London - A recurring complaint in the current batch of results announcements by materials and additives suppliers is that crude-oil-related slump in many feedstock costs is eroding prices and margins on products sold to the tire and rubber industries.
Among those trying to turn the tide is Orion Engineered Carbons, which on 1 April introduced a new production-cost related surcharge for rubber carbon blacks customers in Europe. Existing pricing agreements did not cover increases in carbon black oil and other energy-related costs, it explained.
In a 6 May first-quarter conference call*, Orion CEO Jack Clem reported: “We've gotten some traction with this initiative and expect to see some positive impact on our margins as we move into the next few quarters.”
Pressed further by analysts, however, Clem admitted that cost negotiations were continuing, adding that it “is premature for us to make any assessment as to how these efforts will play out over the course of this year.”
More significantly, the Orion boss said that the surcharge was just a temporary fix and that broader measures were needed to shore up rubber black prices.
With the contract season for 2017 now approaching, Clem said: “I have had these discussions with many of our customers and they seem to understand that a patch is not going to be the solution. It has got to be a structural change in the formula...”
During such negotiations, the problem for Orion, and other suppliers to tire and rubber manufacturers, is overcapacity and slow growth in the many markets around the world.
In response, Orion is shifting production to more speciality carbon black products for plastics and printing applications, and to more technically unique rubber black grades, including those sold to the mechanical rubber goods industry.
This strategy is in evidence at Orion’ facility in Quingdao, China – in January the company acquired all remaining shares in the Qingdao Evonik Chemical operation for around €28 million.
“We have begun to move into some of the speciality, and some of the non-rubber applications with that plant since we've acquired it,” said Clem. “The large majority of the material that is produced there is not commodity ASTM grade but more tapping into the high-end mechanical rubber goods.”
Clem declined to say how much speciality product was now being produced at Quingdao, but said: “It’s a fair percentage and one that we intend to grow to a substantial part of its capacity as we move through 2016.”
Orion, he added, has “pretty strong plans to have a fair position there in 2017 particularly in the polymer and in the printing inks markets.”
Orion’s message seems to be that customers should pay more for carbon black in the short term or face reduction in availability in the longer-term.
How this is playing out in the market will become more evident at the company reports on its business performance over the rest of the year.
*See full transcript by Seeking Alpha ( www.seekingalpha.com )