August 17, 2011 Titanium Dioxide A Shining Future Ahead Titanium dioxide (TiO 2 ) is an inorganic substance that is derived primarily from heavy mineral sands containing Rutile or Ilmenite ores. TiO 2 has one of the highest refractive indices (2.61 for Rutile crystals), making it the primary pigment for producing white colour in paints, plastics and paper. Tony Hayes, Metals & Mining Analyst tony.hayes@europac.ca Research Associate: Yang Liu yang.liu@europac.ca www.europac.ca SPECIALTY / INDUSTRIAL METALS
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Titanium Dioxide Overview Titanium dioxide (TiO 2 ) is an inorganic substance that is derived primarily from heavy mineral sands containing Rutile or Ilmenite ores. TiO 2 has one of the highest refractive indices (2.61 for Rutile crystals), making it the primary pigment for producing white colour in paints, plastics and paper. Source Titanium dioxide is mined from Ilmenite and Rutile ores. Ilmenite is more widely used because of its availability but Rutile is more desirable because it has a higher concentration of TiO 2. Ilmenite Rutile Percentage composition of TiO 2 45-65% 95% Global Reserves 650 million tonnes 42 million tonnes Global 2010 Production 580,000 tonnes Reserve Locations Australia, China, India, South Africa, Canada Australia, 18 million tonnes In 2010, 6.3 million tonnes of titanium minerals were produced, of which Australia accounted for 25% 1. The global titanium dioxide pigment industry is worth $12 billion USD. The mineral is also found in South Africa and Canada, with the three countries together accounting for 60% of global Ilmenite production 2. Usage Titanium dioxide pigment is known for its brilliant whiteness, opacity, nontoxicity, inertness and UV protection. It is found in the Rutile or Anatase forms which refers to the crystal structure within the pigments. End users prefer Rutile crystals which are higher grade than Anatase and can be used in smaller quantities while obtaining better results. In the pigment industry, 60% of the paint bought is used for painting houses and 80% of house paint is used for painting existing houses. Paint used for automotive, white goods and other specialty applications need higher quality pigments and is increasingly being imported by Chinese manufacturers 3. Figure 1: Titanium Dioxide usage through the Value Chain 4 2
Industry Players Feedstock Producers The top five producers accounted for nearly 62% of Ilmenite and Rutile supplies in 2010. Rio Tinto is one of the largest suppliers of TiO 2 feedstock, followed by Iluka, Exxaro, Kenmare and BHP Billiton. Processors There are two ways TiO 2 can be processed: the sulphate process and chloride process. The sulphate process is more established, while the chloride process is newer and more cost efficient (however, is it also more tightly controlled). Using the sulphate process is the only way to produce both Rutile crystals and Anatase crystals (Often used in paper, ink and lower quality paint). The chloride process generates only the higher quality Rutile crystals, which is preferred by manufacturers. Company Dupont Description Largest producer of TiO 2 pigments in the world Estimated capacity: 1.3 million tonnes Cristal Global Huntsman Kronos Tronox Second largest producer of TiO 2 pigments Estimated capacity: 795,000 tonnes UK based producer with higher costs of production due to concentrated sulphate processing Focused on rth American and European markets Filed for bankruptcy protection in 2009 due to low profit margins combined with low demand Estimated capacity: 1.3 million tonnes Accounted for 9% of TiO 2 supply Dupont pioneered the chloride process in the 1960s and has since incorporated the technology into all of their operations. With this advantage, Dupont has developed the most cost efficient plants in the world. However, the competition is catching up, as all five of the largest TiO 2 producers have since acquired the ability to use the chloride process as well. rth American plants were the most profitable in 2010, followed by plants in Asia-Pacific and Europe 5. End Users End users are predominantly paint and coatings companies and include Akzo bel, PPG Industries, Sherwin Williams, BASF, Kansai Paints and Valspar. 3
Industry Trends Analysts agree that the industry will experience a supply shortage in the upcoming years resulting in increasing titanium dioxide prices in the short term. What is less clear is the long term pricing of this mineral. Global demand for TiO 2 pigment in 2010 was estimated to be 5.3 million tonnes 6 and is expected to grow 3-4% annually until 2015. However, due to years of underinvestment in the industry, production capacity is not expected to follow suit. To start increasing the supply, large capital investments will have to be made, and rising ore prices will be sure to follow. By 2016, it is predicted there will be an overall shortfall of 1.7 mt TiO 2 units and an Ilmenite deficit of 1.1 mt TiO 2 units. The tight TiO 2 feedstock markets, especially for