Independent Titanium Dioxide Pigment Price Forecast Predicts Rising Prices For Those That Can Weather The Present Squeeze

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In today's environment of almost zero cash margins for most TiO2 pigment operations, where reinvestment economics disappeared some years ago, coupled with the largest drop in global demand seen in a generation, the perfect storm has arrived for the pigment industry. Internationally renowned titanium consultancy, TZ Minerals International, forecasts prices for titanium dioxide to rise rapidly in the second half of 2010.

We have already seen the permanent closure in 2008 of one of Cristal Global's French-based sulfate plants

In today's environment of almost zero cash margins for most TiO2 pigment operations, where reinvestment economics disappeared some years ago, coupled with the largest drop in global demand seen in a generation, the perfect storm has arrived for the pigment industry.

It is evident that leading companies should finally be able to justify closing high cost plants, allowing them to realign portfolios and establish a more competitive cost structure going forward. However, this is a high price to pay, as closing an old pigment plant can cost US$100 million, if not more. Unfortunately, there will also be a case to idle these plants so that they can be brought back on line during the upturn expected in 2010.

No decisions in this industry are easy to make, but to redirect the price erosion back to a point where high quality greenfields plants can be justified, high cost capacity must come out of the market. A detailed analysis of the global supply/ demand balance forward to 2013 is used to develop our latest 5 year regional price forecast. TZMI's Pigment Price Forecast, the only independent forward-looking analysis of the prices for the titanium dioxide pigment, is published bi-annually by TZ Minerals International Pty Ltd (TZMI).

In 2008 global pigment demand was estimated at 4.716 million tonnes, down 4.9% from 2007. The compound average growth rate (CAGR) of pigment demand over the five year period to 2008 has been below the long term average. From 2003-2007 the CAGR was 3.6%, however, the 4.9% year-on-year drop in 2008 decreased the five-year CAGR to only 1.8%. Regionally, the main consuming markets for TiO2 pigment are the major industrialised economies of North America, Europe and the increasing role for China. Per capita consumption is highest in North America and Western Europe. The greatest opportunities for growth lie in the less developed high population economies, led by China and India.

Demand for pigment in Asia-Pacific is expected to grow from 1.657 million tonnes in 2008 to 2.160 million tonnes by 2013, a CAGR of 5.45%, with an average just over 100,000 tonnes per year of new annual demand over the five year period. Global per capita consumption is expected to decrease to 0.62 kg in 2009 before recovering to 0.79 kg by 2013.

On the supply side, annual growth rates should be more subdued than the demand side - primarily due to the relatively weak reinvestment economics for the major pigment companies. Conversely, Chinese producers are expected to continue their rampant production growth, fuelled by much lower capital costs and an acceptance of tighter margins by the plant owners. Capacity utilisation rates at the Chinese plants are also expected to increase as technology improves. As a consequence, this will lead to higher pigment quality, with more Chinese production becoming acceptable in wider markets.

If TZMI's forecast of permanent plant closures in the US and Europe occurs, there is likely to be a supply shortage occurring in the period 2010/11 as the remaining plants reach maximum output. There is little chance of investment in additional brownfields capacity during 2009 and early 2010, resulting in at least another two year period before significant additional capacity can become available. The result is likely to be a very strong rebound in pigment prices in all markets in 2010 and 2011, before some tempering in the rate of increase from 2012.

The Pigment Price Forecast H1 2009 includes an in-depth analysis of regional pigment trade for the period 2001 to 2008, extracted from TZMI's proprietary database.

The Pigment Price Forecast H1 2009 is developed concurrently with TZMI's Global TiO2 Pigment Producers Comparative Cost and Profitability Study, the benchmark analysis of the leading industry producers. The study covers 61 pigment plants spread across 27 countries and covers over 90% of the 2008 output. The study is an independent analysis built up from individual plant cost structures plus an analysis of global pigment trade during 2008. This year's study also addresses the indicative cost structures in 2012 and relates this forecast to the required regional pricing to maintain or increase profitability.

"It is clear that cost pressures, particularly for energy related inputs, bulk freight and sulfur, have considerably impacted the profitability of the sector in 2008," said David McCoy, Australian-based Senior Partner at TZMI.

The differential in operating cost structures between chloride and sulfate process plants widened in 2008. "The exposure of sulfate technology to rising energy prices is much greater than that of chloride technology. The considerable rise in the price of sulfur and sulfuric acid had a significant affect on the industry in 2008, but impacted primarily in China where spot market purchases are more prevalent. The large weighting of the sulfate production in non-US dollar markets also resulted in a relative increase to the fixed costs in the sulfate industry, as the US currency depreciated against most global currencies in 2008," said McCoy.

"We have already seen the permanent closure in 2008 of one of Cristal Global's French-based sulfate plants" said McCoy, noting that Le Havre ranked last in terms of cost structure and 58th in terms of profitability in the 2007 study. "In the last 4-6 months we have seen a continuation of the poor profitability in the sector, combined with a collapse in demand as the supply chain experiences a severe destocking cycle, resulting in several more plants being placed on "care and maintenance" explained McCoy. "If the downturn extends through most of 2009 it will become more difficult to recommission some of these plants and permanent closures seem likely. When you analyse the portfolio structure of the major producers, it makes a lot of sense to keep high cost plants closed and enable more output to lower cost facilities. However, the barrier to exit is a costly one."

ABOUT TZMI
Headquartered in Australia, TZMI operates a team of expert consultants from global locations including Australia, South Africa, China and Europe. With over 100 years of accumulated experience, TZMI's principals have been closely involved in the mineral sands and TiO2 pigment industries since the 1970s. TZMI specialises in confidential consulting services for the titanium minerals, zircon, titanium sponge and TiO2 pigment industries as well as publishing specialised market studies and reports based on its comprehensive database of production and market data. http://www.tzmi.com

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David McCoy
TZMI
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