Carbon black crisis looms
By David Shaw*:
Up to about 2016, the global supply-demand situation for carbon black was balanced, or slightly in over-supply. As we move into the middle of 2018, the world carbon black supply-demand balance is getting tight. Toward the end of this year, and into 2019, that tightness is likely to move to shortages and allocations
I’m writing this from the Carbon Black conference in Chengdu, China. It’s not only India that is suffering from a crisis in carbon black. The aim of this column is to trace the origins of this crisis and discuss how it might be resolved.
As with so many difficult situations, there are multiple causes. Very rarely does a single event lead to such a significant imbalance of supply and demand; its often three or four things happening together that lead to such difficulties, and that is certainly the case in the current shortages of carbon black.
In this case, there are environmental constraints in the United States and China and India; these have led to a reluctance to invest in new capacity, and indeed some reductions in capacity. Meanwhile, the global tyre industry has been increasing output in almost every region of the world with special emphasis on India, with a glut of new radial truck tire factories.
And finally, carbon black makers appear to have taken the decision to prefer their customers in the tyre industry over the smaller players in the non-tyre segment. As one senior executive put it, “can you imagine the reaction from Bridgestone, if we told them that we could not deliver their full order volume, because we have a local shoe maker who needs the carbon black?”
Globally, according to Paul Ita of Notch Consulting– a leading analyst of the carbon black business – capacity for carbon black declined in 2017. That is pretty much a world first. In reality, the world needs roughly 400kt of new capacity each year to cope with increasing demand.
Taking 2016, 2017 and projections for 2018 together, around 334kt of new capacity will be added around the world. At the same time, a little over 200kt of annual capacity was taken out, leading to a net gain of just 120kt, when additional capacity according to the trendline should have been around 1200kt in that period.
Part of the reason for the lack of new capacity has been environmental constraints.
In China up to 1000kt of capacity has been taken out as smaller suppliers decide it is not worth continuing in business in the face of strict environmental controls. Much of that has been replaced with modern, clean capacity.
In the United States the five main carbon black makers have agreed to a settlement with the Environmental Protection Agency (EPA) to pay almost USD500mn for environmental upgrades and fines. This cost will not result in any new capacity In fact, the EPA rules mean it is now virtually impossible to add further capacity in the US. The EU also has strict environmental rules making it virtually impossible to add new capacity in the region.
It appears that the ever-tightening rules as well as the US settlements have limited the enthusiasm in those majors to add capacity anywhere in the world.
Although trendline growth would have needed an extra 1200kt, actual demand growth in the tire industry has been stronger than that.
Anecdotally, many suppliers to the tire industry have reported that demand for their materials was up strongly in 2017 and 2018, and in all regions of the world, leading to tight supply in many different materials.
That is the global picture. Up to about 2016, the global supply-demand situation for carbon black was balanced, or slightly in over-supply. As we move into the middle of 2018, the world carbon black supply-demand balance is getting tight. Toward the end of this year, and into 2019, that tightness is likely to move to shortages and allocations.
However, there are more local difficulties, such as the one being experienced in India today.
It seems that there is more going on than meets the eye. Some of the discussions in Chengdu highlighted the extraordinary growth in demand for carbon black among Indian tire makers.
For example, India’s carbon black imports have been growing very strongly in recent months. In 2016 imports were running at around 10kt/month. In 2017 that grew to 12.4kt/month, but in January 2018 it rocketed to 18.6kt. At the same time, the Indian government is placing restrictions on exports, in a bid to ensure domestic industries have sufficient carbon black. As a result, exports have plunged.
Part of the reason for the increase in imports was the forced closure in December 2017 of Continental Carbon’s factory in Noida. That produced some 6000t – 7000 tonnes/month. Power and water supplies to the factory were cut off and the factory was required to upgrade its environmental protection, after the factory was found to have been adding to air pollution in the vicinity, in breach of national air quality laws. In the five months it has been closed, India has lost some 32,000 tonnes of production.
That factory is now coming back on stream, and latest reports suggest that material from the upgraded factory started reaching the market in late April.
However, even taking into account this reduction in domestic supply the increased imports appear to have increased total supply into India by some 25,000 tonnes over the last 6 months.
It’s not clear where this extra material is going. Some of it may be going to new tire factories. Michelin is known to be increasing the output of its under-utilised TBR factory in Tamil Nadu, but this still does not explain the excess.
There is a suspicion – not confirmed – that some tire makers are over-ordering in order to build up stocks ahead of an expected shortage later in the year.
Meanwhile, India’s carbon black makers are struggling to maintain supplies to their customers. Increased deliveries to the tire sector have diverted some manufacturing capacity away from the non-tire customers, and this, combined with import duties, is putting great pressure on India’s smaller, non-tire rubber goods makers.
Already a few carbon black suppliers have had to put some customers on allocation. Although there is a hope that this is a short-term measure, there is concern in the industry that global shortages will limit the availability of import options, and this may create real shortages later in the year. Today the tire makers have enough material, but eventually, even the tire makers may face restrictions on deliveries of carbon black.
*David Shaw is the founder and CEO of UK based Tire Industry Research