R-22 Pricing: Where Will it Stop?

“Where has all of the R-22 gone?”the question most within the industry are asking lately.

In the first quarter of 2012, the market saw an unanticipated price increase of over 100%! This is not unexpected since R-22 is a commodity and follows the simple base economic supply vs. demand relationship (http://tinyurl.com/dyomler).  It’s simple ECON-101: the EPA shrunk supply so prices increased.

Below is some information on what factors are plaguing the market and creating high cost R-22.

Demand Status

January 1st 2010: No more HCFC-22 equipment was supposed to be produced. Demand for R-22 was supposed to go down as the industry switched over to R-410a units and other retrofit options. As we can see below this did not occur:

“The magic moment of Jan. 1, 2010 when HCFC-22 equipment would no longer be manufactured ended up being magical for only a few months.  By the middle of 2010, a number of manufacturers had begun to ramp up production of such equipment and, through a loophole in the regulation, dry-shipped them without the refrigerant. Several industry observers think the shipments are in the tens of thousands with one such observer …millions will be sold.”  Ted Gartland of Allied Representatives

The reasons for the development – which, to many, was unexpected, include:

  • The original U.S. Environmental Protection Agency (EPA) ruling of 2009: designed to curtail use of R-22, this states that entire systems could not be manufactured and that any replacement components for aftermarket use could not be pre-charged with the refrigerant.
  • The fact that condensing units constitute a component not an entire system.
  • There is still an ample supply of R-22 at fairly reasonable prices.
  • A sluggish economy is helping prop up R-22 supplies.
  • There is a customer demand for the less expensive R-22 components to use in repair of older R-22 components, rather than changing out to R-410A a/c equipment.”

(source: ACH NEWS/Peter Powell)

With the addition of dry shipped units into the market throughout 2010 and 2011, along with the industries hesitance to retrofit R-22 units as the refrigerant was readily available at economically feasible pricing through 2011, installed inventory has not greatly reduced. Therefore, demand has stayed consistent from 2010 until today.

Supply Status

As R-22 use and units continued to stay consistent and the legal controls did not reduce its prevalence in the market the EPA took drastic methods to force change in the market.

“On December 30, 2011, the EPA issued a rule for further reduction to the production and importation rites of R-22, than was put in place on January 1, 2010. Original plans called for a 10% reduction to the previous year’s numbers. The proposed rule put everything on hold while the industry waited on an official number from the EPA.

On Friday, January 20, the EPA shocked the world by stating these reductions would be a staggering additional 35% (total reduction of 45% from last year’s numbers). This has to go through several legal channels, and the EPA says it cannot issue the final ruling for 45-90 days, but most industry experts think this number will stick.”  (Herring, Charles. “R22 Pricing and Availability.” )

Through government involvement the supply of virgin imported or manufactured R-22 was and will stay reduced by 35%

 

 

 

 

 

 

 

 

 

 

 

The above graph represents the relationship between supply and demand of R-22 in the current market.  The black line represents the consistent demand (quantity) to price relationship. As price of R-22 goes down the quantity demanded goes up as people install more dry shipped units and hold off on retrofitting.

  • The red line represents the consistent supply relationship before EPA interaction. As price goes up producers are willing to produce more R-22 (taking feed product from other products and bringing it into the market as R-22)
  • The intersection of the black and red line represents market equilibrium! This is the point where supply = demand and price stays consistent.
  • The blue arrows represent a reduction in supply due to EPA interaction
  • The blue line now represents the new supply relationship because of shift in overall availability to produce virgin R-22
  • The Intersection of the black and blue line now represents the new price of R-22 in the market

The Solution

There are 2 ways we get down to the original market equilibrium price:

1.     Reduce demand by retrofitting units and no longer installing R-22 units (shifting black line left)

2.     Practicing responsible recovery and recovering more R-22 to be re-claimed, shifting the supply curve back to the right

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