Millennium says global TiO2 demand fell by 5% in 2005

FOCUS ON P I G M E N T S A MONTHLY REPORT FROM REG ADAMS

MILLENNIUM SAYS GLOBAL TiO2 DEMAND FELL BY 5% IN 2005

DECEMBER 2005 In this issue

MARKETS

3

Hitox pigment prices raised Ukrainian paint demand to rise by 10-15% by 2006/07

PLANTS

3-5

DuPont to spend $1 bn on new TiO2 plant in China Clariant expands masterbatch capacity in Eire Daio recycles white pigment from paper sludge PolyOne to close Manchester masterbatch plant

COMPANIES

5-6

DC Chemical & Morgan Chase acquire Columbian Omya/Huber PCC deal under EU anti-trust scrutiny

LITIGATION

6-7

DuPont & Kronos settle patent dispute out of court

TECHNOLOGY

AN INTERNATIONAL NEWSLETTER MONITORING TECHNICAL AND COMMERCIAL DEVELOPMENTS IN THE PIGMENTS SECTOR ISSN 0969–6210

7-8

New products from: Ampacet, Cabot, CTM, Engelhard, Holland Colours, Johnson & Johnson, Millennium and Opel/GE Plastics

EVENTS

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$15 bn. It inherited from Millennium the position of second largest TiO2 producer in the world, largest merchant supplier of titanium tetrachloride and of titanium oxychloride and one of the largest cadmium pigment suppliers in the world. Lyondell is also the world’s largest manufacturer of propylene oxide. Within North America, Lyondell is the second largest producer of ethylene, propylene, acetic acid and vinyl acetate monomer and it is the third largest producer of polyethylene. The petrochemicals sector is currently enjoying an upswing in the business cycle, generating healthy profits and enabling Lyondell to pay off some of its long-term debt, which amounted to $7.9 bn at the end of 2004. The company’s target is to reduce debt by at least $3 bn and so far during 2005 it has paid off $1.5 bn. It also took the bold and costly step of getting out of the toluene diisocyanate (TDI) sector by closing its plant at Lake Charles, LA, with the loss of 280 jobs and incurring a pre-tax charge of $195 M for decommissioning, demolition, employee severance benefits and

Marie Antoinette is most famously associated with cake, with the Breguet watch and with the guillotine. This year, a tenuous connection between Marie Antoinette and the TiO2 pigments industry was established. During the 1780s, she apparently spent many a pleasant season in the Trianon pavilions on the fringes of the gardens of Versailles. More than 200 years later, one of these buildings was converted to the Trianon Palace Hotel and on 1 December 2005 it provided the grand setting for Millennium’s annual seminar for the European chemical press corps. The date was exactly 12 months on from the completion of the $1.6 bn takeover of Millennium by Lyondell. Mr John Beard (President of Lyondell Europe) was the first speaker. He drew attention to the fact that as a result of the takeover, Lyondell (headquartered in Houston, TX) is now one of the world’s 10 largest chemical companies, with operations on five continents, a global workforce of about 10,000 people and annual sales revenues in excess of

World: TiO2 Pigment Consumption Demand (M tonnes) 2003 World Total North America* Latin America Euro, ME & Afr** Asia/Pacific

