Into the fire

Like most industries, the refractories market can hardly believe its turnaround in fortunes within just a single year. Richard Flook, managing director of Shinagawa Refractories Australasia Pty Ltd, got the tone just right in his presentation last month “Refractories: between a rock and a hot place” at IM’s 8^th Chinese Industrial Minerals Conference, Qingdao, 7-9 September. Not only was his paper title most apt, his opening quotation from Charles Dickens’ Tale of Two Cities was spot on: “It was the best of times, it was the worst of times”

The refractories market, one the top consuming markets for a range of industrial minerals (see Refractories Fundamentals panel, p.30), is primarily driven by the steel industry, which consumes around 70% of world refractories. Other key drivers are the non-ferrous metals, cement, glass, ceramics, and lime industries which also require refractories for their manufacture (see Refractories Market Structure panel, p.31).

Prior to the economic crisis all these market sectors, especially steel, were reasonably buoyant and the refractories business, while having to tolerate, let’s say, routine challenges in energy, freight, and raw materials costs and availability, was looking forward to a period of sustained growth.

All that came crashing down towards the end of 2008, most notably reflected in the nosedive of the global steel industry, and followed soon after by the other markets.

The first half of 2009 witnessed leading refractory players such as RHI AG, Vesuvius International, Minteq, ANH, and Magnesita Refratorios SA, announcing losses in revenue and profit in 2008, and some of these companies having to embark on “restructuring” programmes involving closing and idling of plants, and loss of jobs.

Grim times indeed. But it has not quite been totally doom and gloom. The Morgan Crucible Co. Plc, UK, reported that its Asian and Latin American business had “shown resilience” and noted that demand in the petrochemical sector had remained robust through the first half of 2009. Elsewhere, RHI reported successful development in the “comparative stability of Turkish markets”, while Magnesita reported that the Brazilian cement industry, boosted by strong demand from the construction industry, “practically did not feel the crisis, maintaining stable demand for refractories.”

However, it does seem that the worst may have passed. The World Steel Association’s July 2009 figures indicated a shallowing of the decline of global crude steel output (see chart above).

World crude steel production in July 2009 was 103.9m. tonnes, and although down 11.1% over July 2008, represents the highest monthly production figure this year. Most producing countries had significantly declined in output, exceptions being with China (up 12.6%), India (4.3%), and Iran, (15.1%).

Indeed, perhaps unsurprisingly, it has been Asia, predominantly driven by China, accounting for almost 50% of world steel output in July (>50m. tonnes), which has weathered this storm better and is recovering more swiftly. Thus, those multinational refractory groups with subsidiaries in this part of the world are no doubt relieved with their foresight on investment in these countries, which, let’s be honest, are the only certain areas showing clear signs of continued demand for refractories in the future.

Consolidation

Even before the crash of late 2008, the refractories business was continuing to consolidate into large multinational groups. During 2008, Brazil’s magnesite and refractory leader, Magnesita SA, recently acquired by local private equity firms, caused a stir by merging with dolomite and refractories giant LWB Refractories.

Austrian leader, RHI AG, strengthened its position further, after divesting insulation arm Heraklith in 2006 and then purchasing Monofrax and Foseco (see comparison table p.33).

In Japan, Shinagawa Refractories Co. Ltd has merged with JFE Refractories Corp., a subsidiary of JFE Steel Group. While in India, Bharat Refractories Ltd has finally formally merged with the country’s largest steelmaker, Steel Authority of India Ltd (SAIL).

The accompanying panel on refractories market structure (see p.31) illustrates the estimated market share and size by revenue of some the leading world players. Some 47% of the market is accounted for by just six groups, led by Vesuvius, Belgium (subsidiary of Cookson Plc, UK) and RHI AG, Austria.

More consolidation is expected in the future, as such groups benefit from global production and sales networks, superior purchasing power for raw materials, and in matching the similar consolidation practices taking place in their end user markets (eg. steel, cement, glass).

