TiO2: False bottom

Commentators predicting a market upturn in the titanium dioxide (TiO₂) pigments and coatings industry in the past few years would be unlikely to find much success in the field of divination.

The sector, at both the feedstock and finished-product ends, has repeatedly defied expectations of a turnaround, reflecting weak post-crash global gross domestic product (GDP) growth, to which it is tied, and an additional set of market-specific problems.

While reversals of fortune were being predicted as early as 2013 by multiple analysts and companies, a recent Moody’s report suggested that the bottom has not yet been hit.

"We don’t think the TiO₂ cycle has hit bottom. Price declines in the first and second quarters, and trade publications reporting that third-quarter negotiations are likely to result in further declines, strongly suggest there is further to fall," Moody’s said in a 26 August report, entitled "Titanium Dioxide Cycle Yet to Hit Bottom, Recovery Possible by 2017".

"Low global operating rates combined with year-end seasonal weakness and new manufacturing capacity in China and Mexico don’t bode well for the paint and coatings season as we move into the first half of 2016 and rated producers (…) will see their earnings under pressure," the ratings agency added.

TiO₂ is used in pigments, owing to its exceptionally high refractive index (2.87 at a 632.8 nanometres (nm) particle size, according to Filmetrics). The high refractive index means that when mineral sources of TiO₂ are purified and powdered, a "brilliant" white can be obtained for paints, coatings, papers, plastics, food products and cosmetics such as sunscreen, where the mineral is used to absorb harmful ultraviolet spectrum bands of electromagnetic radiation.

Produced primarily via heavy mineral (HM) sands mining, TiO₂ can be sourced from the minerals rutile, ilmenite and leucoxene, a blend of rutile and anatase. While zircon is also generally present in HM deposits, it is typically considered a minor byproduct, 

According to "Mineral Sands: An Overview of the Industry", a paper written by Greg Jones, a former Iulka Resources Ltd geologist, most mineral sands deposits are found in "unconsolidated fossil shorelines several hundreds of metres to tens of kilometres [long]". 

HM are concentrated once mined via wet sizing and density separation processes and dry magnetic, electrostatic and density-based methods.

Ilmenite and leucoxene are primarily treated via the sulphate process, whereby concentrated sulphuric acid is used to remove the iron component from the mineral, which has the formula FeTiO₃. 

The iron sulphide created when sulphuric acid is reacted with the mineral is removed via precipitation and filtration and the remaining titanium sulphate is hydrolysed to yield TiO₂ and water.

The chloride process is preferred when the feedstock material is at least 70% rutile, according to "TiO₂: Manufacture of Titanium Dioxide", a report by the UK’s Royal Society of Chemistry. In this process, impure TiO₂ is chlorinated and then recovered by oxidation, yielding a premium, high purity product.

Paint manufacturing, including lacquers and varnishes, represents 62% of TiO₂ pigment consumption according to the US Geological Survey (USGS), while the plastics industry accounts for 24%; paper, 11% and others around 3% of consumption. 

TiO2 pigment prices, 2011-2015

Source: IM Prices Database

Shifting sands

Strong demand for TiO₂ products leading up to 2012, when the construction industry was still healthy in China and the continuing trend of rapid urbanisation in Africa, the Middle East and India, resulted in a shortage of TiO₂ feedstock materials, pushing prices up sharply.

The challenge to produce more feedstock was quickly met by producers, which ramped up production from 6.3m tonnes titanium mineral concentrates in 2010 to 7.45m tonnes material in 2014, according to the USGS, representing a four-year capacity jump of just under a fifth.

As this happened, according to Moody’s, "[TiO₂] customers found ways to reformulate, use less through substitution and move down the quality scale," for example, by substituting chloride TiO₂ for sulphide TiO₂.

TiO₂ substitutes include ground calcium carbonate (GCC), precipitated calcium carbonate (PCC), talc and kaolin.

TZ Minerals International Pty Ltd (TZMI), a TiO₂ industry consultancy, gave a bleak assessment of pigment and feedstock markets in its August 2015 Mineral Sands Report. "The industry is suffering from lower prices, weak demand, high inventory levels and a general oversupply of most products," the organisation said."Pricing is relatively volatile in this market," Philippe Guillemaille, head of sales and marketing at Argex Titanium Inc., a new-route TiO₂ company with low-cost production aspirations, told IM.

