The landscape of the TiO2 industry is changing rapidly and there is no guarantee that the market fundamentals of the last 20 years will return during the next five years. On the demand side, emerging economies are stretching the supply chain to the breaking point, forcing rapid price escalation for those customers able to source the material. On the supply side, the industry has been in a clear “retrenchment” over the past 20 years, with suppliers rationalizing high-cost capacity during industry downturns and only adding incremental capacity through brownfield additions, while attempting to grow with the market and maintain market share.

TZMI does not expect any significant capacity expansions outside of China over the next two years, but expects global demand to grow more than 4% over the same period. China producers will add significant capacity over the next decade, with this capacity to run at very low utilization rates. The ability of China’s producers to procure adequate feedstocks to support the additional capacity is in question.

Supply/Demand

Figure 1 Click to enlarge

Two pieces of evidence support our bullish forecast. The first is the rise of the middle class in emerging economies – particularly China, Brazil and India – which most economists expect to continue. As the middle class grows in number, the growth in disposable income, a key indicator for TiO2, is likely to outpace GDP in these countries. Second, TiO2 demand is still behind cumulative global GDP growth rates over the past decade, so the industry has some “pent up” demand that is likely to spur growth at greater than GDP rates. Figure 2 provides an “S Curve” function that indicates the steep curve for demand growth as emerging economies increase disposable income levels and are able to purchase more “quality of life” products like TiO2. Figure 3 provides a historical comparison of global GDP growth and TiO2 demand growth.

Figure 2 Click to enlarge

As stated previously, supply has not kept up with demand since mid-2009, and 2011 is developing into the same headline (Figure 4). None of the global producers are expected to add significant capacity in the next two years due to the lead-time required for internal and external approvals. In 2010, Tronox and Exxaro added 43,000 tpa of chloride technology capacity to the Tiwest Joint Venture in Western Australia, following  approximately 160,000 tpa capacity permanently shut down in 2009 (Savannah, GA, and Baltimore, MD, plants operated by Tronox and Cristal Global, respectively). Huntsman also “swapped” some of its UK-based sulfate capacity to chloride through the closure of Grimsby while at the same time expanding Greatham.

Figure 3 Click to enlarge

TZMI expects the global producers to add capacity through de-bottlenecking activities, innovation and small capital investments, but these activities seem likely to add less than 50,000 tpa of near-term capacity at a time when global demand is expected to increase by more than 200,000 tonnes.

China’s producers will likely add a considerable amount of capacity in the next two years. Historically, new capacity added in China operates at much lower utilization rates – as low as 40-50% of nameplate in the initial years of operation. The significant near-term concern for China’s producers, however, is feedstock availability. The feedstock of choice for Chinese producers, sulfate ilmenite, will be in substantial shortage for several years. In practicality, sulfate producers in China will likely be limited by feedstock availability and will face significant price pressure for the material. The net effect is a cap on the amount of exports that China can provide to other emerging regions. Non-Chinese producers can fill part of this gap, but not all. Globally, we expect a continuation in shift in trade and rising TiO2 pigment prices, both of which have been ongoing since late 2010.

Feedstock Market

Figure 4 Click to enlarge

The term “feedstock” in the TiO2 context refers to TiO2-containing minerals that can range from 40-95% TiO2 content. Generally, sulfate operations use lower TiO2 feedstocks, while chloride feedstocks are generally higher in TiO2. TiO2 feedstocks are mined materials, with the majority of minerals historically provided from Australia, South Africa, Canada, the United States, Norway and a number of African countries. Australia, Canada and South Africa have historically been the major producing countries, accounting for around 56% of global supply.

Feedstocks represent a significant cost for TiO2 producers, and TiO2 represents a significant cost for coatings and plastics producers. The industry structural issues associated with these facts have been one of the primary causes of shrinking profitability in both the TiO2 and feedstock sectors. As a result, feedstock producers have also curtailed investment in the sector; in fact, many feedstock producers are mining companies with other investment options that were more attractive over the past decade.

The issue with feedstocks is principally that investment today results in feedstock sales in 8-10 years, on average. As such, the feedstock supply landscape is mostly written for the next four to five years. Almost nothing can be done to remedy the situation that is evolving. As such, TZMI expects pricing in the feedstock sector to rise dramatically, with the undersupply situation to reach a crescendo in 2014 or 2015. For TiO2 pigment producers, there is almost nowhere to hide. We expect the cost curve to shift upwards in subsequent years through 2015. With pricing power clearly now upstream of the coatings sector, these increases in titanium feedstock pricing will ultimately be passed on down the supply chain.

Substitutes

TiO2 substitutes have been around for decades. Two major substitutes are most pervasive: hollow sphere polymers and inorganic extenders. While the price for TiO2 was in decline and supply was abundant, users of TiO2 pigment did not need to pay close attention to substitutes since formulating these products required more effort than generated savings. Most likely these products are getting a second look by formulators looking for ways to offset increased costs without compromising the performance of products.

TZMI believes that the ability of substitutes to play a major role in curbing TiO2 demand is limited in the short-term. Extenders are generally inexpensive, but have limited ability to replace the functional attributes that TiO2 provides (opacity and brightness). Hollow spheres can probably replace 10-15% of TiO2 in targeted formulations, but the functional change to the attributes of the end products to accommodate these alternatives often limits the use to a minority of formulations. As TiO2 prices continue the march up, the substitute products will gain more favor, but TZMI believes the net impact to demand is probably limited to 1% in the next two or three years.

TiO2 Outlook

TiO2 prices have been rising dramatically since mid-2010. The fundamentals supporting the rapid increases are low inventory, high capacity utilization levels at producers, rising costs and a persistent under-supply situation. Prices are likely to continue the upward march as fundamentals are not likely to change in 2011 or 2012. Already, TiO2 producers have announced increases of $300 per tonne in most regions. We believe the price increase announcements will continue through 2011 and 2012.

We also predict that the supply of feedstocks is in question – more so for sulfate producers in the short term, with all feedstocks impacted over the next five years. The impact is not limited to costs for TiO2 producers; security of supply and potential disruptions to TiO2 pigment customers are also serious concerns. Some pigment customers may experience supply disruptions, some of them significant.

Historically, there are two to three significant production disruptions (e.g., hurricanes, earthquakes, accident, equipment failure, etc) per year. Already in 2011, Sakai Chemical’s plant in Onahama, Japan has been temporarily idled due to the impact from the massive earthquake on the northeastern coast of the country. This site’s status for the remainder of 2011 is uncertain. Further disruptions in 2011 could result in significant impact on pigment prices.

TZMI believes the TiO2 pigment under-supply situation will persist until at least 2013. The global producers are developing capacity addition plans and will be deploying capital for smaller brownfield expansions prior to 2013, but significant capacity is likely to come on after this period. Given the poor financial history of the industry, global producers are likely to be more disciplined in adding capacity during this growth phase of the industry.

E-mail Eric Bender at ebender@tzmi.com for more information.