Supply Situation Report: Light at the end of the tunnel for TiO2 feedstocks

The titanium dioxide (TiO₂) feedstock industry underwent a significant period of upheaval during 2012: prices rose, prices fell and production was cut by some of the largest producers.

As 2013 began, a new vision of the industry emerged - one of a tortoise withdrawn into its shell. With weak end-market demand and fallen prices, some producers slashed output and battened down the hatches.

Now, as 2013 reaches its halfway mark, the situation is undoubtedly more positive as decent GDP growth figures will encourage end-markets. The destocking trend that defined the second half of 2012 appears to be drawing to a close. Production will remain low, but demand appears to be returning and a hint of optimism comes with it.

SUPPLY SECURITY

After a turbulent 12 months for TiO₂ feedstock prices, supply of mineral sands has seen major curtailments by leading producers. Not only have some of the expansion programmes that were underway been halted, existing supply has been slashed.

Rio Tinto is the world’s leading producer of TiO₂ feedstocks from its facilities at Richards Bay Minerals (RBM) in South Africa and Fer et Titane (RTFT) in Canada.

As demand from pigment producers waned in 2012, Rio Tinto put its zircon and rutile processing operations at RBM on care and maintenance. In addition, the upgraded slag (UGS) production facility, which produces chloride-grade slag at RTFT, was taken offline.

The company’s “TiO4” expansion plan was also halted because of market conditions. It was undertaking a prefeasibility study for a $4bn feedstock production plant in Bacancour, Quebec, Canada, which was put on hold. A prefeasibility study for an additional mine in Madagascar was also cancelled.

“In Becancour, RTIT has reviewed the economic viability of the TIO4 Program and decided to stop prefeasibility studies there in January 2013,” the company told IM.

The market situation has been difficult and these restrictions should keep costs low, while helping to support prices as demand increases.

Iluka Resources Ltd, the world’s second-largest producer, has also taken drastic action, cutting back its operating capacity to 30-40% for the year. Rutile and synthetic rutile production in 2013 is predicted to only be around 200,000 tonnes - 40% of capacity.

In April 2013, the company idled its Eneabba mining operations in Western Australia, which produces ilmenite, zircon and rutile. The company’s second synthetic rutile kiln in Capel, Western Australia, has been idled and the Tutunup South mine (ilmenite production to feed the kilns) is also being idled. In addition, output at the company’s mineral separation plants have been restricted.

“We expect setting production at such a low level will allow finished product inventory to be drawn down progressively as demand recovers,” David Robb, managing director, said.

While rutile and the other higher-grade feedstocks have seen severe supply curtailments, ilmenite supply has remained relatively secure.

Major producers Kenmare and IRC Ltd have both continued production at the same level as previously.

In Q1 2013, Kenmare produced 137,500 tonnes ilmenite up from 123,600 tonnes in Q4 2012. Production increased partly due to the dredge pond coming towards the end of its transition from the low-lying Namalope Flats zone onto a raised dunal plateau, where it will mine in the future.

The Irish company has, in addition, just completed an expansion of its production facilities, for which the majority of the output was already contracted for, Michael Carvill, managing director, told IM.

IRC Ltd, producing ilmenite in the Far East, was another company that did not reduce production and actually expanded it by half to 40,093 tonnes ilmenite for Q1 2013. The company continues to aim for annual production of 160,000 tonnes.

Sales increased at IRC, but around 8,000 tonnes ilmenite remain unsold.

Despite the slow sales, ilmenite supply has remained secure, and will most likely continue to do so.

Ilmenite is valuable in the sense that it is the lowest grade and cheapest feedstock, so there is always a solid demand base, as Carvill explained:

“There is a certain equivalency of value in the use of ilmenite because of its nature as a feedstock of titanium slag, and since chloride slag has remained so robust in terms of pricing, that has given a certain strength to the ilmenite,” he said.

An end in sight

Many TiO₂ pigment producers are operating their plants at low capacity rates, with some even operating as low as 60-70% of total capacity. As much of this pigment is still to be introduced into the market, there is a large amount of potential demand for feedstocks waiting in the wings, leading many market participants to wonder how long these curtailments will last.

The short answer is they are unlikely to end this quarter and - given the amount of time it takes to bring a plant back online - are unlikely to end soon.

“The situation at RTIT plants all over the world will be reassessed on a regular basis taking into account market conditions,” Rio Tinto told IM, adding that it is “beginning to see improvement in zircon demand, particularly in Asia”.

But the company had no specific plans to return to full production levels.

Iluka Resources echoed this: “[We have] the ability to restore higher levels of production relatively rapidly, for example, mineral separation plants can be moved back to higher utilisation rates in a short period of time, with sufficient concentrate available to be processed,” it told IM.

It, too, has no specific plans to return to a higher level of production.

While major companies are cutting back on their supply of rutile and synthetic rutile, feedstock production in eastern Europe is taking a different route - with Group DF at the head.

