Henan Billions-Lomon merger creates new dominant force in China’s TiO2 market

By IM Staff
Published: Thursday, 28 May 2015

The deal between the two companies makes Billions China’s largest TiO2 producer while Lomon synergies yield competitive edge. Quality and low cost key to market share

By Dominic Morgan

Chinese titanium dioxide (TiO2) producers Henan Billions Chemicals Co. and Sichuan Lomon Titanium Industry Co. announced at the beginning of May their intention to merge into what many in the industry expect to become a flagship enterprise for the global titanium pigments market.

The deal, which was officially announced on 5 May, crowned a month of speculation that a major integration was in the pipeline. On 7 April, the rumour mill in China’s TiO2 industry went into overdrive as Henan Billions suspended trading on its securities on the Shenzhen Stock Exchange. 

A preliminary deal with Lomon should be agreed before July to allow Henan Billions to end its trading suspension before the three-month limit set by China’s Securities Regulatory Commission, with the final purchase most likely to be completed around December.

Details of how the new company will be structured have not yet been released. One option is that Lomon will be directly integrated into Henan Billions, which would boost the company’s operating capital. However, it is likely that Henan Billions may allow Lomon to continue to operate as a separate brand.

News 12  

The ability of Chinese companies to combine low cost
production with increasing quality positions them as a
force to be reckoned with in the global TiO2 industry.
Source: Fredrik Rubensson 

Strengthening Billions’ competitiveness

News of the merger will have been greeted with grim faces in the boardrooms of Henan Billions’ domestic competitors. 

The deal will not only make Henan Billions by far the largest TiO2 manufacturer in China, with an estimated production capacity of 520,000 tpa – equating to around 17.45% of the national total and more than double that of its closest rival – but it will also help the company become more competitive in a number of other ways.

By merging with Lomon, Henan Billions will gain access to the company’s integrated mining and processing operation. This integrated business structure was one of the cornerstones of Lomon’s earlier success, guaranteeing a steady stream of high-quality raw materials and largely shielding the company from interruptions in supply or price rises. Lomon’s production capacity of 300,000 tpa TiO2 also allowed the company to gain cost advantages through economies of scale.

After the merger, Henan Billions will benefit from a more secure, higher quality raw materials supply and the new company will be able to use this supply more efficiently to reduce production costs.

Product range and quality

Insiders in China’s TiO2 industry say that Henan Billions’ products, including its R699 TiO2, are not regarded as high quality and the company depends heavily on its price advantages in the low- to mid-end section of the market.

On the other hand, Lomon’s R996 is highly respected within the domestic market and the company’s sulphate process technology is the most advanced in China.

As a consequence, once the merger has been completed, Henan Billions will have products targeted at the high-, mid- and low-end segments of the TiO2 market.

Moreover, Lomon’s large R&D resources will help Henan Billions improve the quality of its products. Henan Billions is one of the few producers in China with its own chloride process production line, but the company is yet to release its chloride process products into the market as the production quality in this facility is still unstable. 

Lomon’s expertise should help Henan Billions accelerate its development of chloride process technology, as well as refine its sulphate process facilities.

Exports

With China’s TiO2 market still bloated with overcapacity and gross profit margins among China’s listed TiO2 producers averaging just 16% last year, Henan Billions’ success in the export market has given the company a crucial strategic advantage.

A 52% year-on-year increase in rutile TiO2 exports was a big factor in its strong performance in 2014, when the company recorded a 19% growth in revenues and net profits of $10.46m (a 173% increase on 2013).

TiO2 prices are now rising slowly, but until major industry consolidation takes place, profit margins in the domestic market are likely to remain slender and the export market will remain a particularly important battleground for China’s leading titanium pigment producers.

Lomon and Henan Billions between them accounted for over a third of China’s total TiO2 exports in 2014, exporting 134,900 tonnes and 88,900 tonnes, respectively, so Henan Billions will hold a dominant position in this growing market in the wake of the merger.

It will also be able to integrate Lomon’s strong marketing channels and brand recognition, which will provide a significant boost to the company’s marketing efforts overseas.

Henan Billions’ competitors 

Henan Billions’ formidable strategic advantages mean that its competitors will be under pressure to respond with their own mergers and acquisitions (M&A) to remain competitive.

According to industry analysts, rival producers CNNC Huayuan (180,000 tpa TiO2 capacity) and Shandong Doguide (120,000 tpa) are considering a merger and it is possible that Shandong Dawn (100,000 tpa) and Jinan Yuxing (100,000 tpa) could also strike a deal.

What is clear is that a fresh wave of M&A activity is necessary for the long-term development of China’s TiO2 industry. The market is currently saturated by small-scale producers, almost all of which churn out products of similarly inferior quality. 

A round of consolidation will help weed out this excess capacity and the larger producers that remain should have more control over prices and more resources for much-needed investment in R&D. This merger could be the bridge to a new era for TiO2 in China.

*Dominic Morgan is the senior editor at CCM, a provider of market intelligence on chemicals, food and agriculture in China and the Asia-Pacific. For more information, visit www.cnchemicals.com.