Out of the melting pot: A year of change in refractories

By IM Staff
Published: Thursday, 06 September 2018

After a year of reorganization and changing narratives in the refractories industry – from significant M&A activity to raw material price spikes, and from booming end-market demand to uncertainties in global trade – Industrial Minerals correspondent Myles McCormick takes stock of a changed landscape for companies operating in the sector.

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iStock 


It has been a busy year for the refractories industry.

A snapshot of the state of the sector in 2016 would look markedly different from one taken in 2018. Activity in mergers and acquisitions (M&A) has reshaped the corporate landscape, with the companies previously ranked numbers two and three in the sector now melded together.

In addition, stable raw materials supply and prices have given way to extreme volatility, and a sluggish steel industry has roared into gear, pushing up refractory demand exponentially – although threats of large-scale trade disruption loom large in the background.

The state of play both upstream and downstream is now vastly different from what it was 12-18 months ago, and refractory makers have had to react accordingly. Simply put, the game has changed.

Consolidation

October 2018 will mark one year since a marriage of convenience saw Austria’s RHI and Brazil’s Magnesita combine to form the biggest participant in the refractories industry, in the form of the giant RHI-Magnesita.

Meanwhile, Imerys, another industry leader, has continued its expansionary strategy, acquiring a number of new businesses in the refractories and refractory raw material space in 2017. These included three installers of monolithic refractories in Europe, a US refractories developer, and a Chinese zirconia producer, as well as two well-known French brands – calcium aluminate specialist and speciality alumina producer Alteo.

Consolidation in refractories is not a new phenomenon. In an industry that has traditionally been quite regional, M&A activity is a natural driver of growth. The newly created RHI-Magnesita, for example, can trace its roots back to more than 20 separate companies.

"Consolidation has been occurring in our industry for well over 150 years, and we see it as a part of business," Carol Jackson, chairman and chief executive officer of HarbisonWalker International (HWI), said.

But increased M&A activity in recent years has been driven by a number of factors, industry participants claimed.

A push for ever-greater cost efficiency in the form of economies of scale means that bigger is invariably better. A pooling of resources drives down overhead costs across the board.

RHI-Magnesita has already made gains in three areas, according to Stefan Rathausky, the company’s senior vice president for strategic marketing and corporate communications.

In purchasing, bundling volumes and renegotiating contracts has brought down costs.

In the supply chain, transferring products to more suitable sites in the company’s new wider network is leading to productivity and capacity improvements, as well as lower logistics costs and greater customer proximity.

And in business support, the company has sought to take advantage of synergies, thus ensuring, for example, that there is just one account manager for each customer and to take advantage of cross-selling opportunities.

On top of the obvious advantages of economies of scale, there is an increasing desire among customers to be able to purchase their full line-up of products from one refractories producer, according to Heiki Miki, managing executive director and general manager responsible for overseas business at Japan’s Shinagawa Refractories.

"They have a tendency to prefer a one-stop-shop… People are looking for a package… I think that is also driving M&A," he said.

From a macro perspective, consolidation injects a degree of stability into a sometimes chaotic market.

"Having large [market participants such as] RHI-Magnesita, Vesuvius, Imerys, I think those big suppliers bring a certain discipline into the market place," Miki said. "If you have too many small suppliers, people will try to get into pricing wars. But having big suppliers, I think that brings discipline."

Consolidation in the sector seems likely to continue, especially in the scattered Chinese market.

And RHI-Magnesita shows no sign of losing its appetite for further expansion.

"In the short term, we are considering small, selective M&A, but in the long term we expect consolidation to continue," Rathausky said, adding that a strong cashflow means that the company is "probably already in a position to make acquisitions."


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Flame on: Steel production in the first half of 2018 was up by almost 5% year-on-year,
buoying the refractories industry.
RHI-Magnesita 

Healthy industry

The refractories industry is generally looking quite healthy, on an uptick in construction activity globally, which in turn pushes up the need for basic materials such as steel, cement and glass – all of which require refractory products for their manufacture.

"Steel consumption is growing; cement consumption is growing; glass consumption is growing," Miki said. "People need more bridges. People need more cars. People need more buildings. [They need] more infrastructure, all over the world. And it’s driving more [refractory] consumption."

Steel production – which accounts for around 70% of the global refractory market – has undergone a particularly notable period of growth. Globally, production was up by 4.6% in the first half of 2018 compared with the corresponding period in 2017, with China-fueled Asian production up by as much as 5.2%, according to the World Steel Association (Worldsteel).

This growth is directly affecting the incomes of refractory producers, with reported sales growth outstripping these levels quite substantially. UK-listed Vesuvius, for example – which until recently was the world’s largest participant in the refractories sector - reported increases in first-half 2018 revenue of 13% in the North American Free Trade Agreement (Nafta) region, 3% in the EU, 28% in South America, 23% in China and 21% in India.

Vesuvius also reported strong growth of 10.2% in its foundry division, reflecting strong demand for heavy trucks, mining equipment, construction and agricultural equipment.

This is a pattern apparent in the results of most large producers.

Imerys recorded a 3.7% revenue increase in its energy solutions and specialities division in the first six months of 2018, a boost that it said was "primarily driven by the dynamism of refractory and industrial markets in the monolithic refractories."

