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DuPont Faces Squeeze as Titanium Ore Costs Advance: Commodities

November 30, 2011

(For more commodity columns, click on CMMKT.)

Nov. 22 (Bloomberg) -- DuPont Co., the world’s biggest maker of titanium dioxide, may struggle to maintain profits from the white pigment because mining companies supplying the industry with raw materials haven’t kept pace with demand.

Developing economies are consuming more titanium dioxide, mostly used in paint, as living standards improve. China uses less than 1 kilogram per person annually compared with as much as 4 kilograms in developed countries, according to data from Iluka Resources Ltd., which mines titanium-bearing ore. The pigment, also known by its chemical formula TiO2, has climbed 38 percent this year, according to ICIS-LOR data.

The cost of rutile, a raw material containing as much as 95 percent Ti02, has jumped 77 percent in 2011 and is heading for the biggest yearly gain since at least 1997, according to Metal Bulletin data. Average prices may advance 62 percent to $1,700 a metric ton in 2012, according to a RBC Capital Markets presentation this month. There isn’t likely to be any “significant” new supply until at least 2015, RBC said.

“The market will stay constrained in terms of supply for a significant amount of time,” Tom Casey, chief executive officer of Tronox Inc., a U.S. pigment producer, said Nov. 10 at a conference in Hong Kong organized by industry consulting group TZ Minerals International.

Rutile, found in mineral-sand deposits, is upgraded into purified titanium dioxide, which is then sold as a white pigment that adds opacity to paint, plastics and paper.

Raising Prices

DuPont said last month that earnings at its performance- chemicals unit doubled to $593 million, helped by the company passing on higher raw-material costs to buyers of its TiO2. Asia-Pacific prices for the pigment will rise by $200 a ton on Jan. 1, DuPont said yesterday in a statement. DuPont probably will announce similar 5 percent price increases around the world, Mark Gulley, a New York-based analyst at Ticonderoga Securities, said today in a telephone interview.

Profit margins won’t grow next year because higher TiO2 prices may be offset by rising ore costs, Jeffrey J. Zekauskas, an analyst at JPMorgan Chase & Co. in New York, said in an Oct. 26 note.

“We see continued demand growth in 2012 and beyond,” said Gregg Schmidt, a spokesman for Wilmington, Delaware-based DuPont. He declined to comment on predictions for TiO2 and ore prices.

Expanding Production

DuPont expects global economies will “pick up” next year, Schmidt said. DuPont CEO Ellen Kullman said Oct. 25 that a growing global population and rising per-person pigment consumption will help TiO2 performance remain “strong.” The company is spending more than $500 million to expand production at its five TiO2 sites and plans to build a new plant in China.

Huntsman Corp., a U.S. TiO2 producer, may see ore costs double in 2012, its Chief Financial Officer J. Kimo Esplin said Nov. 2.

“There has been chronic underinvestment” in supply, said Thomas Van Valkenburgh, a vice president at Cristal Global, a company in Saudi Arabia that is the second-largest producer of titanium-dioxide pigment behind DuPont.

Demand for TiO2 raw materials is spurring mining companies to develop new supplies. Rio Tinto Group, which was the biggest producer of titanium-dioxide feedstock in 2008 according to TZ Minerals data, and Australia’s Iluka are expanding mines and building new operations.

Mozambique Expansion

Rio is spending C$800 million ($771 million) over five years to sustain and extend the life of its mine in Lac Allard in Quebec, Canada. The London-based company is also conducting a $60 million study to consider expanding four mines in South Africa, Canada, Madagascar and Mozambique.

The study “is a very huge project, even in the Rio Tinto sense,” Jean-Francois Turgeon, a managing director at Rio Tinto Iron & Titanium, said at the Hong Kong conference. The project is in its early stages and, if successfully implemented, would bring on new output in 2017, Turgeon said. Increasing supply “is not going to happen tomorrow,” he said.

Tronox agreed Sept. 26 to sell a 38.5 stake in itself to South Africa’s Exxaro Resources Ltd. to gain controlling interests in operations that will give it more raw materials.

Kenmare Resources Plc, a Dublin-based mineral-sands producer in Mozambique, is spending $300 million to expand production of ilmenite, another mineral containing titanium. Kenmare appears to be the only producer “increasing significant capacity next year,” said Jeremy Dibb, a mining analyst at Cannacord Genuity Ltd. in London.

Tight Supply

It’s not just raw-material supplies that are helping TiO2 prices advance. The pigment is also in tight supply after processing plants were shut during the global recession that began in 2008, allowing producers such as DuPont and Huntsman to pass on higher costs.

TiO2 makers won’t keep accepting higher prices for raw materials, Dibb said.

“Feedstock producers need to improve profitability, but now the pigments people are saying the increases have gone far enough,” he said.

More expensive TiO2 is making buyers such as Saudi Basic Industries Corp., which is also known as Sabic and is the world’s largest petrochemicals maker, look for ways to reduce usage. Dow Chemical Co. is accelerating the roll-out of Evoque, a new polymer that it says allows paintmakers to cut TiO2 use by 20 percent without sacrificing a paint’s ability to mask the background color of a wall or fence.

’Profit Compression’

“There’s profit compression along the supply chain,” Jim Wilkerson, a global category manager at Sabic, said in an interview in Hong Kong.

Tronox’s Casey said in a Nov. 15 presentation that a tighter lending policy in China is exacerbating seasonally weak TiO2 demand in the current quarter. Tronox plans to use the period of softer demand to build up TiO2 inventories ahead of an anticipated increase in demand in 2012, he said.

TiO2 prices may fall 15 percent in 2012 because of a global economic slowdown, Warsaw-based ING Groep NV analyst Adam Milewicz said last week.

Ore Prices

A 15 percent decline is unlikely amid rising ore prices because the highest-cost pigment producers would become unprofitable, said Hassan Ahmed, a New York-based analyst at Alembic Global Advisors.

“We find it hard to believe that TiO2 prices would decline in the face of rising ore prices,” Ahmed said in a Nov. 18 note.

Rising TiO2 prices are having a trickle-down effect. Gross profit margins at Sherwin Williams Co., the largest U.S. paintmaker, have contracted for six straight quarters on a year- on-year basis. The Netherlands’ Akzo Nobel NV, the world’s largest paintmaker, said last month it will restructure its house-paint unit because of rising ingredient costs and weak construction markets in the U.S. and Europe.

“TiO2 is a major component of the cost of a can of paint, and the paintmakers are getting squeezed because they can find it quite hard to pass those costs along,” Ian Davenport, president of Davenport International Associates LLC, a New York- based consultant, said in a telephone interview. “The price of paint will continue to rise.”

--With assistance from Simon Casey in New York. Editors: Steven Frank, Jasmina Kelemen

To contact the reporters on this story: Michelle Yun in Hong Kong at myun11@bloomberg.net; Jack Kaskey in Houston at jkaskey@bloomberg.net

To contact the editor responsible for this story: Simon Casey at scasey4@bloomberg.net


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