Wednesday, April 11, 2018

INDUSTRY SPECIAL ....Back in the black: Carbon black producers eye better business prospects


Back in the black: Carbon black producers eye better business prospects

The Indian carbon black (CB) industry has posted significant improvement in earnings, thanks to improved operating rates amongst the handful of players, soft prices for carbon black feedstock, brisk demand, and protection from cheap imports, particularly from China. The rubber processing industry and especially the automotive tyre industry is understandably worried and has called for steps to be taken to ease their burden, but they will find little relief in the near term.
CB is mostly a commodity manufactured in highly controlled processes to produce specifically engineered aggregates of carbon particles that vary in particle size, aggregate size, shape, porosity and surface chemistry. It is produced either by a thermal oxidative or by a thermal decomposition process of feedstock that come from petroleum refining or from coke ovens. The technology is fairly mature, widely available, and most developments focus on improving efficiencies and reducing the environmental footprint.
Tyres – the main growth driver
Markets for CB can be broadly classified into two categories: rubber and non-rubber. The former includes the all-important tyre business where CB serves both as filler and reinforcing agent. It is cheap and effective, and despite the emergence of other options like silica (for so-called ‘green’ tyres) is expected to remain the preferred option for a long time to come. Tyre use accounts for about 65% of global CB demand, which implies that the growth of the CB industry is intimately tied to that of the automotive industry. With this industry moving east to China, India, and Central & Eastern Europe, the tyre industry has followed, and with it CB producers. Another 20% of global demand goes into non-tyre rubber applications including hoses, pipes, cables etc.
CB also finds applications in a host of smaller applications at least some of which require speciality grades that command a significant premium over commodity rubber grades. These serve diverse end-uses such as coatings, plastics, fibres, paper, electronics etc., and account for the balance 15% of CB demand.
Consolidated industry, but dominated by China
Unlike the broad chemical industry, the global CB industry is fairly consolidated; the number of producers is small (excluding China) and the top-10 account for nearly half of global capacity, which stood at about 16-mtpa in 2016. Like in several other chemical value chains, China is the elephant in the room – accounting for about 45% of global capacity and an even larger proportion of the new capacity created in the last decade. It is also the largest consumption centre for CB – accounting for little more than one-third of global demand in 2016.
The investment binge in China has turned the country from a small importer in 2010 to a net exporter in 2016, and squeezed margins for all. Average operating margin of the eight leading global CB players declined from 13.6% in FY10 to 11% in FY14 due the competitive environment.
But the ramp up in capacity is over, and so is the blistering pace of growth. The country has more than a 100 producers – mostly operating small, uneconomically sized plants – and several are now being ordered shut due enforcement of strict environmental norms. This has served to improve prospects for other producers elsewhere in the world. Average capacity utilisation in the global CB industry, which was about 80% in FY17 is expected to rise to 86% by FY21 as demand is likely to improve by 3.8% over 2016-2021, even as supply increases only at 2% CAGR over the period.
Improved margins and operating rates in India as well
India’s CB markets are on an even keel. Domestic demand of about 850-kt in FY18 is matched by production of about 830-kt. But this disguises a considerable trade – imports of speciality grades and exports of commodity grades mainly to neighbouring countries and to some in South East Asia.
Capacity utilisation in the domestic industry, which comprises five players with capacity a tad in excess of 1-mtpa, is now about 85%, and expected to further improve in the near-term. With plants running flat out, feedstock prices remaining low and the threat of cheap imports from China having abated at least for some time (in part due the imposition of a stiff anti-dumping duty on imports), the margins for the domestic producers have improved.
According to estimates made by CARE Ratings, a ratings firm, operating margin in the Indian CB industry has risen from 8.2% in FY15 to 11.5% in FY16 and to 15% in FY17. The current year could see a similar level of performance; though feedstock prices have moved up a bit, most producers are in a position to pass on rise in costs to customers by raising prices. The leading CB producers are also expected to divert more of their output to the domestic market and curtail exports, due the simple fact that price realisations at home are significantly better.
The domestic rubber and tyre industries have been lobbying government to remove the anti-dumping duty on imports from China. The All India Rubber Industries Association, the industry lobby group, has raised concerns that the price rise in CB will lead to closure of several rubber processors businesses, especially SMEs, but this is just scaremongering. Of greater concern is the need for new capacity, as demand is expected to rise at a CAGR of 4.2% to FY21. This implies that India will need an additional supply of 35-kt to 40-kt each year, and a world-scale plant of about 150-ktpa size every three years.
These investments are more likely to come from expansions and greenfield projects from the present lot of producers than from a new entrant into the business.
Moving up the value chain
While the outlook for the domestic industry seems bright, the industry will do well to consider expansions of its portfolio to cover speciality grades of CB that serve very different markets. The global market for speciality blacks is estimated at about 915-kt – about 10-12% of the total market for CB – while the Indian specialty black market at 49-kt is about 5% of the total market and served almost entirely by imports (to the extent of 92%).
Efforts to diversify into this more lucrative business, enjoying higher margins, will require both a retuning of processes and plants and, just as importantly, a more market- and application-oriented selling than the ‘make and pack’ approach that works well for commodity blacks.
Global players are targeting much of the growth in developed and mature economies to come from these specialities. In India too, Phillips Carbon Black Ltd. – the market leader commanding approximately 40% of the overall Indian market – is targeting increasing sales of speciality blacks for improved profitability. Just how far it has to go in this direction is revealed by the fact that out of the 472-ktpa of capacity that it has spread over four plants, just 12-ktpa is configured to make high-margin specialty grades.
The profitabilities of Indian CB producers will be a healthy black for some time to come, as they benefit from a global tightening of markets, brisk demand and protection from cheap imports. Their joy, however, is not shared by consumers.
Ravi Raghavan
CHWKLY 060318


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