Supply Situation Report: Iron oxide – back in the black

By John Ollett
Published: Monday, 25 March 2013

Iron oxide is an important pigment material for creating red, yellow and black colours in concrete, bricks, paints, inks and a wide variety of other materials. The construction industry - which accounts for the majority of iron oxide pigments end use - suffered greatly in the global recession and the after-effects linger on across the world.

Iron oxide is an important pigment material for creating red, yellow and black colours in concrete, bricks, paints, inks and a wide variety of other materials. The construction industry - which accounts for the majority of iron oxide pigments end use - suffered greatly in the global recession and the after-effects linger on across the world.

As such, it is important to assess if this situation has begun to clear and whether or not supply of this critical pigment will be able to meet any new demand coming on-stream.

 
SUPPLY SECURITY

Iron oxide production is centred on three main regions - China, Europe and the US. China is the largest producer - producing around 500,000 tpa, which is half of global output - but consumes much of its output internally, while Europe and the US produce 300,000 tpa each to make up the majority of remaining global output.

Synthetic iron oxide makes up the lion’s share of production, contributing 1m tpa on average, while natural iron oxide normally contributes 200,000 tpa.

LANXESS remains the world’s largest iron oxide pigment producer with an output of 350,000 tpa synthetic iron oxide, produced from plants in Australia, Brazil, China Germany, Spain, UK and the US. Rockwood Pigments remains steady as the second-largest producer, with facilities in China, France, Germany, Italy, UK and the US.

As China is the largest end user of iron oxide pigments, it is one of the most important markets to access. Despite any recent weakness in market demand caused by the financial crisis, companies are continuing to expand production there.

LANXESS will begin construction in the second quarter of 2013 of a 25,000 tpa iron oxide red plant in Ningbo, China.

“The plant, with state-of-the-art environmental standards, will initially have an annual capacity of 25,000 tonnes [and] an investment of about Û55m [$71m*],” the company told IM.

“Construction will begin in the second quarter 2013. The production start-up is scheduled for the first quarter of 2015,” it added.

Cathay Industries, another major producer, is also constructing a new synthetic iron oxide plant for yellow, red and black iron oxide pigments in Anhui province, eastern China. The project, a joint venture with the Tonghua Group, will commence production at 100,000 tpa before expanding to 150,000 tpa and will sell into the Chinese market.

However, one existing threat to the Chinese supply security identified by LANXESS was environmental regulations.

“The increasing enforcement of very stringent environmental standards in China is forcing manufacturers in China to invest massively in the treatment of wastewater and off-gas,” the company told IM.

Steven Spackman, Cathay Industries managing director, agreed.

“New policies will increase the regulatory requirements and energy efficiency requirement of iron oxide plants and environmental compliance will increase the cost pressure for all iron oxide plants,” he said.

However, Cathay has been anticipating this for several years and believes that its new plant in Tongling and expansions and upgrades to its Wuxi plant will put it “well ahead of the regulatory and environmental requirements”, Spackman said.

The US also saw some expansion, with Rockwood Pigments continuing construction of its synthetic iron oxide plant in Augusta, Georgia. While the full capacity has not been announced, the plant will cost $11m and employ nearly 100 staff.

This plant will be the first synthetic plant to be brought online in the US in 35 years.

Natural iron oxides are also produced in the US and, in mid-2011, Alabama Pigments Co. increased mining at its McCalla, Alabama mine site.

These increases have all required substantial investment in new plants and equipment, which could hamper smaller producers, LANXESS said.

“It remains to be seen how many of the current manufacturers are financially able to make this kind of investment and how many will have to pull out of the market,” it added.

“We anticipate that, in the medium term, some of our competitors will simply have to shut down production - not just in China, but worldwide. The process of market consolidation will continue,” it said.

 
 
MARKET DEMAND

Iron oxide pigments main end market is construction, which accounts for half of total output. The other main end market is coatings, accounting for a quarter, with the remainder being used in plastic, rubber, paper, glass, foundry and other end uses.

