TiO2 feedstocks: mind the gap

By Kasia Patel
Published: Monday, 22 September 2014

Following recent improvements in TiO2 demand, Kasia Patel, Deputy Editor, looks at why feedstock producers have yet to benefit, as well as concerns about China’s slow down.

Titanium dioxide (TiO2) has suffered from stockpiled resources, bullish construction indicators and a lack of demand, which have kept prices low in the last couple of years. This has affected both TiO2 producers and those supplying feedstocks to the industry.

Recently, however, demand for TiO2 has seen an upturn driven by heightened activity in the paint and pigments industry as construction spending in areas such as Asia and the US has increased. Although this is a welcome change - and is good news for companies producing TiO2 - it has so far failed to materialise in a resultant rise in demand for feedstock producers.

The current market situation has left producers making predictions quarter after quarter that increases in feedstock demand, and thus prices, are imminent, while at the same time holding off capacity expansions. The problem has been further exacerbated by a spate of new producers coming online in the last year, with additional new supply anticipated.

Chinese demand, or lack thereof, is also beginning to become a concern as the country is a major driver of commodity consumption and mineral sands importer. The slowdown in its economy is likely to affect demand.

TiO2 turning a corner

Mineral sand deposits typically contain both zircon and TiO2 products. The relative weighting of each mineral varies between deposits and has an influence on how economically viable a project is.

Demand for feedstocks, ilmenite, rutile and leucoxene, is closely linked to demand for TiO2 pigments, which is driven mainly by the paint industry (including use in lacquers and varnishes), as well as, to a lesser extent, by use in plastics and paper manufacturing. TiO2 pigment is also used in catalysts, ceramics, coated fabrics, textiles, floor coverings, printing ink and roofing granules.

In terms of substitution, minerals that are able to compete with TiO2 as a pigment include ground calcium carbonate (GCC), precipitated calcium carbonate (PCC), kaolin and talc.

In 2013, increased TiO2 pigment production in the US led to a year-on-year (y-o-y) increase in titanium mineral concentrate consumption, which the US Geological survey (USGS) estimates increased by 5% from 2012. Mining of TiO2 feedstocks increased by 4% in response to the increase in global pigment production.

Domestic production of TiO2 pigment in the US was 1.2m tonnes in 2013, a 5% increase y-o-y according to the USGS. Imports and exports in 2013 were expected to increase over 2012, but still remained lower than 2011 levels.

However, while construction saw a flurry of activity in North America and some Asian countries, 2013 remained a difficult year for TiO2 pigment producers, with demand for high grade ores lower than historical levels. Throughout the year, pigment producers operated at lower rates of between 65 and 70%, resulting in lower demand for high grade feedstocks.

According to leading paint producer, AkzoNobel, one of the biggest uncertainties it has had to face over the first half of 2014 is the pace of development of the global economy, which the company says has remained fragile, making customer demand for raw materials difficult to predict.

“Chronic fiscal imbalances may further adversely impact the global, regional and national economies in markets where we operate,” the company said.

It added that sales for the remainder of the year are likely to continue to be impacted by decreased expansion rates in high growth markets and continued economic and market downturn in more mature economies. As a result, AkzoNobel said it would focus on business structure and reducing costs to mitigate market conditions.

DuPont, another major player in the pigment industry, noted that though sales of TiO2 had increased slightly in the second quarter of 2014, TiO2 prices remained about 3% lower y-o-y. It added that, currently, industry demand is staying relatively stable but that it expects moderately lower ore costs for TiO2.

Major TiO2 producer Rio Tinto also noted an increase in TiO2 production in 2014, with production for the first half of the year at 762,000 tonnes. Q2 production, meanwhile, was at 372,000 tonnes, down 19% y-o-y and 4% quarter-on-quarter (q-o-q).

Despite the lower output figures, the company said it expected TiO2 demand to outstrip supply by 2016, adding that the majority of the demand would come from increased urbanisation.

At full capacity

The increase in TiO2 demand and its feedstocks in 2012 led to new capacity being planned, and, after a tough 2013, producers are finally seeing light at the end of the tunnel.

However, while new TiO2 feedstock projects are in development, existing feedstock producers have slowed down capacity expansions and even taken existing capacity offline while lacklustre demand for TiO2 continues. In 2013, Rio Tinto Minerals announced that it would cancel its feedstock expansion plans while deciding to put its South zircon and rutile processing operations on care and maintenance. The company’s Quebec chloride slag production facility was taken offline and the pre-feasibility study was also cancelled in response to weak demand and to reduce operating costs.

