IM 2012 Round-ups: Zircon

By John Ollett
Published: Friday, 21 December 2012

Starting off the year in a bad place, things just got tougher for zircon with overstocks and substitute minerals looming

Zircon has had a rough ride this year, even compared with its flagging sister industry of titanium dioxide (TiO2) pigment and associated feedstocks.

While the industrial mineral, which is used chiefly as an opacifier in ceramic and enamel glazes for white and super-white ceramic and porcelain tiles, is mined from the same deposits as TiO2 feedstocks, it has different end markets and consumers. As a result, its profitability and outlook is significantly different.

Zircon and TiO2 feedstocks both saw prices jump in 2011, driven mostly by a global shortfall in supply and by a rise in demand powered by the Chinese construction market.

However, it is in market outlook where the two differ. While TiO2 pigment and feedstocks are predicted to rebound during 2013, the zircon market is predicted to continue to struggle due to modernisation and substitution.

Slow out of the gate

Unlike TiO2, zircon was already dipping by Q4 of 2011, and this negative picture was compounded in 2012 by major producer Iluka Resources’s early results.

“Fourth-quarter zircon volumes were influenced by the impact of global economic conditions on customer confidence and on the availability of credit, together with the effect of measures by the Chinese central government to control inflation and temper speculative activity in some parts of the Chinese property market,” the company said in its Q4 report.

Tronox and Rio Tinto, the other major Western producers of zircon, agreed with this market prediction.

Iluka slashes forecast

Iluka slashed its intended zircon production by 70,000 tpa for the year in the second quarter, which increased its estimated zircon unit costs for the year by A$50/tonne ($50.72*) up to A$700/tonne ($710.27).

Iluka also indicated that zircon demand softened in Q4 2011 and Q1 2012 due to both the global economic situation and destocking by zircon consumers, particularly ceramic manufacturers.

Zircon production for 2012 was originally estimated at 500,000 tonnes, but has been reduced to 430,000 tonnes through the mining of ore at its Jacinth-Ambrosia operation and lower production of zircon-rich concentrate at its Narngulu and Hamilton separation plants.

Oversupply in China

China was the big story during Q2 where a serious oversupply of zircon was driven by its declining construction industry, which is the largest in the world.

Zircon was stockpiled by both traders and producers through the quarter, market source told IM, with one source estimating this to be a volume of between 50,000-150,000 tonnes. Prices remained steady at the time, but have since declined, while major producers are rumoured to be slashing output like their Western contemporaries.

As the zircon produced in China is used almost solely for domestic use, this did not directly affect external markets.

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 as a portion of zircon must still be used, falls in demand will be slowed.

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

Later in the year, Chinese oversupply became such a large issue that major producers Rio Tinto and Iluka Resources opted to auction zircon at a point far below market price.

Rio Tinto auctioned around 15,000 tonnes premium-grade zircon starting at around $2,000/tonne at the end of August, while Iluka Resources auctioned 5,000 tonnes high-grade zircon starting at $2,150/tonne the day before Rio’s move, IM was told at the time by market sources.

This was indicative of the pricing pressure that top-tier producers (Rio Tinto, Iluka, and Exxaro) were experiencing, one source told IM.

The result of this auction, sources indicated, was that many buyers were hesitating to commit to large purchases of zircon in case prices fall further.

Some companies have also had to renegotiate their longer-term contracts with new price offerings between $2,050-2,300/tonne.

Rio Tinto launched another auction in Q3, but this had a poor reception, with a large proportion remaining unsold.

Q3 woes

The third quarter brought woes for all the major producers. Tronox, which completed its first full quarter with Exxaro’s operations integrated, saw both declining sales volumes and prices during the period.

“To illustrate the magnitude and the effect of the weakness in zircon demand, the [year-on-year] y-o-y zircon volume declined 74%, (...) which equates to over $90m in lower y-o-y sales of what is a high-margin product for us,” Tom Casey, CEO, told investors at the time.

Casey believes that zircon prices will continue to decline, especially as volumes decline.

Iluka Resources agreed when it reported in October that Q3 2012 production had dropped y-o-y by more than half to reach 77,700 tonnes from 167,300 tonnes.

Outlook for 2013

The outlook for zircon was summed up by Philip Murphy, TZ Minerals International managing director, at the company’s (TZMI) conference in Hong Kong.

“A weak offtake persist[ed for] longer than anticipated,” he said. “The timing for, and pace of, demand recovery is a major uncertainty.”

Zircon is seeing substitution in tiles as customers opt for polish, rather than glazes, or tiles that use less zircon, or in some cases, neglecting to choose tiles altogether and choosing substitutes such as glass panels.

Also, government sponsored construction, which is rising in China, uses tiles with much less, or no, zircon. These may be less effective, but they are considerably cheaper.

“Trading conditions [for zircon] are going to remain tough for a while,” he added.

Unlike its sister industry,TiO2, no pick up is seen for zircon in the near future, and 2013 could bring even more difficult trading conditions if the macroeconomic depression continues.

*all calculations made in December 2012