Major TiO2 Supplier Forecasts Continuation of Demand Rebound; Further Price Moves Hinted

Major suppliers of titanium dioxide (TiO2) pigments, looking for a business turnaround in the wake of steep price erosion that hammered profits during the past two years, say pigment users can expect higher prices as the TiO2 demand trend continues an upswing that began earlier this year.

That was the opinion voiced by executives of Millennium Chemicals Inc. at a recent media briefing in Brussels. Those executives said they expect TiO2 sales volumes to increase by 3.2% in 2003 from this year, with annual growth of approximately 2% forecast over the next five to seven years.

While not a breakneck growth pace, the volume gains forecast by Millennium would mark an improvement from 2001, when recession or downturns in the major industrial economies sent TiO2 demand down a steep 5.6%, based on a worldwide average, according to Millennium estimates. Volumes are expected to rebound with a 6.6% gain this year, based on a worldwide average, the company projects.

Based on those growth figures, Millennium executives are looking to build their case for higher TiO2 prices, which they say fell as much as 15% between the end of 2000 and early 2002. Millennium is the world's second-largest TiO2 supplier, behind industry leader DuPont Co.

In an interview with PCI, Gary Cianfichi, Millennium Chemicals vice president, Global Coatings Business, said TiO2 suppliers are being squeezed by a seeming contradiction of low prices and rising demand, despite two rounds of price hikes this year. He says those moves only allowed suppliers to add 10% or slightly more to prices, well short of the erosion seen in 2000 and 2001. As a result, he says TiO2 suppliers are in no position to consider capacity additions that Millennium projects are needed to prepare for rising demand - even if consumption inches up only modestly as predicted.

"After TiO2 prices fell, customers got stronger price reductions than they ever expected. I don't think anyone forecast prices to fall like that, given the slowdown," Cianfichi said. The situation is attributed in part to some extraordinary events, such as the aftereffects of the terrorist attacks of Sept. 11, 2001, and the U.S.-led military campaign in Afghanistan.

"We are going to have to improve profitability through a combination of reducing costs and price increases. So there's probably more coming, if demand is good," Cianfichi said of the outlook for further price moves.

"We're going to need more capacity in our business, and it's a capital-intensive business," he said. Tightness in supply also is seen as a possibility in the coming year, he says, citing signs of a squeeze earlier this year in Europe and Asia. He pointed to significant declines in finished TiO2 inventories, which he said are down to 30 days of sales in some areas of Europe - approximately half the backlog seen there early in the year.

At the media briefing in Brussels, Millennium Chemicals Senior Vice President David Vercollone said worldwide economic growth is expected to accelerate to a 2.9% pace in 2003, up from an estimated 1.7% for 2002. Growth in North America is forecast to rise to 3.0% in 2003, up from 2.4% this year. Positive growth numbers are also envisioned for Western Europe (2.5%), Eastern Europe (4%), Asia-Pacific (3%), and even Central and South America (3%), where industrial activity has been hit hard by economic woes in Brazil and Argentina.

Demand for TiO2 also is projected to return to positive territory in 2003 in all regions, led by a 5% increase forecast for Asia-Pacific, Vercollone said. Millennium says China alone will experience TiO2 demand growth of 8.0% next year. Demand in North America is forecast to rise 2.0% next year, off slightly from 2.5% this year on the heels of an estimated 4.1% demand dropoff in 2001. In Central and South America, TiO2 demand fell an estimated 8.0% in 2001 and will plummet another 11% this year before rebounding by 3% in 2003, Millennium projects.

Millennium says the combination of rising demand and an essentially steady TiO2 industry capacity level will result in a shrinking gap between capacity and demand over the next five years. Production operating rates have risen to approximately 90% from a low of about 85% that was hit in 2001 And rates are projected to rise gradually between now and 2007, to approximately 93%, although a dip to just under 90% is anticipated in 2003 or 2004.

Regarding the current price and supply situation, Millennium says TiO2 suppliers are seeking to recover from the woes of 2001, starting by ratcheting prices up with the two rounds of moves this year. "What' s interesting is that these were global increases, which is a new precedent in most, if not all, regions," Cianfichi said. "We think that was the case due to how terrible business conditions were. Profitability had eroded or gone away, but volume and demand has been up significantly this year for TiO2 products.

"We had a position where prices fell lower than last several years and went below profitability, yet volume was taking off as economies came out of recession. We're still not at reinvestment levels, but that gives you an idea of how far prices had fallen."

No reinvestment initiatives are being announced. "With operating rates high, in low 90% range, we believe that with low pricing, there is an opportunity to re-adjust prices up to be able to re-invest in the business."

As for its own capacity levels, the company has made a handful of relatively modest moves aimed at trimming costs, the biggest of which was the closing of a sulfate-process anatase TiO2 production unit in Baltimore. That reduced output by about 44,000 metric tons annually, with the products used primarily for paper. The company's chloride-process plant remains in operation in Baltimore. At the same time, Millennium increased chloride capacity at its Western Australia facility by 16,000 mt/year, to 95,000 mt. At its plant in Ashtabula, OH, the company added about 10,000 mt/year in chloride capacity. The company made no changes to capacities in Europe or Brazil. "The focus is reducing costs as much as we can, to keep costs down to the customer," Cianfichi said.

"Value is king," he said. "We've been squeezed pretty significantly over the last year and a half. So we have been challenged, in order to retain a modicum of profitability, to reduce costs. We significantly reduced SG&A (sales, general and administrative) costs, capital expenditures and the cost of manufacturing."

For the year ending in September 2001, the TiO2 business's operating profit was $69 million. It fell to $46 million for the year ending in September of this year, but the situation would have been much grimmer without major cost cutting. Price erosion cut into operating profit by $91 million. That was offset by $60 million in cost reductions.

"The bottom line is that the price lever is huge in this business. We can't cut our way to prosperity, but we've done an awful lot. But we have to have price increases also."