He contrasted this with a "strong base" of consumption, which stands at around 5.7m tpa and is worth roughly $16.5bn each year.

"A number of pigment producers have shifted owners frequently because it’s a difficult industry in which to sustain profitability. Current sulphate and chloride-route producers are facing environmental issues which require more and more investment," he said, adding that, despite wider gloom, he believes the industry is at its market bottom. 

Guillemaille said that the TiO₂ industry is defined by a set of "diligent" companies, which he contrasted with the current mind set of the iron ore industry, where producers are unwilling to cut back production at high-cost mines, despite poor pricing levels induced by oversupply.

Tronox Ltd announced plans to cut pigment and feedstock production by 15% in early August 2015; Rio Tinto cut TiO₂ production by 18% year-on-year (y-o-y) during H1 2015; Huntsman Corp. said in February that it would cut European supply by 100,000 tpa and shut four US plants; and The Chemours Co. announced the closure of its Edge Moor TiO₂ manufacturing plant located near Wilmington, North Carolina, US, together with the suspension of its third TiO₂ production line, representing a supply cut of 150,000 tonnes TiO₂.

"We believe this is the right business decision," Chemours said when announcing its cuts. "Chemours is committed to the TiO₂ market, and these changes position us for growth in the industry," it added.

Guillemaille said: "More plant closures will happen; you’ve just got to check the public companies. The stocks are floating freely right now. They’re at book value and shareholders will demand profitability. They’re not going to be sleepy about it."

Moody’s agreed, stating: "In light of the broad-based level of pain, with the industry operating at well below reinvestment economics, further production curtailments are likely, probably sooner rather than later."

Production volume cuts are being mirrored by cost reductions at mines and plants in the industry. Robert Porter, the general manager of investor relations at Australia-based Iluka Resources Ltd, told IM that the company had seen both a reduction in its unit cash costs of production in 2015 and increased its revenue per tonne.

Sierra Rutile managed to cut its direct operating cash cost by 16% in Q2 2015, compared to the previous quarter, while on the pigment side, Chemours has announced intentions to find savings in plant efficiency and selling, general and administrative expenses totalling $40m for H2 2015. Similar measures are planned and being implemented across the board.

Neil Gawthorpe, marketing and logistics director at Sierra Rutile, told IM that the company has made great strides in cost reduction, making it one of the lowest-cost natural rutile suppliers globally.

"Many companies will be benefitting at present from the low oil price and this is also applies to Sierra Rutile, but the company has also made sustainable savings in the areas of labour, power optimisation and material costs," Gawthorpe said.

"There is of course still room for further improvements in these areas but it is the expansion of production volumes – and the resultant dilution of fixed-costs – that will take Sierra Rutile to a market-leading cost position," he added.

However, TZMI believes that, for the industry as a whole, "these measures are not enough to counter the price decreases resulting from weak (…) fundamentals, nor will they be in the next two quarters".

"Obviously these measures are critical for the industry at the moment, but with everyone lowering costs at the same time, the structural impact on the market is that the marginal costs of the industry are lower," the consultancy said, adding that industry overhang exceeds 1.5m tpa on a nameplate basis, with the majority of the oversupply material originating in China.

Stockpile buffer

Despite relatively strong supplier discipline and cost cutting measures, a big problem facing the industry is that extra pigment demand will not necessarily result in pigment or feedstock price increases, owing to low operating rates in both industries.

Today, operating rates stand at about 80%, according to Moody’s. This is an improvement on 2012, where operating rates stood in the low 70% range, but still lower than the 90% which Moody’s believes is necessary to give suppliers the ability to raise prices.

"In the absence of more meaningful capacity rationalisation, we believe the industry is probably at least two-to-three years away from that level," Moody’s said.

The historically high stockpiles reported by suppliers and consumers are a further impediment to recovery, as producers need to work through these before buyers will consider the rises necessary.

"TiO₂ prices have remained under pressure, with the industry continuing to absorb feedstock inventories incentivised from the previous period of high prices," Rio Tinto advised in its most recent quarterly earnings statement.

Sierra Rutile’s Gawthorpe said that TiO₂ inventories could weigh on pigment prices in the medium-term, but that high-grade chloride feed inventories are now returning to normal levels, meaning that any effect is set to be short-lived.

"Inventories of lower quality feedstocks will undoubtedly continue to cause pricing pressure within that sector," Gawthorpe said.