4112 1284 205 1488 1135

2004 4441 1350 229 1586 1276

Year-on-year Growth

2005

04 vs 03

4217 1310 238 1483 1187

+ 8.0% + 5.1% + 11.7% + 6.6% + 12.4%

05 vs 04 – – + – –

5.0% 3.0% 4.0% 6.5% 7.0%

* Includes Mexico. ** Europe, Middle East & Africa Source: Millennium, Nov 2005

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F O C US supply contract terminations. Mr Beard was asked bluntly about Lyondell’s strategic commitment to the TiO2 industry, given that it has not been very profitable over the past 15 years. He responded by saying: “We have a good record of getting value out of businesses with a volatile profits history. At the outset, Lyondell was created from the businesses that Arco effectively threw out. The olefins business typically earns its cost of capital in only two out of seven years. But we have learned to prepare financially and operationally for the next cycle downturn. There are some analogies there with the TiO2 business, where we have some worldclass assets. So we are determined to make this business profitable.” Against the background of Lyondell’s decision to quit the TDI sector, Mr Beard was asked whether Lyondell is planning any further divestments, eg the flavour and fragrance chemicals business. He replied: “It is in the nature of business that anything we own is for sale – but only at the right price!” Mr Gary Cianfichi (Vice President, Marketing & Sales at Millennium) then presented a review of the TiO2 pigment industry. Drawing on macroeconomic data from Global Insight, he said that world economic growth is likely to be 3.3% this year, representing deceleration. World gross domestic product (GDP) had increased by 1.7% in 2002, by 2.6% in 2003 and by 4.0% in 2004. The forecast for global economic growth in the second half of this decade is 3.2% per annum. Economic growth in North America has been and is expected to continue to be around the global average, while growth in Japan and Western Europe has been and is expected to continue to be below the global average. At the other end of the spectrum, high economic growthrates are forecast for China, Eastern Europe, Latin America, the Middle East and Africa. According to Mr Cianfichi, TiO2 consumption growth is very strongly correlated with global economic growth. Having said that, it is obvious from the data presented here that the correlation is not a simple one. World TiO2 consumption increased by 8.0% in 2004 (versus 2003), while world GDP increased by 4.0%. World TiO2 consumption will

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probably record a fall of 5% in 2005 (versus 2004), while GDP increased by 3.3%. Mr Cianfichi explained that one of the most difficult aspects of measuring and forecasting TiO2 pigment consumption is the role of inventory build-up and draw-down. TiO2 manufacturers hold inventories of pigment that vary over time between 20 days’ sales and more than 80 days’ sales. Major TiO2 consumers hold inventories of pigment that are typically on a smaller scale, but still show quite wide variations. Major paintmakers hold inventories of paint (containing TiO2) that vary quite widely depending on perceived seasonal demand changes. Major paint wholesalers and retailers also hold varying inventories of paint. Similarly, with papermakers, plastics processors and other consumers of TiO2. For a TiO2 manufacturer, recording monthly aggregate shipments of kilos of TiO2 moving out of his warehouses is relatively straightforward. But it is a much more difficult task to assess how much of that TiO2 is going into building up inventories along the supply chain rather than satisfying actual current demand. Perhaps the most surprising feature in Millennium’s table is the 7.0% drop in TiO2 consumption in Asia/Pacific, including China. Mr Mark Stoll (Head of Millennium Asia/Pacific) confirmed that even in the Chinese market TiO2 consumption fell back during 2005, albeit only slightly. He pointed out that the Chinese Government adopted certain specific measures to curb possible overheating of the economy – focusing on the automotive industry and on the construction industry, particularly on speculative projects for big residential condominiums and office blocks in the cities. These measures had a sharp adverse impact on the paint and plastic sectors, which fed back to a cutback in purchases of TiO2 pigments. Elsewhere in Asia, economic growth and TiO2 demand were seriously affected by prevailing high oil prices. Mr Cianfichi drew attention to the upturn in TiO2 purchase orders, especially from North American customers in September and October 2005. But it is difficult to know at this

stage whether this represents a true upturn in underlying demand, whether it merely signifies general moves towards restocking all along the supply chain or whether the upturn is mainly due to a wave of “panic buying” following major plant outages in Mississippi and Louisiana in the wake of Hurricane Katrina. On the supply side, Millennium estimates current world capacity at around 4.9 M tonnes/y, slightly down on the 2004 figure, reflecting the impact of retrenchments in capacity in France, the UK, South Africa and the US. To meet customer demand during the sales boom last year, TiO2 producers were running several of their plants flat out and the average global operating rate was 91%. Against a background of a sharp downturn in demand this year, the average global operating rate has declined to 85-88%. Meanwhile, TiO2 pigment prices have recovered from the low point reached in mid-2004. They increased quite steeply during the second half of last year in all regions. In Europe, prices held steady in the first quarter of 2005, but have fallen back somewhat since then. In Asia/Pacific and in Latin America, the upward trend in prices continued into 2Q 2005, but there was a slight downturn in 3Q 2005. In North America, the average realised selling price for TiO2 was slightly higher than or at about the same level as 2Q 2005. Right now, with the DeLisle plant still shut down for extensive repairs, the global TiO2 supply/demand balance is described as “snug”. Millennium and the other major TiO2 suppliers are confident that they will achieve the price increases of 6-10% posted for all market regions. (See ‘Focus on Pigments’, Nov 2005, 3). Beyond 2005, further price increases are anticipated because Millennium and other suppliers keep emphasising that TiO2 pigment prices are still at least $400 per tonne lower than the level needed to fully justify reinvestment in new TiO2 pigment capacity. And, with demand for TiO2 forecast to rise by 2-3% per annum over the long term, reinvestment in new TiO2 pigment capacity is going to be necessary to satisfy ongoing customer demand. Reg Adams

DECEMBER 2005