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
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
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
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
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
RHI-Magnesita has already made gains in three areas,
according to Stefan Rathausky, the company’s
senior vice president for strategic marketing and corporate
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
"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
|Flame on: Steel production in the first half of 2018
was up by almost 5% year-on-year,
buoying the refractories 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]
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
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
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
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
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
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
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
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
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
Again, however, this price inflation has largely been passed
along to customers.
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
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
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.
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
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
"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.