Likewise, in 2013, Iluka Resources cut its operating capacity to around 40% and idled its Eneabba mining operations in Western Australia (WA), which produces ilmenite, zircon and rutile. It also idled its second synthetic rutile kiln in Capel, WA and the Tutunup South ilmenite mine. Outputs at the company’s mineral separation plants were restricted.

Newer producer Sierra Rutile also slowed the development of Gangama dry mining project as it waits for market conditions to recover, saying that it wishes to ensure that the current market recovery is fully embedded before implementing this project. “We will continue to reassess this decision in light of on-going market developments,” the company said.

Despite this, other new projects are in development with the production of TiO2 feedstocks expected to increase over the coming years and a variety of new junior projects hoping to make it into operation. Though funding has been more difficult to obtain, the recent demand recovery in TiO2 has encouraged junior producers.

In the Ukraine, a new 120,000 tpa pigment plant is expected to be constructed in Crimea by 2015, while capacity at an existing plant, also in Crimea, is expected to triple its production from 40,000 tpa to 120,000 tpa. Elsewhere in Canada, a new 50,000 tpa pigment plant is expected to finish being constructed by 2015.

Mining at Base Resources’ Kwale project in Kenya was expected late 2013 with a production capacity of 330,000 ilmenite and 79,000 tpa rutile. Commercial production at the facility began in April 2014 and the company said it sold 91,529 tonnes ilmenite in Q2 2014, up from 47,300 tonnes in the prior quarter. This represented almost 100% of Base’s ilmenite production from its Kwale mine during the period, which stood at 91,620 tonnes, up from 68,193 tonnes produced in the three months to the end of March.

Although the company said that ilmenite prices have been under pressure in recent months, but it added that it expects a reduction in output from other ilmenite producing regions, which could lead prices to stabilise at, or close to, current levels in the near term.

Base also noted that TiO2 feedstocks are “gradually being worked down, but are likely to remain at elevated levels for the remainder of 2014”.

Production at Mineral Commodities Ltd’s Tormin project in South Africa also began in December 2013, and in June, the company produced around 5,000 tonnes non-magnetic concentrate, 29,400 tonnes garnet concentrate and 8,300 tonnes ilmenite concentrate.

Full production capacity at the project is 1.2m tpa, which includes around 48,000 tpa zircon and rutile, 135,000 tpa ilmenite and 240,000 tpa garnet concentrate.

MZI Resources is also set to become a significant producer of leucoxene, a source of TiO2, and zircon, with estimated output tonnages of 70,000 tpa and 10,000 tpa respectively.

Plugging the gap

As closely linked as TiO2 pigment production and TiO2 feedstocks are, there has been a disconnect along the way in the last three years, leaving feedstock producers waiting for the uptick to translate into measureable benefits.

According to one Asia-based trader, the reason behind the gap between increased demand in pigments and a lack of resultant demand in TiO2 feedstocks is the supply chain issue in the industry.

“There is too much material in the supply chain right now. There are lots of new producers coming online in terms of feedstocks and so the oversupply situation is likely to continue,” the trader told IM.

Though prices in TiO2 have seen an uptick in the first half of 2014, this is also unlikely to translate into an increase in ilmenite and rutile prices owing to the current market situation, despite recent forecasts given from existing producers anticipating price increases before the end of the year.

The trader added that there is almost no chance that prices will improve in the next six months (see Price Briefing pp53-54).

In terms of feedstock supply, around 70% of global supply has been provided by three major producers; Iluka Resources, Rio Tinto, and Tronox.

The result of the boom in 2012 was that many new projects began being rolled out with producers keen to cash in on the rise in TiO2 demand. Now, with lower prices, juniors are finding it increasingly difficult to obtain funding for new projects while existing producers who were previously looking to expand, are keeping a close eye on the market to assess the best time for capacity upgrades.

“The result of the boom was that lots of projects popped up, but right now, big producers are happy with low prices because it will stop new producers from coming online,” one trader told IM.

The China slowdown

Historically, Russia has been a large importer of mineral sands, though in recent years China has become the dominant customer owing to its construction boom.

According to engineering design firm AECOM’s 2013 Asian construction outlook, Asia has maintained growth in the construction market while Western economies have slowed down, and the report outlined that the region was expected to remain the fastest growing market until 2020.

AECOM also outlined that China, which accounts for 41% of the Asia-Pacific total construction spend, is expected to lead growth based on its size and growth potential with increases in construction spending followed by India, Indonesia and Vietnam.

However, as the construction industry in China has begun to slowdown, so, too, has its consumption of TiO2 and its feedstocks.