Group DF, led by Dmitry Firtash, is made up of sulphate-route TiO₂ pigment producer CRIMEA Titan, as well as the feedstock mining operations at Volnogorsk and Irshansk in the Ukraine.

The group is looking to expand and plans to invest around $2.5bn by 2017. Much of this will be in a new 120,000 tpa sulphate-route TiO₂ pigment plant, but Group DF also plans to construct a titanium slag plant, with the capacity of 150,000 tpa, and a titanium sponge plant, with the capacity of 40,000 tpa.

On top of this, the company is updating the mining machinery at Volnogorsk at a cost of $14.3m to improve the efficiency of ore mining, and reduce maintenance costs.

Significant new titanium slag capacity will also be coming online as Norwegian producer TiZir begins its ramp-up.

The current capacity at the TiZir’s Tyssedal slag plant is 200,000 tpa titanium slag and 110,000 tpa high-purity pig iron, but it will be upgrading its nameplate capacity to 220,000 tpa by 2014 and 400,000+ tpa by 2016. To do so it would have to reduce actual production in the short run to 140,000-150,000 tonnes in 2014, but increase to 200,000-220,000 tonnes again in 2015, reaching full capacity in 2016.

The company claims this would make it the second-largest producer worldwide below Rio Tinto, which produces 2.25bn tpa slag, and above Tronox and the accumulated Chinese producers, which produce 370,000 tpa slag and 200,000 tpa slag respectively.

So, supply is likely to remain limited for higher-grade feedstocks, such as rutile and synthetic rutile, but the increases in capacity for slag, in addition to its comparative strength, will feed through and help maintain demand the ilmenite used to create it. Given that there have been no real supply curtailments by ilmenite miners, supply of both ilmenite and titanium slag - both chloride and sulphate - should remain relatively secure for the future.

MARKET DEMAND

Market demand for TiO₂ feedstocks has been, at the very least, suboptimal and, at the very worst, dire.

Unlike other minerals, TiO ₂ feedstocks are almost exclusively used to make TiO₂ pigments, apart from small quantity uses, such as rutile for welding. As such, the fortunes of the feedstock industry are inextricably linked to the fortunes of the pigment industry.

After the price boom of 2011 and early 2012, pigment prices fell sharply in the second half of 2012. This was driven by a severe drop in demand from end-users, including paint producers, plastics producers and ink producers.

As prices had risen, and looked like they would continue, end-users began panic-buying TiO₂ pigments and expanding their inventories, which in turn encouraged higher prices, until the situation reached critical mass and demand practically vanished.

As demand exited the pigment industry, producers took preventative measures and reduced the capacity of their plants - Rockwood even slashed output to 60% of total capacity during 2012.

This filtered down to the mineral sands industry.

“Sales volumes in 2012 were also markedly weaker than in the global financial crisis trough of 2009; a year when 758,000 tonnes of zircon, rutile and synthetic rutile was sold,” David Robb, Iluka Resources CEO, said.

Legacy contracts out

The TiO₂ feedstock industry has traditionally been priced on long-term legacy contracts and prices have, for years, lingered around a level that producers felt was n ot sufficiently profitable to maintain the industry.

During 2011 and 2012, feedstock producers began to move more towards short-term contracts with market pricing.

“Iluka was able to price its rutile and synthetic rutile products free of old style, 'legacy' contract constraints,” Robb said.

“Some other major producers operated in 2012 under such contracts which meant that at least some of their volume was priced at an appreciably lower level than what might have been achieved given prevailing market conditions,” he added.

Number three producer Tronox was another company that has borne a significant cost burden from having to continue to sell on these contracts at below market prices.

However, this situation is changing.

“Most of these legacy under-market priced contracts have, or are, expired so our feedstock costs are moving in the opposite direction. They’re significantly declining as a result of our acquisition [of feedstock mines],” Tom Casey, Tronox CEO, said.

“We had 140,000 tonnes titanium slag that we sold last year pursuant to an under-market price contract that we entered into [previously] (É) 40,000 tonnes of that production is no longer under contract. the 100,000-tonne balance of that contract expires at the end of 2013,” he added.

With these contracts ending, many pigment producers stocked up their inventories - much as paint producers had done further down the supply chain - so when prices reached a peak they could simply run down their inventories rather than buying new stock.

This, combined with the already lower demand from pigment producers because of the end-user destocking, has led to the extremely muted demand that has prompted the curtailments.

Zircon has typically proved an advantage to titanium feedstock producers. It is normally found in the same marine, coastal and palaeochannel sediments formed during the Tertiary age, 65m to 1.8m years ago.

Here the similarities end as zircon is used in entirely different end markets and has a very different supply chain to TiO₂ feedstocks.

Zircon’s main end-market is as an opacifier in ceramic tiles, as well as in refractories and chemicals.

Its main geographic end market is China and, with China’s housing boom, it has been very profitable in the past few years.

Often, when the TiO₂ feedstock industry reached a low point in its cycle, profits from the zircon industry would help to sustain producers while they waited for the feedstock industry to improve. This time, however, demand for zircon has collapsed due to a number of macroeconomic factors.

