TIO2 producers are focusing on raw materials amid feedstock shortages

16 January 2012 00:00  [Source: ICB]

Fears over raw material availability in the medium term are leading titanium dioxide (TiO2) producers to tie up more closely with feedstock supplies.

Titanium is the ninth most abundant mineral in the earth's crust, but years of under-investment in the mining and processing of the ore has resulted in shortages of up to several million tonnes per year.

© Rex Features Demand for end uses such as coatings remains strong

Even in a situation where there is zero demand growth per annum the titanium ore market should remain under-supplied globally, at least through 2014, Hassan Ahmed, head of research at Alembic Global Advisors, wrote in a company note.

As a result, mining companies such as Australian-based firms Rio Tinto and Iluka are greatly inflating the costs of ilmenite and rutile, which contain up to 63% and 95% of TiO2, respectively.

Iluka raised rutile prices by 70-75% from July 1, 2011 - to a weighted average of $1,340/tonne (€1,021/tonne) - compared with the first half of the year, and recently announced another 80-85% hike on top of that, effective January 1, 2012.

In response to these concerns, several TiO2 producers are backward-integrating to secure raw-material supplies in an attempt to stem future cost hikes.

"Mining companies are being much more aggressive in terms of prices," said Luis Rebollar, managing director of Titanium Technologies Europe, Middle East and Africa at US-based DuPont. "We are working to secure supply as the price of ores will escalate ­dramatically."

US PLAYERS BACK-INTEGRATE

DuPont has signed a deal with Australia's Base Resources to offtake at least 72% of the expected rutile output from a mining project being developed in Kwale, Kenya. The agreement will span six years from the start of production in 2013.

In addition US-based Tronox said in September that it would acquire Exxaro's mineral sands operations. The agreement will see Tronox obtain South African mining firm Exxaro's stake in the two companies' 50:50 Tiwest joint venture in Western Australia, and 74% stakes in Exxaro's KZN Sands and Namakwa Sands operations in South Africa, in exchange for around 38.5% of Tronox's equity.

This will increase Tronox's production capacity to around 465,000 tonnes/year of TiO2 pigment, and backward integrate it with production capacity of about 95,000 tonnes/year of natural rutile, 380,000 tonnes/year of slag and 220,000 tonnes of synthetic rutile.

"This will make us independent heading into the future," a source at Tronox said.

Cristal Global is getting in on the act, using Finnish firm Outotec to build an upstream ilmenite smelting plant in Yanbu, Saudi Arabia.

The scalable facility - expected to become operational in the fourth quarter of 2013 - will be built on a turnkey basis and initially require 800,000 tonnes/year of ilmenite ore to produce 500,000 tonnes/year of 85% TiO2 slag, although a maximum capacity of 1m tonnes/year will be possible.

This, the Saudi Arabian TiO2 producer said, will bring significant cost savings and operational synergies.

"This shows that producers are not willing to go along with horrendously increased costing," another manufacturer said.

However, while producers are securing feedstock supply streams, the fundamental issue of structural ilmenite and rutile supply shortages in the medium-term remains.

The problem dates back over a decade, as overcapacity saw TiO2 prices remain largely flat for years. Between the fourth quarter of 1999 and the third quarter of 2009, average values rose by only €120/tonne in Europe.

During that time mining companies were unable to make money as any increases in the price of rutile or ilmenite would be impossible to pass through the supply chain to end-users. This, in turn, led to years of under investment in new mines.

Then, during the recession of 2008-09 several TiO2 plants were forced to close, shortening the market.

Recovery in 2010 saw demand rise by 10%, not least because of growth in the developing economies of China and Latin America.

With this surge in buying interest, the TiO2 market became under supplied and prices began soaring. Between the fourth quarter of 2009 and fourth quarter of 2011, TiO2 values in Europe soared on average by €1,340/tonne, to €2,950-3,330/tonne FD (free delivered) NWE (northwest Europe).

OPERATIONS PETERING OUT

Now, with ilmenite and rutile supplies running low, TiO2 producers have had difficulties this year keeping output up. One European manufacturer was able to run at only 50% of capacity at one point in 2011.

TiO2 demand is predicted to grow in line with global GDP - by around 3%/year - over the next five years, and mining companies are making the most of the situation with price hikes of their own. Many mining companies are also switching to quarterly or monthly contracts with their buyers - as opposed to the annual agreements held before - for greater price flexibility in a volatile market.

"The challenge now is to develop new mines, which requires investment, samples and permits. It can take up to five to eight years," said Rebollar.

This, however, is the time frame put to new mines in Europe or the US, but some of the most plentiful resources are found in areas where there is little or no infrastructure, such as east Africa and Madagascar.

HIGH-RISK CATEGORY

Ahmed said 40% of mine development activity through the end of the decade is in the high-risk category or prone to substantial delays. There is the prospect of medium-term ore supply shortages while hundreds of millions of dollars is still needed for investment into these new mines.

"Mining operations are petering out and we could have up to a 20% shortfall in ore," complained one TiO2 manufacturer.

Rebollar said DuPont is exploring other projects to ensure secure rutile supply and long-lasting stability, especially as the firm is expanding its TiO2 capacity. The manufacturer plans to boost its TiO2 capacity by 350,000 tonnes/year by the end of 2014. The expansion plan includes investing in an additional 200,000 tonne/year TiO2 line at DuPont's production site in Altamira, Mexico.

DuPont is not the only company looking at bringing extra capacity to deal with strong global demand. Tronox will expand capacity at each of its three TiO2 plants in the near term. Debottlenecking and technical advances could take its 90,000 tonne/year Botlek plant in the Netherlands to about 115,000 tonnes/year, with smaller expansions at Hamilton, Mississippi, and at its Tiwest joint venture at Kwinana, Australia.

US-based Huntsman also plans to boost its TiO2 output by around 40,000 tonnes/year by debottlenecking plants, but it is more confident about the security of ore supply.

"I struggle to see a scenario where ore ­supplies somehow diminish in the coming years and demand for TiO2 substantially ­increases, and we are running around to figure out where we pick up ore - I don't buy that scenario," Peter Huntsman, chief executive of the company, told ICIS in an interview in ­November.

Indeed, others have said that a potential slowdown in 2012 may ease the pressure on upstream availability and even ensure TiO2 prices fall.

SEVERE TIGHTNESS

In November, Netherlands-based bank ING said that TiO2 sales will be highly vulnerable to the expected global economic slowdown of 2012, and despite the severe tightness seen in supplies this year, prices will decline by 15%.

Others disagree, given raw material cost hikes, and several TiO2 producers have announced price increases effective 1 January to the tune of €250-300/tonne.

TiO2 buyers have rejected this notion out of hand, though, as more than 50% of demand comes from the paints and coatings industry, the peak season of which is in the second and third quarters of the year.

Buying interest will be too weak to carry through a €300/tonne price increase in January, although further hikes are likely around April, say customers who are feeling the pinch after two years of hikes.

"TiO2 increased profitability after a loss-making situation for the past 10 years, but the increases now are so steep it's not good for the industry," said one producer. "Price increases are essential, but we don't want the entire supply chain to break down."

However, a buyer responds: "TiO2 producers have improved their margins a lot over the past couple of years, but now they are getting greedy."

By: Amandeep Parmar
+44 208 652 3214

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