Global Titanium Dioxide Industry Slides Perilously South

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The US$10.6 billion titanium dioxide pigment industry recorded an unacceptable level of profitability in 2008 on the back of sharply rising energy and sulfur prices, coupled with titanium dioxide price increases that failed to meet cost inflation pressures. TZ Minerals International Pty Ltd (TZMI) announced that according to its annual independent in depth analysis of the global titanium dioxide pigment sector, the weighted average manufacturing cash cost increased by 13.2% in 2008, while at the same time revenue growth was only 6.9% on a US dollar basis. The result was a further reduction in the industry revenue to cash cost (R/C) ratio for the sector to 1.12, the lowest point attained in the five year old study.

It is clear that cost pressures, particularly for energy related inputs and sulfur, have considerably impacted the profitability of the sector

The US$10.6 billion titanium dioxide pigment industry recorded an unacceptable level of profitability in 2008 on the back of sharply rising energy and sulfur prices, coupled with product price increases that failed to meet cost inflation pressures. TZ Minerals International Pty Ltd (TZMI) announced that according to its annual independent in depth analysis of the global TiO2 sector, the weighted average manufacturing cash cost increased by 13.2% in 2008, while at the same time revenue growth was only 6.9% on a US dollar basis. The result was a further reduction in the industry revenue to cash cost (R/C) ratio for the sector to 1.12, the lowest point attained in the five year old study.

In 2008, DuPont's oldest and smallest chloride plant, US-based Edge Moor, replaced the Saudi-based Cristal Global plant Yanbu as the lowest cost facility in the study. However, the bottom-up analysis had Yanbu retain its status as the most profitable plant when calculated on a cash-margin basis.

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.

DuPont remains the clear industry leader with the highest profitability rating, when all five plants in its portfolio are consolidated. According to TZMI, DuPont generated a Pre-Tax Operating Income (PTOI) close to 50% of the US$1.062 billion achieved for the entire industry. China's Sichuan Lomon operation had the lowest cost for the Chinese producers and was ranked 17th in terms of total global cash cost and 21st in profitability in 2008. This is a significant change downward to 2007 as the Chinese producers, 97% of which use the sulfate process in this study, were significantly impacted by the sulfur and sulfuric acid spot markets, particularly in the first half of 2008.

The revenue to cash cost ratio decreased 2.7% for the five global producers (DuPont, Cristal Global, Tronox, Huntsman and Kronos) in 2008, accounting for 70% of the production covered in the Study. On the other hand, the R/C ratio for the regional producers, covering 28 plants, decreased by 9.2%, primarily on the back of significant exposure to escalating sulfuric acid and energy costs.

There was a significant increase in the number of plants operating in a negative cash-margin position in 2008. Whereas in 2007 TZMI calculated that 13% of the output that year was operated with negative cash margins, in 2008 that had increased to 27%, or 25 plants. "It is clear that cost pressures, particularly for energy related inputs and sulfur, have considerably impacted the profitability of the sector," said David McCoy, Senior Partner at TZMI.

The differential in operating cost structures between chloride and sulfate process plants widened again in 2008. On a cash cost basis the difference was 38%, with only 5 sulfate pigment plants with cash costs below the industry weighted average. TZMI forecasts this gap to close over the next 18 months as cost inputs moderate, particularly for sulfur and sulfuric acid. "This cost inequality is a function of the costs of the inputs being differentiated between the two processes, but also a function of the location of the plants and the fluctuations in exchange rates," said McCoy. Western Europe accounted for 23% of the Pre Tax Operating Income of the sector in 2008 while contributing 27% of the production. At the same time the Euro appreciated 6.8% against the US dollar and pigment selling prices in Western Europe were relatively static when measured in Euros. On the other hand North America, which produced 34% of the pigment accounted for in the study, contributed 59% of the global PTOI. North America, particularly the US, remains the stronghold of large volume, low cost production in this industry.

"Early in 2008 Cristal Global took the decision to close its Le Havre sulfate plant in France, which was the highest cost facility in the 2007 TZMI study. Late in 2008 and early in 2009 there have been further announcements of plants being idled or temporarily closed as demand collapsed in all markets," said McCoy. "By 2010, TZMI expects some reasonable recovery in the profitability of the sector on the back of some hard decisions by major producers to shut high cost assets and recovery in product pricing," commented McCoy. "However, generalities about this sector should not be treated as gospel as each producer and region is distinct. We are entering a period of major change for the titanium dioxide sector. Higher titanium feedstock prices are expected to be fully rolled out by 2010 to support much needed investment decisions by the suppliers. Pigment manufacturers will have to pass through reasonable price increases over the next 18 months as the perpetration of this situation is unsustainable".

Each year TZMI releases its Global TiO2 Pigment Producers Comparative Cost and Profitability Study, the benchmark analysis of the leading industry producers. The study covers 60 pigment plants spread across 27 countries and covers almost 92% 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.

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

Enquiries:
David McCoy, Senior Partner, TZ Minerals International Pty Ltd, Phone: +61 (0)8 9359 6000, Fax: +61 (0)8 9359 6050, Email: dmccoy (at) tzmi (dot) com

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