Ilmentie will drive up prices and encourage short term contracts 7. As much as 80% of the increase in demand will come from developing countries as the TiO 2 market is strongly correlated to GDP growth 8. The recent growth in demand is largely attributed to China, which with consistent GDP growth of 9-10%, compensates for declining or stable demand in developed countries. The demand in China has risen over the past 10 years from 200,000 metric tons annually to nearly 1 million metric tons annually, with no signs of slowing down over the next 6 12 months. The UK consulting company Artikol has a more conservative estimate for global TiO 2 demand growth placing it at 2.7% from 2010-2019. However, they also believe in faster growth for China at 5% a year, and see demand potential in India in the next 10 years as well 9. The rise in the worldwide middle class population is also expected to increase TiO 2 consumption in the next 5 years 10. On the supply side, several international and regional companies have started to enter the growing Chinese market. However, much of these planned additions are based on the sulphate process, which causes production costs to be high. While Chinese producers have stated their desire to move towards the chloride based process, a lack of technology, scale, and access to high quality feedstock diminishes their likelihood of success and limits their production capacities 11. According to ICIS Chemical Business, a minimum of 100,000 t/year of additional pigment will be needed even if the demand only grows by 2% a year. DuPont currently has plans to expand capacity by 350,000 t/year, which will add 9% to global TiO 2 capacity. Producers in the Asia-Pacific region have also been working on capacity expansions but at a much smaller scale 12. Outside of China, there are no TiO 2 pigment plants expected to be built before 2013-2014, and TZ Minerals International (TZMI), expects prices to rise on tight supplies. Manufacturing costs are already expected to increase by 30% from 2010-2015. Figure 2: Globalisation of TiO 2 Demand Figure 3: Correlation between TiO 2 demand & real GDP Figure 4: Titanium feedstock supply/demand outlook 4
New Projects from Titanium Dioxide Producers 10 Country Production (TI0 2 units ktpa) Earliest Start South Africa 190 2012 Mozambique 250 2012 South Africa 25 2011 Senegal 330 2013 Kenya 246 2013 Australia (WA) 66 2013 Australia (WA) 59 2013 Australia 122 2013 Pricing Forecast and Explanation In 2009, a lack of pricing discipline combined with a decrease in global demand and competition from Asia resulted in very low industry margins and Tronox (5th largest TiO 2 processor) to file for bankruptcy protection. Since 2009, pricing discipline has returned with an expected 20% price increase in raw materials representing a 5% cost inflation for end users. The price increases should improve industry profitability, especially the profit margins of producers and processors, though Credit Suisse does not see this trend continuing beyond 2012. In 2010, the average industry profitability expanded by more than $140 US/t relative to 2009, and the revenue to cash cost ratio also increased by 6% for the top 5 producers 13 (Tronox has continued production through bankruptcy, and after a 2 year restructuring program, emerged from bankruptcy protection in February, 2011). Increasing ore prices, which represent a significant cost to processors, discourages the development of new processing capacities. As a result, companies with both mining and processing capabilities will have an advantage in the marketplace. Titanium dioxide prices differ depending on the concentration of TiO 2 found in the product. While Rutile has a high concentration of TiO 2, because of its limited occurrence, Ilmenite is often used instead. There are several grades of Ilmenite based on its TiO 2 content: Chloride grade (>58% TiO 2 content) used as Chloride process feedstock Sulphate grade (<58% TiO 2 content) used as Sulphate process feedstock Feedstock for slag (<50% TiO 2 ) Ilmenite can also be upgraded by decreasing the impurity content to yield higher value. There are also several types of upgraded feedstock available: Synthetic Rutile: 88-95% TiO 2 content Chloride Slag: 85-95% TiO 2 content Sulphate Slag: 80% TiO 2 content The following sections explain pricing forecasts for the different types of feedstock. 5