The construction industry tends to move in correlation to GDP, which is a measure of the average income per capita. This means that as GDP increases, a household’s income rises and it tends to invest in construction products such as new housing and renovations.

Conversely, when GDP dips, a household’s income falls and that household cannot afford to purchase new premises or renovate or expand existing property. Tracking a country’s GDP gives a good indication of existing demand for iron oxide pigments.

The construction industry has had a torrid time of late because of the global financial crisis. As the financial markets collapsed in 2007-08, the construction industry dipped sharply as home buyers and owners were unable to afford mortgages. Iron oxide demand, in turn, fell.

“The global downturn in this [construction] industry sector has had a significant impact on iron oxide consumption,” Spackman told IM.

Recent news has been more positive and as many industries around the world begin to recover, a tentative recovery has been seen too in the iron oxide industry.

“Demand has picked up marginally after a significant drop during the global financial crisis, but [demand] remains well short of pre-crisis levels,” Spackman said.

Construction, in particular, has begun to rally, but a significant aspect of this recovery is that it differs from region to region, giving a very different demand picture for China, Europe and the US, Stefan Schlag, senior consultant at IHS, told IM.

 
China’s construction slides

China’s construction industry has been the single largest end market for iron oxide pigments for a considerable period.

Spurred on by traditional prodigious growth rates, the market blossomed for many years, but has recently experienced a serious dip.

This has been in part due to Chinese GDP, which has remained above 8% (excluding 1998 and 1999) since 1990 (see Table 1). However, these growth rates may no longer continue.

“GDP growth has always been in the order of 8% in past years, and a large part of this came from infrastructure projects and construction in China. [But] if you look into the future, or already to the end of 2012, we have seen the growth rate drop below 8%,” Schlag told IM.

The Chinese construction industry has grown in line with GDP, but by 2010 China was believed to have 65.4m empty houses, according to a survey by the State Grid Corp. of China. Although this figure has been challenged by various other companies, the existence of a large number of unoccupied homes is undeniable.

The Chinese government introduced a number of restrictive policies to slow the expansion of the housing sector, and resulting higher prices, which meant that the construction industry stagnated as investors left the market.

In order to fund its targeted 8% growth in GDP level, China tended to invest heavily in infrastructure, but that is now coming to an end, “because too much infrastructure investment was allocated to projects that had no use," Schlag said.

“We expect GDP growth to slow down, and we particularly expect GDP growth to slow down in infrastructure projects,” he added.

US construction follows

The global economic crisis crushed the construction industry, particularly in the US, and it is still struggling to recover. The lingering effects of that crisis, coupled with the limited availability of finance, stopped the growth of the US construction industry completely, rather than simply slowing it.

Governmental construction was hit hard as government spending was slashed as rampant budgets were reined in. This general weakness in the construction industry has had an impact on iron oxide demand in the US.

 
  In more recent months, it has been the prospect of the fiscal cliff that has been affecting market demand. The fiscal cliff is the date when a large number of US tax hikes, spending cuts and incentive reductions all come into effect as required by previously enacted laws. The intention of this was to reduce the US’s astounding national debt of $16.432 trillion, which has increased by $5.8 trillion during President Obama’s term alone, according to USA Today.

Many of these decisions were deferred in a last-minute deal, but continue to create uncertainty among businesses during the first half of 2013.

“Businesses are very aware and are going to be very cautious,” Anika Khan, Wells Fargo director and senior economist, told IM. “They’ll continue to be on the fence.”

This has led to some uncertainty in the US market, but there has been a noticeable increase in activity, with spending on US construction projects climbing beyond forecasts in December 2012. Outlays rose 0.9% to an $885bn annual rate, the highest level since August 2009, after increasing by 0.1% in November.

