation and an oligopolistic structure with important investment characteristics.
        Editor's Note: Stephen Hoffmann is a contributing editor to Water Investment Newsletter, 230 Main St., Halstead, KS 67056, 1 year, 12 issues, $140.
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