Raw materials integration

Another trend which can be tagged onto the recent consolidation of the refractories business, is that of integration with raw material sources.With its merger with LWB Refractories in 2008, Magnesita immediately expanded its albeit considerable (but limited to Brazil) captive magnesite and dolomite sources, with LWB’s refractory dolomite sources (and related basic refractory manufacturing bases) in the USA, Europe, and China.

Although some steel producers have acquired or own integrated refractory manufacturers with which to supply their demands, the more appropriate direction of integration is upstream to secure the all important refractory raw material supply, or at least the primary raw materials required.

In China, it has been standard practice for many years that most refractory producers own captive mineral operations or are affiliated to major refractory mineral producers. Outside China, the fashion in recent years has been to either purchase existing raw material producers, or develop and expand captive mineral sources. This trend is expected to continue.

RHI now boasts some 50% of its requirements are met by its own mines (mostly magnesite, also dolomite). In response to the squeeze on dead burned (DBM) and fused magnesia supply from China, RHI has expanded and started new production facilities in Turkey and South Africa.

The Austrian group has also gone one step further in order to secure consistent and quality supply of DBM for its Chinese plants by entering a joint venture with a Chinese magnesite producer, and has invested in a state of the art processing plant in Dashiqiao, Liaoning. The first batches of its High Quality DBM grade have just been produced (see p.33 panel for comparison between RHI and Magnesita).

Other leading refractory producers are also affiliated to certain, and in some cases somewhat smaller scale or specific, but nonetheless vital, mineral sources (see table p.39).

World steel production 2008-09

Source: World Steel Association

Obviously, owning or having control of a mineral source should lessen the risk of impact of external influences causing fluctuations in mineral availability and price. In the last two years, any refractory producer sourcing Chinese refractory minerals will have been acutely aware of this. China has continued to steadily restrict exports of bauxite and m agnesia, and as prices have risen and supply tightened, consumers are having to look elsewhere. Therefore, this has given added impetus to refractory companies to secure mineral supplies elsewhere in the world, eg. RHI’s move to a joint venture (Quintermina AG) to source magnesia from North Korea.

One reaction to China’s export trade policy on refractory (and other) minerals has been to attempt legal action against China. This has been actioned by US refractory producer Resco Products Inc., and also via the World Trade Organisation by trade respresentatives from the USA, the EU, and most recently Mexico. Their respective cases continue, as does the long held debate over whether such actions will either prolong or dismantle China’s ongoing mineral export policies (see News p.6).

Specific consumption

Some mention should be made of specific consumption of refractories in its various end uses. As can be seen in the accompanying chart (p.31), this has steadily declined since 1950 from around 60kg/tonne steel to 15-16kg/tonne steel in 2008. Much of this has been led by Japan which has attained rates as low as 7-8kg/tonne steel (see Japan refractories market panel left), while the average in China is about 26kg/tonne (except for Baosteel at 9kg/tonne).

While clearly this has meant less volume use of refractories overall, the demand for higher performance refractory products, and thus using more sophisticated, higher quality, and better performing refractory mineral grades, has risen considerably.

Leading refractory producers & their affiliated mineral sources

Chinese growth & change

A discussion of the world refractories industry cannot be complete without reference to the staggering rise of China’s refractories industry, whose production in 2008 amounted to 24.17m. tonnes. Of this total, 15.5m. tonnes were shaped products, 472,000 tonnes insulation products, and 8.1m. tonnes monolithics.

Chinese refractory exports in 2008 were 2m. tonnes, a 38.5% increase over 2007. Significantly, the value of Chinese refractory exports increased markedly, by 57.41% to $1,296m. over 2007.

The accompanying panel (p.41) illustrates the Chinese increase in refractory product and raw material output, and in particular, China’s dominance in the end user markets of steel, cement, lime, glass, and ceramics.