United States-based Minerals Technology (MTI), meanwhile, saw a 39% year-on-year spike in income in its refractories division in the first quarter of 2018, "primarily on higher refractory volumes."

There are some fears that a refractory oversupply situation may emerge in China, but the bigger producers have dismissed this as being in lower quality products, while demand for high-quality refractory goods from the large multinationals remains strong.


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Raw materials

But if healthy demand for refractories among buyers paints a positive picture for producers gazing downstream, the view upstream is significantly less rosy.

Booming demand has put strain on an already tight supply of raw materials – most notably magnesite and dolomite. This, coupled with government restrictions causing a drop in Chinese supply, has sent prices skyrocketing.

A government clampdown to enforce stricter environmental regulations has led to the shutdown of many suppliers of magnesite, and reduced availability internationally led to prices multiplying almost three times in late 2017, to a level at which they have since remained roughly stable.

Prices for bauxite, silicon carbide and zirconia also crept upward in the second half of 2017, although not to as extreme an extent.

Proposed export taxes, nationalization of Chinese mining operations and more restrictive allocations of explosives permits - for use in magnesite ore extraction - may yet put further pressure on supply.

"The bottom line is that we expect that costs will continue to go up and that we will see continued volatility," HWI’s Jackson said.

Others were more sanguine about the prospect of continued raw material price fluctuation.

The first half of 2018 saw something of a stabilization in all key refractory raw materials – fused magnesia, bauxite, flake graphite, brown fused alumina, dead burned magnesia and silicon carbide (zirconia prices continued to climb). But magnesia prices seem to be staying at their new heights and refractory producers are preparing for a situation that is the new normality.

"We do not expect current raw material market prices to remain at these high levels in the long run. However, we expect these to settle at a much higher level than what we knew before 2017," Rathausky said.

While most refractories producers have sought to pass the higher costs on to customers, the lag in passing on the increased burden is taking its toll on some.

The speed of the increases meant that many were unable to pass on the costs in July-December 2017 – Vesuvius cited contractual obligations which tied it to certain price levels – and consequently took a hit in their 2017 results.

Most have now handed the inflated costs on to customers, but for others the effects of the raw materials price spike continues to take a toll on their bottom lines.

MTI, for example, which sources 57% of its magnesite from China, expected at the time of writing to take a substantial hit in its April-June 2018 results as a direct result.

Businesses were looking at volatile supplies of raw materials for years to come and were making contingency plans accordingly.

RHI-Magnesita restarted fused magnesia operations in Norway, and increased its investment in a dolomite mine and production facility in Chizhou in China’s Anhui province.

MTI made efforts to optimize kiln operations in Turkey to supplement the supply of magnesite to its European operations. Its chief financial officer, Matthew Garth, indicated in a conference call that it was "pursuing every single angle" to overcome the issue, including attempts to move away from its reliance on China.

Another raw material input that has seen price increases – although for very different reasons – is lithium, the price of which has soared in recent years due mainly to demand for its use in electric car batteries. Refractory makers use lithium carbonate in the production of mold powders and have accordingly been hit by those price increases.

Again, however, this price inflation has largely been passed along to customers.


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Trade war

The introduction of import tariffs under Section 232 by the administration of President Donald Trump in the United States has been closely monitored by the refractories industry.

Tariffs on steel imports into the US are likely to lead to an increase of 7-9 million tonnes per year of steel production in the country, representing growth of 9-11% over the 82 million tonnes produced in 2017, according to Vesuvius.

This will benefit those refractory producers with a strong US presence, but will potentially hit those whose focus lies elsewhere, although the effects are unlikely to be felt before the end of 2018.

In theory, if non-US steel production takes a hit, those refractories producers exposed may also see a drop in demand. Most larger market participants are geographically quite diversified, however, so the effects on them will probably be neutralized.

Mooted tariffs on refractory raw materials and finished goods, however, have the potential to hit the industry directly and participants will be carefully watching any moves to introduce these.

But the harm this would cause to the steel industry, through the passing along of costs, make their introduction unlikely, because the US government is keen to support this sector.

Outlook

Looking to the years ahead, producers are generally optimistic. Infrastructure expansion looks likely to continue apace globally. And continued strong demand for steel, cement and glass mean that there will be continued strong demand for refractory products.

India is likely to become the world’s most populous country within the next half-decade, and will be a key target market. Steel production on the subcontinent has rocketed, and a decade of strong growth has made it the third-largest producer globally.

The Indian government is aiming for production of 300 million tpy by 2030, triple its 2016 annual production. Per-capita production should rise from 63kg to 160kg.

RHI-Magnesita has been watching India’s rise with interest.

"Driven by the growth in steel production, the Indian refractory market is expected to expand significantly and to fuel the local market demand for high-quality refractory solutions," Christoph Jandl, senior vice president for technical marketing, said.

China, too, is in the company’s sights, with environmental restrictions and a shift toward stronger quality standards favoring established refractory producers.

In the short term, the US is also likely to see strong growth, according to HWI. Global demand, for monolithics especially, is likely to increase in the next five years. The company has established a new facility in South Point, in the US state of Ohio, that was designed specifically to take advantage of this.

The current health of the market looks likely to remain, at least for the foreseeable future.

And the outlook for steel demand, the best indicator for refractory demand, remains positive. Worldsteel forecasts 2018 growth of 1.8%, followed by growth of 0.7% in 2019.