One independent financial and economic consultant who did not wish to be named told IM at a recent industry event, which discussed China’s economic cycle, that, considering the large part China has had to play in commodities demand, this recent slowdown is becoming a concern.

“China has had one of the fastest credit booms in the developing world in the last few decades,” the consultant told IM. “Monetary factors and industrialisation have made China a massive force driving commodities. In 2012 the country accounted for more than half of the world’s steel consumption, but now 70% of China’s housing stands empty as this has been invested in.”

The analyst added: “In recent times there have been question marks over the strength of China’s economy and what has been driving it. When you look at credit booms and supercycles, they often end badly. Out of the last 17 credit booms we’ve had, only one has ended well.”

Another London-based commodities analyst told IM that in 2013, 14% of China’s GDP was in mining and metals commodities, not including oil and gas.

“However, since then, the commodity percentage of GDP has started to decline and commodity demand is expected to fall behind GDP growth. China will continue to be resource constrained. It is a net importer of all raw materials but a net exporter of finished products,” the analyst said.

The Chinese government is also now facing issues in terms of sustainable development, as environmental issues are likely to escalate in China. The analyst explained to IM that there is a common misconception that Chinese producers are against the implementation of environmental regulation, when in reality producers acknowledge the problem of environmental issues, which have become too big to ignore.

“There is a misconception that this is not something they want in place, but they, too, want a sustainable supply and would rather deal with this issue now than be forced to deal with even harsher regulations in the future when it might be too late,” the analyst said.

The steel industry in China will be the most impacted, however, producers in other industries are also keen to work with the government voluntarily rather than face unwelcome changes.

“Environmental issues are likely to escalate in China, the question is whether or not the government solves these in the short term without causing economic disruption,” the analyst said. “Production costs will also increase in China more than other countries. The shift of plants overseas has already begun, as it is cheaper in other countries, with a lower staff turnover and better communication owing to better English speakers. China needs to reshape its industry.”

While some analysts are concerned at the slowdown in China’s growth, others have sought to reassure the industry that China’s growth will continue.

“I’m not that worried about China. The pace of development shows that they have reasonable and experienced leadership. Yes they have challenges, but they have done very well in the way that their growth has been managed,” one analyst told IM.

Price outlook

According to figures from Iluka, pigment prices in 2013 averaged at around $2,800/tonne, a far cry from the $3,500/tonne prices seen in 2012. This inevitably led to declining feedstock prices, with the company’s average rutile falling to $1,070/tonne, down from $2,400/tonne in 2012. By the end of 2013, average rutile prices stood around $910/tonne.

An uptick in TiO2 demand in 2014, owing particularly to a revival in paint demand in the Northern Hemisphere, has led to increases in production by leading pigment producers, Tronox, Huntsman and Kronos, with slight increases in DuPont’s TiO2 volumes. Some producers have also noted signs of demand recovery in minor markets.

Destocking has also occurred in the TiO2 major producer inventories, normalising to between 45 and 60 days. All of these market conditions indicate that pigment prices may have now stabilised, with the IM Pricing Database reporting prices for TiO2 pigment (high quality, bulk) of $3,140-3,230/tonne CFR Asia; €2,600-2,640/tonne ($3,420-3,475/tonne) CIF Northern Europe; and $3,360-3,400/tonne CIF US.

However, the subsequent increases in TiO2 pigment prices towards the middle of 2014 has yet to lift prices in feedstock minerals, with prices in the ilmenite market showing no signs of picking up in the foreseeable future, according to IM sources, despite feedstock producers remaining hopeful of a recovery before the end of the year.

One trader said that ilmenite prices stood at $440/tonne two years ago and were now down to around $140/tonne on a CIF China basis, with IM prices indicating the cost of ilmenite (bulk concentrates, min 54% TiO2) stands at $140-155/tonne CIF China.

“It’s getting to the point where it doesn’t really make any sense to produce anymore more,” one trader told IM.

Sources said recent production increases from ilmenite miners has added weight to the supply side at a time when demand remains flat to weak, making material easy to get hold of.

Given the present availability of ilmenite, producers are finding it difficult to negotiate on offer prices and are prepared to drop prices to shift material, sources said.

“There is nothing on the horizon to suggest that ilmenite prices will not keep going down,” another source said.

“From a cynical point of view, it would appear to be in the interest of larger miners, who dominate the mineral sands market, to keep ilmenite prices low in order to see off smaller competitors and maintain market share,” one trader told IM.

This mismanagement has resulted in too much ilmenite available on the market, meaning that even as TiO2 demand begins to improve globally, the prices of feedstocks are continuing to decline.