Irish mineral sands miner Kenmare Resources Plc, which operates mines in Mozambique, also noted that ilmenite inventories have been reduced from a peak at the end of 2014, but remain a source of supply.

As of June 2015, Iluka maintained a stockpile of feedstock worth just over Australian dollar (A$)800m ($572.8m*), nearly double the recorded value for December 2011, which edged slightly over A$400m.

"Iluka’s approach is to flex production and be a demand follower, rather than push product onto the market," Porter told IM.

"Part of the inventory build-up has been associated with the completion of mining at the Murray Basin Woornack, Rownac, Pirro site in Victoria, Australia, with the intention for finished product and concentrate to be processed and provided into the market in the period leading to the next planned development in the Murray Basin," he explained, adding that the inventory will be drawn down accordingly.

"Iluka has a strong balance sheet and I think it has been demonstrated unequivocally that the level of inventory does not have an influence on its market behaviour," he said.

The wider industry problem remains, however, and TiO₂ end-market demand is not expanding substantially. "Overall, the demand for titanium units from end users appears to be little changed from last year — it remains stable," Porter told IM.

Iluka said in its Q2 2015 results that it believes the reason for this flat demand profile reflects currency movements and pigment-specific sector dynamics, rather than underlying demand for TiO₂ products.

TZMI agreed, stating in an August 2015 report that the strong US dollar has lowered dollar-based costs and thus prices in many regions, particularly Europe.

High grade demand

Market conditions for high-grade TiO₂ products are said to be better than those for standard grades, particularly because recent expansions in Chinese pigment production typically focus on low quality material.

"We need to take care of contaminants and radioactivity, whereas the Chinese TiO₂ industry often does not consider these problems," Guillemaille told IM.

He said that while TiO₂ producers require bulk, low quality demand to exist, the margins in niche, high quality sectors is where profits can start to stack up.

Reflecting Guillemaille’s comments, Iluka restarted its synthetic rutile kiln in Q1 2015 after taking it offline for more than a year. The company said the decision was made on the basis of higher demand for premium-grade feedstocks.

Iluka’s Porter told IM that the reactivation of the kiln is underpinned by commercial arrangements, reflecting demand from pigment customers.

He said that when chloride pigment plant utilisation levels were lower, relating to the drawdown of pigment inventories, there was more demand for lower-grade products and less demand for high-grade natural and synthetic rutile.

"As utilisation rates increase there is typically a shift to consumption of higher grade feedstocks," Porter added.

Demand projections

While the US construction industry is booming, sparking positive headlines and generating statistics revealing spending at a seven-year high and single-family home starts up 19% year-on-year (y-o-y), the slowdown in China and global growth projections are less positive, leaving international pigment demand faltering.

High-end applications, however, appear to offer a refuge from a wider malaise.

Looking further ahead, self-cleaning coatings still have some technical hurdles which need to be overcome, but they are a potentially lucrative future pigment market, according to Guillemaille. He also pointed to photocatalytic paints as a good recipient for research dollars.

Meanwhile, Gawthorpe told IM that the high-grade titanium metal market for aerospace applications is showing "exciting growth and is particularly geared towards the use of high-grade feeds, including natural rutile".

"There are also several interesting projects being developed to produce titanium metal at significantly reduced costs, which could exponentially increase the use of the metal. Success in any one of these projects would be a game-changer for the high grade titanium minerals sector," he added.

The wildcard: China

China surprised the industry with the rapidity of its entrance to the TiO₂ markets. Mine production of ilmenite, which stood at 500,000 tonnes in 2009, doubled to 1m tonnes in 2014, over a period of only four years.

Much of this supply increase was caused by the association of ilmenite with magnetite in Sichuan province. High iron ore prices allowed Chinese miners to produce large volumes of low cost ilmenite, Edward Barlow, the China country manager for TZMI, stated in a recent report for Paints and Coatings Industry. 

"Chinese pigment exports have spread rapidly across the world, displacing conventional supply in established markets and winning the lion’s share in new markets," Barlow said.

While production mostly consists of lower-value sulphate feedstock and pigment material of variable quality, as with many other Chinese mineral industries, improved beneficiation and manufacturing techniques are being encouraged.

According to Kenmare declining iron ore prices have resulted in a drop in ilmenite supply in China, potentially increasing the Chinese import requirement to maintain pigment production rates in the second half of 2015.