More recently, January saw an unexpected fall following the biggest back-to-back gain in a year, reflecting a slump in non-residential and government projects. Outlays dropped 2.1%, the biggest decrease since July 2011, to an $883.3bn annual rate.

This cannot be regarded as a new trend because construction industry data is notoriously volatile from month to month. The overall trend for the US construction industry is one of strength, which means, in turn, that iron oxide demand is strong.

Europe’s mixed picture

  The situation is very different in Europe.

“If you look at Europe, it’s a mixed picture,” Schlag told IM. “It did pick up after the crisis, [but] the construction segment in Southern European countries is showing weakness.”

This applies especially to Spain, Greece and Italy, which continue to teeter upon their respective economic cliffs with no clear signs of a return to growth.

Northern Europe fares slightly better, but those countries that are part of the EU continue to be locked into the problems of their southern neighbours, and the uncertainty that this generates dampens construction and iron oxide demand.

Other end markets

While construction will always be the largest end-market for iron oxide, there are other end markets, for example in the colouring of plastics and rubbers - for which the largest market is the automotive industry - as well as inks, paints and coatings, again where automotive is a large end user.

The automotive industry, as with the construction industry, tends to follow the trend of GDP, but with one caveat.

“The automotive industry is less reliant on iron oxide, and the downturn impact in this industry sector has been less problematic for iron oxide,” Spackman told IM.

As the industry begins to rise again after the crisis, iron oxide demand will rise, but less so than titanium dioxide pigment, which is used to make white paint - the most popular car colour according to the 2012 DuPont Automotive Color Popularity report.

White is the most popular colour with 23% of the market, follow by black with a 21% share and with red in fifth place with an 8% market share. Yellow come second last, with 1% of the market.

Both iron oxide and chromium oxide can be used for black pigment, while iron oxide can be used for red and yellow pigment.

MARKET OUTLOOK

The best way to see the how iron oxide pigment market could fare moving forward is to look at the development of the construction industry, which will be driven by China and the US, compensating for a stagnant Europe.

“Demand from the construction industry is expected to grow above the average rate for iron oxide pigments in the coming years,” LANXESS told IM.

 
China’s housing push

China’s new leadership is trying to counteract the country’s construction industry decline. China’s National Development and Reform Commission has approved 60 new projects, which will be coupled with large new infrastructure projects being implemented by individual cities and could run even higher.

Li Keqiang, China’s new Premier, will be leading this housing push with his own focus on the development of affordable housing, according to Business Insider referencing Cheng Li for The Washington Quarterly. The Ministry of Housing and Urban-Rural Development has already focused on this policy, CNBC reported, and is planning to build around 6m units of affordable housing in 2013.

Construction expenditures in China are expected to increase 8.8%/year in real terms through 2016, according to a report from The Freedonia Institute.

“The country will continue to out-perform other major national construction markets. Ongoing urbanisation and industrialisation, rebounding foreign investment funding, rising personal income levels, and further population and household growth will all work to drive gains,” the report said.

The Manufacturers Alliance for Productivity and Innovation (MAPI) also expects that China’s growth momentum will pick up in the second half of 2012, underpinned by the acceleration in infrastructure investment spending and social housing construction.

The underlying demand for housing is likely to continue “thanks to the high savings rates, limited investment options and lack of a property sales tax," MAPI said.

However, Schlag disagrees.

“If you look at the main construction materials - like steel and zinc and these materials are very closely tracked - then you will see that this [high growth] is not continuing into 2013,” he said.

“If we take the five-year forecast period (...) it is not expected that these growth rates will continue. We see growth continuing in automotive and consumer goods and domestic kind of consumer good consumption,” he added.

Schlag anticipates that growth will be far from its 7.5-8% target and more in the 3-4% range.

While the picture of Chinese growth is being viewed as negative, actual growth figures of 3-4% will still be impressive in comparison with the rest of the world. The surge in the US is only expected to peak at 4%.

