Chinese zircon slows on construction industry stagnation

By John Ollett
Published: Tuesday, 03 July 2012

The zircon industry has seen upheaval around the world in recent times with prices rocketing from an average of $842/tonne (FOB Australia) in June 2010 to $2,500/tonne this month. Recent softening demand has seen major producers, like Iluka Resources, slashing production which is likely to keep prices at current levels.

The zircon industry has seen upheaval around the world in recent times with prices rocketing from an average of $842/tonne (FOB Australia) in June 2010 to $2,500/tonne this month. Recent softening demand has seen major producers, like Iluka Resources, slashing production which is likely to keep prices at current levels.

In China, the situation is quite different with market sources indicating to IM that there is an oversupply of zircon. This is being driven by a declining construction industry on which zircon’s largest end-use, ceramics, relies heavily.

Zircon is being stockpiled by traders and producers alike. The estimates of the excess have ranged from 50,000 tonnes to 150,000 tonnes but prices are remaining steady with rumours persisting that major producers could reduce output, a source indicated.

As the zircon produced in China is used almost solely for domestic use, this should have little effect on external markets where prices are steady. But new zircon-heavy mineral sand deposits are coming online which could change the shape of the market.

The prohibitive cost of zircon in China has also led to new opacifier and pigment formulations, which use at least 50% less zircon-based raw materials than before. While mullite (calcined kaolin clay) and olivine can be used as substitutes for zircon in the foundry industry, substitution in the ceramics industry is more difficult.

Calcined alumina is a strong front runner for partial substitution and averages much cheaper at $700/tonne (98.5-99.5% min Al2O3, FOB refinery, US). Substitution rates of about 30% have been reported but a portion of zircon must still be used, slowing any fall in demand that this substitution will cause.

This reduction in content is likely to continue even when the Chinese housing industry picks up, sources told IM.

Chinese construction: portrait of a suffering industry

Zircon’s main use is as an opacifier in ceramic tiles where it increases hardness, inertness, resistance to corrosion, and adds low-sliding friction. These ceramics are chiefly used in construction, an industry that is intrinsically linked to the fortunes of the housing market.

In 2010, China was reputed to have 65.4m empty houses according to a survey by the State Grid Corporation of China. The figure quoted in this survey has been denounced by China’s power companies and other organisations but the existence of a substantial number of empty houses in China is undeniable.

Some have mentioned that there are enough empty houses in China to accommodate the population of France and this glut discourages further supply.

As the two graphs show, the growth rate of investment and sources of funds have fallen to record lows. This restriction in capital, the lifeblood of new projects, will limit the number of new homes coming online. This is likely to lead to serious stagnation in the construction industry.

The effect of an excess of Chinese homes has already been seen in the prices of new houses which dropped again in May 2012 after a series of drops throughout the year. But house prices have not fallen enough to stimulate an uptick in demand as economists have predicted the fall to continue.

The construction industry works mainly around new housing and will continue to stagnate until the housing industry picks up again. However, the government’s recently introduced controls, which are aimed at further cooling the over-inflated industry, make it unlikely that the construction will receive its much needed boost.