DuPont’s (NYSE:DD) performance chemicals segment deals in titanium dioxide (TiO2) and fluorochemicals. The segment has been under pressure since March 2012, due to slowing demand of the white pigment from China, inventory depletion by manufacturers as well as downstream players and rising feedstock prices. All of the players in the industry have experienced the impact of what has been a sharp decline in prices led by slow demand. DuPont, a market leader in terms of production capacity of the pigment, also has an advantage in the form of advanced manufacturing facilities that could process both high and low concentration ores to produce a superior TiO2, through the chloride route. This helps the company manage its production cost effectively depending upon the market dynamics.
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What Led To The 2012 Industry Decline
During 2009, the industry witnessed a sharp fall in demand due to global economic downturn that led the closure of several manufacturing facilities across the world, reducing global production capacity by as much as 7%. As a reaction to the grim industry situation, governments around the world initiated a variety of stimulus packages to revive the industrial sectors. This led to sharp growth in infrastructure and housing markets on the back of these stimulus packages, specifically in China, that led to soaring demand for the pigment. Meanwhile, supply reductions during the prior year created an excess demand situation which resulted in disproportionate price hikes by the manufacturers.
During 2011, the prices of the white pigment soared by around 60%, partly due to artificial demand from paint and coating companies as they bought the pigment ahead of demand amid soaring prices and this consequently led to a massive inventory overhang. All of this, coupled with a slowdown in the pigment’s demand during 2012, driven by ‘cooling’ of the Chinese housing market led to a sharp decline in prices. As customers and manufacturers continued to reduce their inventory levels, volumes dropped significantly as well. However, we expect volumes to pick up as inventory levels bottom out during 2013, and prices to increase during the later half of the year led by rise in demand. (See DuPont’s Chemicals Business Touches Bottom As Emerging Markets Recover)
Feedstock Prices and DuPont’s Advantage
Operating margins of pigment producers were under pressure from both ends due to declining prices under slower demand and higher feedstock prices due to supply shortages. TiO2 feedstock market is very concentrated and is largely controlled by a few large players, namely: Rio Tinto, Iluka Resources and Tronox.
Rising pigment prices and rapid expansion during 2010-2011, along with quick depletion of feedstock bodies led to supply shortage driven by feedstock price hikes. There are some feedstock suppliers in the waiting and the expansion plans of the existing ones are also under process. However, the feedstock supply is not expected to get any better until 2014.
In this environment, we see DuPont’s feedstock flexibility as an advantage over other players in the market. Its manufacturing facilities can process a variety of feedstock grades to produce the pigment through the chloride route, which is preferred over the sulphate process due to lower associated costs and better pigment properties like color brightness, durability, gloss and covering ability for the premium grade coatings. It allows the company to manage its production costs effectively, according to the demand scenario. However, we expect performance chemicals margins in 2013 to still be under pressure as the negative impact of lower pigment prices would more than offset any gains from feedstock flexibility.