Steel market woes are weighing on refractories

By IM Staff
Published: Friday, 03 January 2020

Pressure is continuing to mount on the refractories sector while its main market – the steel industry – suffers from overcapacity, trade tensions and emissions reduction targets, Rose Pengelly finds.

The refractories industry has had another testing year. According to US-based procurement intelligence firm Beroe Inc, trade in refractories in 2019 was largely a buyers’ market, due to supply surpluses and strong rivalry between around 1,500 refractory suppliers globally, effectively giving consumers the power to dictate prices for some products.

Given that the steel industry, the biggest market for refractories, is generally experiencing entrenched difficulties with low prices and overcapacity, this picture is unlikely to alter significantly in 2020. Consequently, competition to sell refractories to steel producers has never been fiercer.

Stefan Borgas, former president of the World Refractories Association and chief executive officer of Austria-headquartered refractories producer RHI-Magnesita, fears that rather than driving refractories companies to differentiate products through quality and performance, competition is making the market more concentrated. "The refractory industry must finally have the courage to make a turn toward the future," Borgas said at the Unified International Technical Conference on Refractories (UNITECR) in Yokohama, Japan, in October 2019. "If we keep following a set route, the industry will shrink, consolidate and commoditize," he added.

The risk of commoditization, where refractory products essentially become fungible and are treated as equivalent to each other, regardless of who produced them, is not new, but remains one of the refractories industry’s biggest concerns. This is because it weakens the power of producers to set prices and allows market forces to determine the value of products, with potentially crippling consequences in oversupply situations. 

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The fortunes of steelmakers and foundries are having
an impact on markets for refractories
Shutterstock 

Some parts of the refractories market, particularly at the raw materials end, have already accepted commoditization, partly in response to demand from buyers for recognized standards across certain product types.

India’s Carborundum Universal (CUMI) refers to its electro minerals division (EMD), which produces refractory mineral products including brown and white-fused alumina, silicon carbide and zirconia materials, among others, as operating in a "commoditized" segment of the market, describing it as "market-driven… where the volatility comes up and where price increases can be pretty quick, depending how the market is moving."

Refractories producers fear that handing more bargaining power to struggling buyers, especially in the influential steel sector, will set pricing precedents that will prove extremely tough to shake. The risk of losing ground in price negotiations is exacerbated by the fact that specific consumption (the amount of refractories consumed per tonne of steel produced) is falling and the World Steel Association (Worldsteel) has hinted that it expects the number of steel producers globally to shrink in response to structural overcapacity. "Excess capacity is a global problem requiring coordinated global solutions," an association spokesperson said. 

In 2019, the Organisation for Economic Co-operation and Development (OECD) put global excess capacity at around 425 million tonnes, which Worldsteel notes is significantly less than the 737 million tonnes calculated by the Global Forum on Steel Excess Capacity (GFSEC) in 2017, but still requires drastic cuts to bring the market back into balance.

"Worldsteel’s position is that governments should promote a swift and timely restructuring of the steel industry by advancing policies that ensure market forces play a decisive role in determining the future of the industry. Market-oriented approaches should ensure survival of the fittest producers," Worldsteel said. If policymakers follow the association’s recommendations, then refractory demand is likely to be hit severely.

Unsurprisingly, the jostling among refractories suppliers for steel customers means that refractories procurement ranks low on the list of concerns for most steel producers. "It’s not an issue our members raise, either as an innovation challenge or an ongoing capital investment challenge," a spokesperson for UK Steel, the trade association that represents British steelmakers, said. "At the heavy end of the blast furnace side, refractories’ lining and re-lining of blast furnaces is a big element and a huge capital outlay when it does come up. But it’s not something we’re worried about in terms of access to the best technologies. It’s not a specific challenge for the sector," they added.

Similarly, Worldsteel does not highlight access to refractories as a problem for steelmakers. "[A much bigger] technological challenge for the industry is climate change," the spokesperson for the association said.  "We estimate that the steel industry accounts for between 7% and 9% of global carbon emissions," they added, noting that the industry’s major focus is on finding technologies that help cut CO2 emissions in steelmaking.

Another unrelenting issue for steelmakers, according to UK Steel, and one that also affects refractories, is increasingly unfavorable international trade relations and, for British steelmakers especially, the United Kingdom’s pending departure from the European Union.

"Dumping continues to be an issue, as do trade wars and the 25% tariffs in the US. Given the UK exports half the steel it produces and 70% of that goes to the EU, anything that impacts on our ability to trade with the EU is going to have a major impact," the spokesperson said. "Because of the trade wars, there are a lot of protectionist barriers that have gone up. We will get caught in the middle of that if we don’t have an orderly Brexit," they added.

Trade wars

While steel has been at the center of trade disputes between China, the United States and the EU, refractories have flitted in and out of the firing line, with the US ultimately deciding not to penalize imports of refractory materials deemed critical to 

US steelmakers. The threat of tariffs nevertheless creates uncertainty in the refractories industry, especially for Chinese companies and international refractories producers with Chinese operations.