Rutile Rutile demand is mostly affected by the titanium sponge markets and welding rod manufacturers. Although they comprise only 8% of the TiO 2 market, this equates to around 30% of the Rutile market. Credit Suisse does not see its demand increasing but prices in the medium term should increase due to plant closures after the global financial crisis that put the bargaining power in the producers hands. Eventually, expansions by several large TiO 2 feedstock producers in the Synthetic Rutile market combined with stagnant demand will drive prices down starting 2013. According to TZMI, bulk Rutile in H1 2011 is priced at $700/750 US/t, an increase from $550 US/t in 2010 Prices will peak in 2012 with Credit Suisse estimated it to reach $925 US/t and decline starting 2013 The long term expected price is $850 US/t Ilmenite The Ilmenite market is more opaque and difficult to forecast than the Rutile market. While short term prices are expected to rise, new mineral sand deposits that should be operational in 2013 will drive prices down closer to the long term forecast. Figure 5: Zircon, Rutile and Ilmenite, quarterly price 1987-2014F in real (2011) terms The long term expected price sits at $160 US/t March estimates by TZMI placed current new contracts at $130-150 US/t with spot sales at $160 US/t and could reach $200 US/t in the near future Existing contracts are priced at $100 US/t 6
Slags and Synthetic Rutile Prices for these markets are not specifically forecasted but prices are increasing because sulphate slag supply is very tight due to the general trend of large processors moving towards producing higher profitability choride products. Chloride slag contracts are currently priced in the mid $400 US/t range while spot prices reach low to mid $500 US/ton FOB. TZMI reports new Synthetic Rutile contracts varying from $600 US/t-$700 US/t, twice the existing contract prices Chloride slag contracts are currently priced in the mid $400 US/t range while spot prices reach low to mid $500 US/ton FOB Titanium Dioxide According to Ti Insight LLC and Credit Suisse, TiO 2 prices have generally declined on a real basis over the past 20 years despite the strong 11% increase in 2010. Tight TiO 2 supply and demand conditions, however, mean that this trend should reverse for the period of 2010-2015 if not longer, giving producers the pricing advantage. The margins gained for top end titanium products should outpace those at the bottom. Figure 6: Global Average TiO 2 Prices Ti Insight LLP had also stated that average world prices for high quality TiO 2 pigment was $2400 US/t but prices could double to $4800 US/t by 2015. Currently, strong demand combined with low inventory levels have resulted in a series of significant price increases from producers with buyers having no option but to accept. Further increases may come for Q3 2011 starting September or October. In Asia, prices are also expected to increase because of power rationing in some provinces that will cause producers to cut back operations 14. In Europe multiple 7
plant closures during the recession combined with aged facilities that mostly rely on the sulphate process have caused prices to soar. With no new prospects for increased capacity soon, Europe is increasingly importing from Asia. Some companies, such as Dow Chemical, are now trying to develop new technologies to decrease the amount of TiO 2 needed in paints to combat rising prices 15. TiO 2 producers have already announced pricing increases of $200 US/t in Q4 2010 with another increase of $300 US/t in Q1 2011 and a further $350 US/t increase in Q2 2011 In rth America, titanium dioxide prices have already reached as high as $3080 US/t as of Q2 2011 In Europe, analysts estimate prices to climb to $4200 US/t by the end of 2011 1 Singh, Digvijay. National Industrialization Co. Rep. no. 2060.SE. Credit Suisse, 17 May 2011. Web. 2 Delivering Value Through Expansion of the World Class Moma Mine. Rep. Kenmare Resources, Apr. 2011. Web. <http://www.kenmareresources.com/investors/~/media/files/k/kenmare- Resources/pdf/presentations/Kenmare%20presentation%20April%202011.pdf>. 3 Zircon and Titanium. The Sands Are Shifting. Rep. Mineral Deposits Limited, Mar. 2011. Web. <http://www.mineraldeposits.com.au/user/files/investor%20centre/presentations/mdl_presentation_march_2011.pdf> 4 Delivering, loc. cit. 5 Singh, loc. Cit. 6 Global Titanium Dioxide Industry Recovery Firmly Under Way. PRWeb. 25 Mar. 2011. Web. <http://www.prweb.com/releases/pcs2011/03/prweb5192364.htm>. 7 Delivering, loc, cit. 8 Argex Receives Titanium Dioxide Pricing Forecasts. Argex Mining Inc. 26 Jan. 2011. Web. <http://www.argex.ca/ uploads/45.pdf>. 9 Titanium Dioxide Prices and Pricing Information. ICIS Chemical Business. Feb. 2011. Web. <http://www.icis.com/v2/chemicals/9076545/titanium-dioxide/pricing.html>. 10 Zircon, loc. cit. 11 Singh, loc. cit. 12 Terry, Larry, and Joseph Chang. Global TiO 2 market in wave of activity. ICIS Chemical Business [Weekly] 30 May 2011. General OneFile. Web. 13 Singh, loc. cit. 14 Terry, loc. cit. 15 Dow Breakthrough Enables Better Paint with Less TiO 2 - MarketWatch. MarketWatch. 24 Mar. 2011. Web. <http://www.marketwatch.com/story/dow-breakthrough-enables-better-paint-with-less-tio2-2011-03-24>. 8
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Titanium Dioxide A Shining Future Ahead Titanium dioxide (TiO 2 ) is an inorganic substance that is derived primarily from heavy mineral sands containing Rutile or Ilmenite ores. TiO 2 has one of the highest refractive indices (2.61 for Rutile crystals), making it the primary pigment for producing white colour in paints, plastics and paper. www.europac.ca