A potential upward spiral in titanium dioxide (TiO2) prices could exert significant additional profit-margin pressure on coatings manufacturers in the next few years, a longtime TiO2-industry executive warned at a recent industry conference.
Bruce Zwicker, formerly vice president of Millennium Chemicals' Global Coatings Business who remains active in the industry, said further hikes in TiO2 prices are a good bet -- with TiO2-capacity tightness a real possibility as early as 2004.
Zwicker offered these views during a presentation titled "Titanium Dioxide Pigment and the Paint and Coatings Industry," given during the recent "TiO2 2003" conference in Miami. The conference was sponsored by Intertech, based in Portland, ME.
Recent price-increase moves by TiO2 suppliers will be accelerated, Zwicker said, if growth in the world's major industrial economies proceeds as expected. "If the economy does recover, price-rise momentum will strengthen for coatings raw materials," Zwicker said during an interview with PCI following his presentation.
"The danger for coatings companies is that they are in the process of being squeezed by raw-material suppliers on one side who need to restore some pricing, and the leverage on the part of their customers -- home centers, the larger contractors and the mega-OEMs, pushing back on paint price increases." Zwicker adds, some paint price increases are getting through, but more is needed."
Zwicker, however, added the caveat that economic recovery, particularly in the United States and Europe, could be derailed by war in Iraq, new terrorist attacks in this country, or other "geopolitical issues." Those events could send the economy back into recession, put a halt to TiO2 price increases and "return TiO2 producers to a dismal state," he said, "and another industry shakeout."
Zwicker, in a review of recent developments in the TiO2 industry, said major TiO2 producers have been forced to take major cost-cutting actions to deal with serious price erosion that shaved an estimated 18% from TiO2 prices between early 2001 and early 2002, due to economic downturns. He estimated that TiO2 consumption declined 5-6% in 2001.
As a result, TiO2 producers were caught in a squeeze between high ore prices and demand weakness. Higher ore costs were the result of very tough long-term contracts set when the pigment industry was enjoying good times in the 1990s. Meanwhile, demand slowed and too much TiO2 pigment production capacity existed.
TiO2 price erosion began to emerge in 1999 but turned serious in 2001. In response, TiO2 producers moved to slash operating and administrative costs just to keep their heads above water, which they managed to do. They also pushed back against ore producers, with some degree of success.
With pigment demand staging a rebound in 2002 -- rising by 6-8% when averaged on a worldwide basis -- TiO2 producers have acted to push prices up with three price-hike announcements in 2002 and early 2003.
Zwicker characterizes the current supply-demand situation as "in balance," but says supply tightness could develop, depending on whether economic growth meets or even exceeds current projections that call for worldwide growth averaging 2.9% in 2003. Such growth, if sustained, could send TiO2-production operating rates up to a sustained level of 95% by 2004 or 2005, with signs of tightness potentially appearing as early as the seasonal demand peak period of April to June of this year.
Zwicker estimates TiO2 demand increased 6-7% in 2002, with some of the increase due to inventory restocking. Europe and Asia led with the growth rates of 8% and more than 10%, respectively. U.S. demand grew a modest 2%. "This year growth will be slower," Zwicker said, "about 2% to 4%, but China's growth will once again lead the way with another double-digit increase."
TiO2 producers, meanwhile, are likely to make incremental capacity-increase moves. "For larger expansions to happen, the TiO2 price would have to go up higher, faster," Zwicker said. TiO2 producers going forward will be more conservative about adding large capacity, due to the industry's historic pattern of supply-demand cycles. "History has proven returns on large projects are often unsatisfactory," he said. "The new business model for producers will have to be smaller projects and some other ways of making the supply chain more efficient."
A danger for coatings manufacturers, Zwicker said, is the threat of escalating raw-material prices on one hand and on the other hand resistance to efforts to pass those costs along to customers. "In the short term, the outlook depends on recovery in 2003. In the long term, it depends on whether (TiO2) producers add capacity yet again." Coatings benefited from lower raw material costs, not just TiO2, in 2001 and early 2002. But that has since changed and cost increases are continuing to escalate. If economic growth does continue, the momentum for higher raw-material prices will strengthen.
Coatings companies will find themselves being squeezed by raw material suppliers on one side and on the other side leverage on the part of their largest customers -- home centers, contractors, OEMs -- pushing back on paint price increases. This, in turn, could generate a gap between coatings-industry "winners" and "losers" -- companies that are able to raise prices and improve operational efficiencies and those that are not as successful. That wider gap could lead to another round of industry consolidation, Zwicker warned.
Zwicker can be reached by e-mail at firstname.lastname@example.org, and by phone at 410/785.9506.