DuPont Co. (DD:US), the world’s biggest producer of titanium-dioxide pigment, is facing slimmer margins as prices in the $16.3 billion market are poised for the first two-year drop in a decade because of oversupply and weak demand.
Prices for the white paint ingredient, known by its chemical formula TiO2, have tumbled 33 percent to $3.97 a kilogram from a February 2012 peak, according to data compiled by Bloomberg. Only coffee and orange juice performed worse among 41 commodities in the UBS Bloomberg CMCI Index. Producer price increases announced last month will fail as customers demand additional cuts, said Jim Fisher, chief executive officer of pigment consultant IBMA Inc.
DuPont, Huntsman Corp. (HUN:US) and other TiO2 producers may not see recovery as soon as they forecast (DD:US) amid a selloff of inventories that are 50 percent higher than normal. More Chinese supplies, customers reformulating products to use less TiO2 and higher titanium ore costs also threaten profits from the chemical used to make paint for appliances, cars and homes.
“The low point of the cycle may be a little longer than some people foresaw,” Fisher, based in Hilton Head, South Carolina, said in a phone interview. He’s worked in the industry for 35 years, including 12 years at the predecessor to TiO2 producer Kronos Worldwide Inc. (KRO:US)
Huntsman, Kronos and Cristal separately announced price increases last month of 10 cents a pound, or 6 percent, for the mineral-based chemical that’s also used to whiten toothpaste and Twinkie filling.
The price announcements will probably be ignored, Frank Mitsch, a New York-based analyst at Wells Fargo Securities LLC, said in a Feb. 28 note. Ian Corydon, a Los Angeles-based analyst at B. Riley & Co., agreed, saying that excess inventory gives paintmakers little reason to pay more and they can bargain the price down.
“Those guys are testing the waters to see if they can get a price increase,” Corydon said of the producers in a phone interview.
Rather than rise, TiO2 may drop another 7 to 14 percent before the price stabilizes next year, IBMA’s Fisher said. A second year of lower prices this year would be the longest losing streak for TiO2 since 2002, he said.
DuPont, the industry’s low-cost producer, probably won’t follow competitors’ price announcements because increases would risk sales as the industry sits on 80 to 90 days of inventory, compared with normal levels of 40 to 60 days, Fisher said.
Prices may not stabilize until 2014, cutting pretax operating income at DuPont by as much as $500 million this year, Duffy Fischer, a New York-based analyst at Barclays Plc, said in Feb. 12 note. Deutsche Bank AG analysts led by David Begleiter estimate earnings in the DuPont unit that makes TiO2 will drop 40 percent to $1.13 billion this year.
DuPont Chairman and Chief Executive Officer Ellen Kullman said Jan. 22 that the market should stabilize in the first half as inventories are used up. She said full-year profit margins from TiO2 will narrow as much as 9 percentage points, cutting the company’s per-share earnings growth to 2 percent to 7 percent, compared with Kullman’s long-term target of 12 percent.
The decline may be worse than forecast, Fisher said. Producer forecasts are overly optimistic on the pace of inventory drawdowns, and they also fail to fully account for the impact of rising exports from China, a slow growing European economy and a bumpy U.S. recovery, he said.
‘Too Much Headwind’
“I don’t know if they have the capability of pushing prices up in this market,” Fisher said. “There is too much headwind going the other way.”
Huntsman, which forecasts pigment earnings dropping to near zero in the first quarter, said sales volumes and prices will improve after this month. Earnings before interest, taxes, depreciation and amortization for its pigment segment may fall to about $200 million in 2013, from $362 million last year, the Salt Lake City-based company said last month.
Huntsman stock has gained 19 percent this year, compared with an 8.4 percent increase by DuPont.
Demand is improving in Asia and exports from China are dropping, helping to stop sliding prices in some parts of the world, CEO Peter Huntsman said in a phone interview yesterday. Price increases in some regions will be successful in the first half, if not in March, he said.
“You first have to stop the knife from falling any further, and you then have to turn it around,” he said.
Janet Keckeisen, a Kronos spokeswoman, didn’t respond to a request for comment today. A spokeswoman for Cristal also didn’t respond to a request for comment.
Sales volumes of pigment tumbled 17 percent in the fourth quarter at Tronox Ltd. (TROX:US), with 12 percent due to excess inventories, about 4 percent from customers reformulating paints to use less TiO2, and 1 percent caused by Chinese imports, said Tom Casey, chairman and CEO of the Stamford, Connecticut-based company.
Tronox has 81 days of pigment sales in inventory, which is 25 to 30 days more than normal, Casey said Feb. 21. Plant operating rates should rise to about 90 percent by year-end, from 75 percent currently, Casey said.
“Volumes should slowly build through the first half,” Casey said. “There’s a lag while we work down the inventories, and then plant utilizations move up.”
Tronox, Kronos and Cristal are most in need of higher prices because of their reliance on European markets, where demand has slowed with the economy, Fisher said.
Meanwhile, Chinese producers have announced plans to add 1 million metric tons of annual TiO2 capacity by 2020, Fisher said. That’s a 63 percent increase in the nation’s output and a 19 percent increase in effective global capacity of 5.39 million tons, he said. Even if some smaller plants are closed by environmental regulations, exports from China will continue to climb.
“The Chinese have changed the character of the business,” Fisher said. “They are keen to participate in world markets.”
Any price gains may only serve to keep pace with costs for titanium ore, Fisher said, as Rio Tinto Group and Iluka Resources Ltd. (ILU) announced plans last month to cut ore production.
Corydon, the B. Riley analyst, said now is the time to invest in TiO2 companies such as Tronox, because a recovery will occur sooner than most expect. Tronox has gained 16 percent this year and Kronos has fallen 11 percent.
‘Waiting for Turn’
“There are a lot of people on the sidelines waiting for the turn,” Corydon, who recommends buying Tronox, said in a March 1 interview. “It’s dangerous to wait because as the money starts flowing in, the stocks will correct pretty quickly.”
Improvement in the U.S. housing market is helping consume inventories that built up last year, and excess inventories will be used up in the first half, Corydon said.
Hassan Ahmed, a New York-based analyst at Alembic Global Advisors, said the price rise announcements made in the face of continued weak demand indicate economic distress at pigment producers. Higher prices that boost earnings to about 13 percent of sales at Huntsman “are imminent,” Ahmed said in a Feb. 25 note.
On the other hand, lower price increases may lead to a protracted earnings trough, potentially resulting in the shutdown of four pigment plants in western Europe and North America, Fisher said.
“This industry is used to a lot of pain,” he said.
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