Naturally, China’s refractory exports took a major hit in the first quarter of 2009, down 53.35% to 616,000 tonnes, as global refractory markets contracted under the recession. However, China’s domestic refractory markets are expected to recover soon, while demand for Chinese refractories in export markets will recover slowly in line with the anticipated slower recovery in western economies. Most recently, the USA has initiated an investigation over alleged dumping of Chinese (and Mexican) refractory bricks into the USA (an EU antidumping procedure is already active against Chinese MgO-C bricks).

China’s refractory industry has suffered from excess overcapacity for many years and has led to severe price competition. With advances in steelmaking technology, the specific refractory consumption is decreasing, which means that actual demand will no longer grow as fast as the Chinese steel market. According to Yoke Fong, commercial director Refractories Asia, Qingdao Almatis Co. Ltd: “Additionally, the consolidation of [Chinese] steel makers will enable them more bargaining power, which will put even greater price pressure on the refractory makers. Consolidation will thus also be on the agenda of the refractory makers.”

Perhaps the most important issue for China’s refractories industry is the need to modify its refractory product portfolio to match demands from the Chinese steel industry, itself under pressure to develop and expand its product mix. This is being driven by steel demand in developing end user markets, such as automobiles, household appliances, and petrochemicals.

In other words, higher value steel products will require higher performance refractories, which will require a new generation of high purity refractory raw materials.

“The [present] percentage of low end [refractory] products is too high and China’s refractory makers win the competition mainly via price advantage in the global market, which is not very profitable for the producers. The limited mineral resources also can threaten the refractory makers, especially those who mainly produce low end products with more natural minerals.” said Yoke.

Here then is an opportunity for producers of high quality refractory minerals to develop production bases either in China, or with a view to exporting to China.

World steel refractory market 2000-2014 (m. tpa)

World refractory market 2000-2014 (m. tpa)


Source: Richard Flook (2009) Shinagawa Refractories Australasia Pty Ltd

Outlook

In essence, with reduced global GDP growth forecast in the short and medium term, most western economies are going to recover slowly, and as a result, refractories demand will follow suit. Swifter recovery, and thus market demand will be focused in China and India.

By the end of Q209, early signs of the start of a recovery were being picked up in the steel industry with ten blast furnaces reactivated. For Q309, 16 more blast furnaces were forecast to resume operations worldwide, and as WSA data shows, crude steel output decline is slowing.

The expectation is that recovery will begin in Q409 in China and India, and perhaps Brazil, and then followed later, well into 2010, in North America and Europe.

However, somewhat soberingly, Krosaki Harima Corp., Japan, appears certain that recovery remains some way off yet. In a statement in May it said: “We assume that the steel output and refractory demand in the fiscal year ending March 2010 will fall significantly below those for the fiscal year ended March 2009. For this reason, we forecast a decrease in net sales for the first time in eight years and no operating income, ordinary income or net income for the fiscal year ending March 2010.”

The key to future refractories demand trends is the steel industry. In his Qingdao presentation Richard Flook concluded that there would be further reductions in the specific consumption of refractories in steel production where a “world best practice” of 5kg/tonne is being targeted.

If this is coupled with anticipation of a reduction in Chinese specific refractory consumption to 17kg/tonne steel by 2014 (and perhaps below the 15kg/tonne target by 2020), and given China’s lion’s share of the world steel industry, then overall, steel refractory growth is set to decrease, and amount to just over 20m. tonnes by 2014. The total world refractory market is estimated at around 35m. tonnes in 2014, representing a growth of just 2% from 2009 (see charts).

Further consolidation of steel and refractory producers is envisaged, and in particular, increased integration with refractory raw material sources - whether through mine development, joint ventures, or acquisitions of existing mineral producers.

Refractory fundamentals

What are refractories?

The term refractory, comes from the Latin word refractarius, meaning stubborn. This is probably the last word with which one would describe the refractories industry, since any resistance to change in market demand would be commercial suicide on the part of refractory suppliers.