"The start-up of new titanium slag plants in China and Saudi Arabia is also expected to have a positive impact on demand for suitable quality ilmenite," Kenmare said.

Balancing this, however, was the Chinese government’s decision to devalue the renminbi currency by around 3% in mid-August.

"[The devaluation] could see TiO₂ exports from China escalate and depress import volumes. Probably not a scenario that encourages a global market uplift," TZMI said, adding that domestic demand is not particularly strong.

 "The capacity rationalisation in the country to date has not been significant enough to favourably impact the global market," TZMI said, noting that Chinese export volumes declined y-o-y in Q2 2015 for the first time since Q3 2013. 

Moody’s believes that pigment producers in China, representing around a third of global supply, are worse off than their Western counterparts. They are struggling to compete and remain profitable in the face of low Asian prices, lower operating rates and higher costs.

"It is fair to say that Western markets are certainly looking stronger than Asia," Gawthorpe agreed. "The slowdown in China and the volatility of its stock markets are obviously cause for concern from a macro perspective."

The higher costs of Chinese TiO₂ production correspond to smaller average plant sizes, the use of the sulphate, rather than chloride, production process and the "fragmented nature" of the industry, according to Moody’s.

One of the biggest consolidatory changes to the Chinese TiO₂ markets in 2015 was the merger of Sichuan Lomon Titanium Industry Co. Ltd and Henan Billions Chemicals Co. Ltd. The two businesses account for 500,000 tpa of Chinese capacity, according to China Chemicals Market, a research consulting group. 

The companies had combined net profits of just under $125m in 2014.

"The Lomon-Billions merger is in our view, a positive development – we have said for some time that consolidation in the pigment industry is necessary." Iluka’s Porter told IM.

According to Gawthorpe, the merger will have a positive effect on the industry because it will drive further consolidation and rationalisation, which are required to optimise Chinese TiO₂ quality and output.

"We are already seeing closures of small, inefficient, pollution-heavy sulphate plants and the emergence of a new chloride pigment sector [in China]," he added.

At the 3^rd China Chloride Route Technology and Source Material Application Seminar in Jiaozuo, Henan province, in July, delegates heard that several companies are making progress in meeting the technical challenges that chloride route TiO₂ production present.

Jie Deng, the vice secretary of the China TiO₂ industry, said at the conference that China now has the strictest environmental laws in its history, which became effective in January this year.

Chloride route TiO₂ producers in China include Henan Billions, Liaoning Jinzhou Titanium Industry Co. Ltd, Yunnan Xinliu Nonferrous Metals Co. Ltd, Luhoe City Xingmao Titanium Industry Co. Ltd and Pangang Titanium Industry Co. Ltd.

A move to chloride production of TiO₂ would likely benefit western feedstock producers, which are much more capable of providing high-grade rutile material than the ilmenite-dominated mines in China.

"The company has long-established
contacts within China and is poised to take advantage of the high quality requirements that will be demanded by the emerging chloride pigment and high-grade titanium metal sectors," Gawthorpe said.

A further, possibly only short-term, question mark hanging over the TiO₂ industry is the enormous explosion that occurred in the Chinese port city of Tianjin in August.

Around 11% of TiO₂ exports leave the country via Tianjin port according to China customs. The scale of the destruction in the port means the impact on TiO₂ exports in the medium-to-long term is still unclear.

The effects of the enormous port explosion in Tianjin, China, in early August of this year are still largely unknown. (Source: Eristic, Weibo)

Small victories

Gawthorpe told IM that consolidation and rationalisation in China combined with capacity reduction elsewhere are strong signs that industry issues are being tackled. This will "undoubtedly" lead to a sector recovery through 2016, he said.

"The recovery of natural rutile pricing is more geared to non-pigment markets, for example, titanium sponge and welding, which are expected to recover in a short time frame," Gawthorpe added.

"This recovery will then be further compounded as and when the pigment sector strengthens."

While TiO₂ pigment producers still have a long and uncertain road to recovery ahead of them, pigment consumers are in much better shape. Sherwin-Williams Co., PPG Industries Inc., Valspar Corp., RPM International Inc., and Axalta Coating Systems Ltd are all "reaping the benefits" of low pricing, according to Moody’s.

TZMI neatly summarises the state of the industry thus: "So can it get any worse? Unfortunately, in the short term, the answer is yes, but a nadir cannot be too far away."

*Conversion made September 2015