US bounces back

The key aspect of US construction is that, despite the government’s potential policies and cuts, the overall picture remains one of growth. This may not be at a level that compares with pre-2007, but one of strength nonetheless.

“I don’t necessarily think that in 2013 we should expect a banner year for construction spending, but it will continue to be a bit more positive - a little muted in the first half of the year because of sluggish economic growth and uncertainty - but we should like to see a bit a pickup in 2013, sometime in the second half of the year,” Anika Khan, Wells Fargo director and senior economist told IM.

Construction should not be judged on month-to-month performance because of its volatility and the figures are normally heavily revised, but more on its general trend, which Khan believes is encouraging.

“[It] is very positive and continues to improve at a modest pace (É) [the US has] finally dug itself out of the hole and is expecting only modest growth, but it is growth nonetheless,” she added.

Schlag pointed that this growth might not be an indicator of a long period of sustained growth, but rather a shorter-term solution as housing prices recover and building activity restarts.

This means that growth could readjust down in the future, which will hamper demand for iron oxide.

Europe stagnates while other areas grow

Unlike the US and China, which are in the midst of change, the situation in Europe continues to be bogged down in the political mire with numerous countries suffering economically and some requiring large bailouts.

Given this situation, the uncertainty that plagued 2012 is likely to continue into 2013 and, barring some drastic changes, beyond. Uncertainty will limit capital spending on construction projects that use iron oxide by governments, companies, and normal home owners.

Much of Europe’s iron oxide production is used to supply external markets, so producers within Europe are unlikely to too adversely affected.

Markets outside of the three traditional mainstays of iron have also been showing promise, LANXESS told IM.

“While our traditional markets are located in Europe and North America, in the recent years, we have seen burgeoning growth in Latin America and Asia,” it said.

Supplying to a global customer-base makes the company less vulnerable to regional economic fluctuations.

Iron oxide shows great promise on a world scale as its largest end market, construction, is moving forward in two of its three largest regions - China and the US. China growth could slow, but will remain strong when compared with other regions of the world, while the US growth will be strong in the short run although this could slacken off in the future.

There have been several expansions in supply, which hope to compensate for these increases in demand, both in China by LANXESS and Cathay Industries and in the US by Rockwood Pigments. This sets the iron oxide pigment industry up to take strong steps forward after the weakness seen during the financial crisis.



Iron Oxide - the versatile pigment

While 98% of iron oxides in nature are destined to become iron ore, a small proportion are used as iron oxide pigments. Iron oxide pigments are an extremely important part of the coloured pigments industry - producing a variety of colours ranging from red to black - and their use dates back to prehistoric cave paintings including the Chauvet cave which dates to roughly 30,000 years ago.

In the modern world, iron oxide pigments still have an important use producing a variety of colours in paint and concrete and are produced in two forms, natural and synthetic.

Natural iron oxide

Natural iron oxide is the only mineral that is suitable to be used as a pigment after being pulverised to a pigment size (typically less than 1ųm and excludes pyrites and siderites) but only makes up roughly 10% of total supply with the rest being made up by synthetic iron oxide.

Natural iron oxide is usually derived from haematite and magnetite but can also be derived from ochre, umber, sienna, goethite, siderite, and lepidocrocite.

It can produce a variety of colours (see table) and this range can be extended by blending in iron oxide from other ores. Adding in haematite can add more red to a pigment while limonite adds more yellow and magnetite adds more brown/black.

Synthetic iron oxide

Synthetic iron oxide is usually manufactured chemically using different processes depending on the colour needed.

Thermal decomposition of iron salts is used to produce reds while direct precipitation of iron salts (usually with oxidation) can produce yellows, reds, browns and blacks and reduction of organic compounds by iron for a variety of colours.

Compared natural iron oxide pigments, synthetic pigments tend to have superior uniformity, colour, purity, greater tinting strength and tight control over consistency. Another advantage of the synthetic process is that it opens up a huge range of potential products to a wide variety of markets.