The only stubborn aspect of the refractories industry is the refractory materials and products themselves. That is, their resistance to extreme conditions of heat and corrosion during the containment of hot and molten substances and gases. In essence, refractories act as heat insulating materials .

In general, products which are applied at temperatures >600ºC are referred to as refractories. The standard DIN 51060/ISO/R 836 defines the following classes:

Thus, refractory products are crucial requirements in all high temperature industrial processes since they protect units of the process against thermal, mechanical, and chemical stress.

Therefore, key end user sectors using refractories include:

• iron and steel
• nonferrous metals
• cement
• glass
• lime
• ceramics
• foundry
• petrochemicals
• incinerators

Refractory products & minerals

Refractory products are manufactured as either shapes (bricks) or dry granular or cohesive plastic materials (monolithics).

The main ingredients of refractory bricks and monolithics are industrial minerals, which impart refractory properties, and increasingly, synthetic industrial minerals and intermediate mineral products processed from natural mineral feedstocks which further enhance refractory performance.

Not surprisingly, with such a variety of industrial processes using heat treatment to produce different end products (steels, non-ferrous metals, glass, cement), and each of those process routes hosting separate stages subject to differing conditions of thermal, chemical and mechanical stress, there exists a plethora of refractory products of differing mineral composition performing individual roles in each application.

The primary challenge for the refractory producer is to source and select the correct mixture (formulation) of refractory raw materials (and other additives such as binders, chemicals) with which to manufacture the correct refractory product with the correct desired properties as demanded by the end use application.

RHI AG, for example, possesses more than 20,000 formulae, allowing it to offer customised products tailored to meet the requirements of a wide range of refractory applications.

Refractory products, and refractory minerals, can be classified broadly into four main categories: acidic, basic, special, and insulating. The following table illustrates a classification of key refractory minerals and selected refractory application temperatures.

A classification of refractory minerals & selected application temperatures

Refractories market structure

The accompanying charts illustrate the size and main end use markets for refractories, the specific consumption of refractories, and the market share of leading refractory manufacturers.

Specific consumption of refractories 1950-2008 (kg refractories/tonne steel etc.)

World refractories market growth 2000-07

Top world refractory companies by revenue (m. estimates 2008)



Leading world refractory producers (and their HQ country) by market share of total revenue ($20,425m.)

Source: Magnesita Refratorios

World market by region 2007 (21.8m. tonnes)

World market by end use 2009

EU market by end use 2007

Source: PRE

China market by end use 2006

Source: Shinagawa Refractories Australasia Pty Ltd

India market by end use 2006

Source: Shinagawa Refractories Australasia Pty Ltd

Japan market by end use 2006

Source: Shinagawa Refractories Australasia Pty Ltd

Head to head: giants of industry

Japanese refractories industry

Japanese specific refractory consumption

Japanese refractory raw material consumption 2001-2008

Japanese refractory production 1998-2008 (‘000s tonnes)

China’s refractories industry

Chinese total output (41.2m. tonnes) of refractories and refractory raw materials 2007 by province (tonnes)

Source: Xu Dianli, Association of China’s Refractories Industry, China’s Refractories, No.1 2009.

Markets by country for China’s basic refractory product exports 2007 (787,600 tonnes, 48% of total)

Source: Xu Dianli, Association of China’s Refractories Industry, China’s Refractories, No.1 2009.

Markets by country for China’s aluminosilicate refractory product exports 2007 (400,500 tonnes, 25%)

Source: Xu Dianli, Association of China’s Refractories Industry, China’s Refractories, No.1 2009.

Combined output of China’s refractory products & raw materials 2001-07; highlighting China’s growing domestic refractories market; exports of raw materials have declined, while those of products have increased.

Source: Xu Dianli, Association of China’s Refractories Industry, China’s Refractories, No.1 2009.

Chinese share growth of world ouput of refractory consuming markets 1994-2008 (m. tonnes)


China produces 38% of world steel

China produces 50% of world cement

China produces 60% of world lime

China produces 41% of world flat glass

China produces ~40% of world ceramics