In their results statements for the first half of 2019, both UK-based refractories manufacturers Vesuvius and RHI-Magnesita cited potentially disruptive effects on global trade from increasing geopolitical tensions and the adoption of new trade barriers and tariffs by several countries as principal risks and uncertainties for their businesses. Added to this risk is the fact that it is becoming increasingly difficult to resolve trade spats.

Until recently, trading nations could appeal to the World Trade Organization (WTO) on behalf of unhappy industries to arbitrate disputes. But recently, mounting frustration with this approach has come to a head. In December 2019, The WTO’s appellate body, the highest authority in its dispute settlement system, was suspended after the US’ policy of blocking judicial appointments because of what it believes is the body’s tendency to overreach its remit left the panel short of the required number of judges.

The suspension is a blow to the concept of rules-based international trade, at a time when the US’ policy of using punitive tariffs as a negotiating tool, and China’s willingness to exploit gaps in the WTO’s rule book, threaten to create an increasingly aggressive trading environment for steel and refractory products.

WTO archives show that the body has dealt with 33 disputes concerning steel (excluding steel pipes and stainless steel products) and advised on 16 issues involving refractories since it was founded in 1995. The EU, Japan and Canada have expressed particular anxiety about the fate of the WTO, fearing it could become irrelevant if a compromise is not reached soon.

Andrew Hood, a trade lawyer at European law firm Fieldfisher, said that while suspension of the appellate body is concerning, the international trade system is not at risk of imminent collapse. "Although the appeal body could cease to operate, for a short time at least, the rules it oversees will continue to be in place and countries should continue to observe those rules," he said. "Any disputes over international actions in breach of WTO rules will still have to go through the preliminary WTO procedures to try to be resolved. In theory, therefore, there should be little immediate impact, even on sensitive raw materials like steel." 

Like worried national trade officials, however, Hood believes that if the suspension continues for some time and trade tensions rise to fill the vacuum, there could be increasing fragmentation of the international trade order which he says "could well see countries stretch – if not break – WTO rules".

The EU, some international organizations and national governments are looking at potential stop-gap measures that can be put in place to ensure resolution of any disputes that occur while the WTO appellate body remains suspended are dealt with.

But given that any interim measures would merely be a less robust alternative to the WTO, its proponents hope that this latest crisis will focus minds of its members and encourage necessary reforms to bring powerful countries like the US back on side.

Innovation in refractories

While the refractories industry is used to reacting to shifts in demand among its end-user industries, which aside from steel includes cement, glass and foundry, some, such as Borgas, think this inclination to follow rather than lead has made industry too reactive when it should be proactively innovating to anticipate structural changes in its core end-markets.

Professor W E "Bill" Lee Freng, co-director of the Institute for Security Science and Technology at Imperial College London who also sits on the technical advisory boards of RHI-Magnesita and UK-based Morgan Advanced Materials, says refractories companies do try to keep ahead of their markets. "A small group of international experts [who make up the technical advisory boards] meet the companies’ senior technical teams about twice a year to look for where innovation will appear and guide their future research and development programs," he said. 

New technologies being trialed include sensors and monitoring for improved control and instrumentation, big data and use of artificial intelligence and machine learning to analyze outputs. "I really see a future for complex quaternary and higher order non-oxide systems with application of machine learning to design new compositions [of refractory materials] with improved properties," he said.

Some companies have an apparent preference to fund industry-based R&D, often close to major production hubs. In its 2019 half-year results statement released in July, Vesuvius said that accelerating R&D efforts at its research facility in Suzhou, China, was a key priority for the company.

Vesuvius said it is also planning six waves of new product launches in the space of 18 months and that it spent nearly £15 million (about $20 million) on innovation in the first six months of 2019 (although this was down from nearly £17 million in the same period in 2018).

RHI-Magnesita, meanwhile, has committed to spend 2.2% of annual revenues on innovation, which equated to around €31 million in the first half of 2019. Other smaller producers have more modest innovation budgets, but a significant chunk of refractories R&D spending is necessarily focusing on how refractory materials perform from an emissions perspective, rather than strictly on the benefits they impart to the end products they are being used to make, according to Worldsteel and Professor Freng. "Clearly, efforts are focused on improved energy efficiency, reduced pollution and application of new technologies to refractories processes," Freng noted.

"There is no technological silver bullet that will work for steel producers in different contexts all over the globe, but rather there will be a suite of technologies which will help dramatically reduce 

CO2 emissions in primary steelmaking," Worldsteel said, pointing to renewables-powered hydrogen projects in Sweden, carbon capture in United Arab Emirates and bio-ethanol operations in other steelmaking locations as evidence of the steel sector’s efforts to decarbonize. 

Outlook

There is a general sense in the refractories market that conditions will get worse before they get better.

Vesuvius said in July that it had "experienced challenging end markets in H1 2019" and did "not expect a recovery in H2 2019." More optimistically, the company added that "in the medium term and beyond, our core end-markets in both steel and foundry are structurally growing."

Other refractory manufacturers made similarly somber near-term forecasts with slightly more positive long-term horizons.

What the predicted restructuring of the steel sector will mean for the size and shape of the refractories industry remains to be seen, but in spite of Borgas’ plea for the refractory industry to have the courage to make a turn toward the future, many expect there to be further shrinkage and consolidation, if not commoditization.