Paints cos’ fortunes under strain from trifecta of oil, China shutdowns & lower rupee




Anubhav SahuMoneycontrol Research

Prices of titanium di oxide (TiO2), the key raw material for paints, is firming up again on account of capacity shutdowns in China. Along with this, oil prices have added to the margin pressure for paint companies. Further, currency depreciation is also not helpful. In light of this, paint companies might face further margin headwinds.

TiO2 – A market with limited supply

Titanium di oxide (TiO2) is a white powder pigment having its main application in paints, paper and plastics as it imparts whiteness and opacity to the final products. After the industry witnessed a recent consolidation, key manufacturers constitute 62 percent of the total production. That said, the bulk of the production share comes from small manufacturers based out of China. Recently, with China shutting down a number of companies on account of environmental concerns has led to supply constraints in the global TiO2 market.

Source: Cristal.com

Major manufacturers 

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Source: Venator

TiO2 prices

Along with the tightening of supplies following China closing down its companies, spot prices of TiO2 have started firming up recently.

TiO2 prices had earlier declined due to increased inventory levels and weaker domestic demand. However, a combined effect of more shutdowns of TiO2 production plants globally, raw material supply constraints (Ilmenite/rutile mineral ores and pet coke) are causing an uptick in prices.

China Titanium di oxide prices trend (USD/tonne)

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Source: ICIS

Additional Chinese TiO2 capacity cut-down in the offing?

China is the second largest exporter of TiO2 pigments constituting 22 percent of global TiO2 export share (CY 2016) and therefore shutdown of facilities in China creates a global shortage. As per Ventator Corp, leading producer of TiO2, there have been 400k MT capacity cut-backs in China during the period 2015-17. In the near-term, further closure of 200k MT capacity is expected amounting to 3.3 percent of global demand (estimated 6155k MT in 2017).

TZMI, a management consultancy firm, estimates that TiO2 inventory in the value chain would be depleted by end of 2017 and hence the overall market would remain tight until new capacity comes in. Ventator mentions that it takes about 3-4 years for the new capacity to come online.

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Source: Venator, TZMI

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Source: Trade map

In case of India, China’s contribution to our TiO2 imports have already shrunk in the first half of 2017. In H2 2016, China constituted 35 percent of total imports of TiO2 pigments in India which has reduced to 28 percent in H1 2017 (data till May 2017).

Not surprisingly, TiO2 price quotation from the sole manufacturer in India, Kerala Minerals & Metals (Kerala Govt. undertaking) is at Rs 205/kg which is 25 percent higher than the local price prevailing 12 months ago.

Pet coke price increase also impacts the TiO2 price

Pet coke prices, a key raw material used for the manufacturing of TiO2, has also firmed up. Chinese coke price is up 14 percent in last one month resulting in a raw material price increase for TiO2 production.

Chinese pet coke price trend

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Source: sunsirs

Paint companies bear the cost pressure

TiO2 prices (~50 percent of the raw material cost) are not the only raw material prices which are of concern for paints companies. Surge in oil prices have increased the prices of oil derivative solvent prices as well. Cost pressures in the last one year have already impacted margins. Aggregate EBIDTA margin of paints companies at 18.9 percent has contracted by more than 300 bps on YoY basis.

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Source: Capitaline

Asian Paints, in the last quarterly conference call, mentioned that it doesn’t expect any substantial easing of TiO2 prices and supply tightness in this segment is expected to remain in near term. Further, recent depreciation of the Indian rupee would add to the cost as a majority of TiO2 is imported.

So overall, paint companies might continue to witness margin pressure in near term on account of higher raw material prices.

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