Zircon prices have dropped to around $1,200-$1,400/tonne from $2,500/tonne in 2012. This has impacted producers’ profits severely and, although an uptick is expected, many end users are operating on a just-in-time basis.

PRICE TRENDS

With the drastic falls that TiO₂ feedstock prices saw in 2011 and 2012, producers and suppliers have been behaving very cautiously.

Prices for rutile have fallen to around $1,100-$1,300/tonne, a level that many producers consider unsustainable. As demand for pigment rises, prices should also begin to pick up.

At their height in early 2012, rutile prices reached almost $2,400/tonne, which many consumers considered unsustainable. Prices for TiO₂ pigment are around $3,000-3,400/tonne and if rutile prices were to rise to those levels again, they would be a huge percentage of the total cost of pigment.

While rises are expected, prices are unlikely to get anywhere near their previous highs.

“Indications are that prices have stabilised, which if sustained, provides essential confidence to underpin volume recovery and represents a pre-condition for potential price increases,” Robb said.

Ilmenite prices have also been declining.

“Ilmenite has experienced a price decline. I think that the price decline is not as extreme as rutile or synthetic rutile because it hadn’t seen that level of price appreciation that they had,” Carvill told IM.

IRC Ltd, a far East producer of ilmenite has recorded prices dropping as low as $263/tonne during 2012 but picking up slightly to $274/tonne in 2013.

However, prices at this level could still be creating difficulty for producers.

“It seems to me that, at this level, ilmenite producers will generally lose money,” Carvill said.

“We don’t believe that ilmenite prices can sustain themselves at these present levels - it’s not enough. I think that they are going to have to return to higher levels,” he added.

MARKET OUTLOOK

The market outlook for TiO₂ feedstocks is, again, very closely linked to that for TiO₂ pigment.

The normal rule-of-thumb for the pigment industry is that it follows the cycle of GDP, due mainly to its major end markets of paint in housing and automotive being very GDP-sensitive.

The GDP outlook is, on the whole, positive and producers of TiO₂ pigment (and therefore also producers of TiO₂ feedstocks) are looking forward to an upswing in demand.

“Consumption of titanium pigment, which is the ultimate market, is closely correlated with world GDP growth and the world is growing,” Carvill told IM.

China is often highlighted as the most important market for a wide variety of industrial minerals and TiO₂ pigment and feedstocks are no exception. While it is true that China is unlikely to see the rapid growth that characterised the past decade, it is still predicted to have much higher growth than either the US or Europe.

China’s GDP growth has declined since H2 2010 from 9.8% to roughly 6.9%, according to the IMF’s World Economic Outlook. Although it will remain under the 8%-mark during H1 2013, it will then pick up slightly and hover around 8% through to the end of 2014.

Data from the Organisation for Economic Co-operation and Development (OECD) concurs, predicting China’s GDP growth to pick up from the 6.6% in Q1 2013 to 8.3% in Q2 2013 and then continue at an average of 8.3% through to the end of 2014.

This growth may differ from its expansions of old, but is nevertheless substantial when compared with figures posted by the other major TiO₂-consuming regions.

US GDP growth has averaged around 2.2%, according to both the IMF and the OECD, but has shown signs of a gradual recovery. It is predicted to continue to strengthen and stay consistently above 3% during 2014.

European woes also look set to end in 2013. The Euro area has experienced very weak growth through 2011 and 2012; IMF data shows figures fluctuating between 1% growth and 2% contraction. The IMF and the OECD both predict that this will end.

The OECD believes that GDP growth will be negligible in Q2 2013 and then rise steadily to 1.2% in Q1 2014 and 1.8% by then end of 2014.

The IMF’s predictions are also positive, but with slightly weaker numbers - predicting that GDP will reach 1% by the beginning of 2014 and oscillate around that level throughout the year.

These three regions account for the majority of demand for TiO₂ pigments and are all showing economic improvement, which will filter down to the TiO₂ feedstock industry.

As this demand returns, the destocking of pigment inventories by paint producers and feedstock inventories by pigment producers will be completed and this will boost demand right through the supply chain.

“[Demand] is returning to the pigment industry, and if it returns to the pigment industry then it will inevitably return to the feedstock industry,” Carvill said.

“I think it is going to happen this year,” he added.

Rio Tinto agreed.

“Given the long-term fundamentals for our business remain strong, coupled with evidence of TiO₂ pigment inventories being worked through, we expect demand to recover,” the company told IM.

Other sources have indicated to IM that volumes have already been showing improvement in emerging markets and there has been increased interest from more established markets, both for TiO₂ feedstocks and for zircon.

This stronger GDP and growing interest bodes well for the industry. There should be increased demand for all TiO₂ feedstocks and the major producers retain the capacity to increase production when necessary, meaning supply shortages are unlikely.

All in all, the industry is looking to a brighter future and the tortoise can begin to emerge from its shell.