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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