Carbon black market faced with challenges

Hilton Head, South Carolina – Demand for domestic carbon black already is starting to outstrip production, and that isn't likely to change any time soon, according to a speaker at the 34th Clemson University Global Tire Industry Conference.

"It's going to be tough," said Gary Horning, national accounts manager for Sid Richardson Carbon and Energy Co., at the Clemson conference, which was held in Hilton Head, South Carolina, 18-20 April.

"Demand for carbon black in North America is increasing," Horning said. "Tread carbon blacks are already tight and will be oversold soon. Some are oversold already."

Horning delivered the presentation prepared by Greg King, vice president for sales and marketing at Sid Richardson, who had been called away on business.

The speech updated King's presentation from the 2014 conference, which predicted that the US tire industry would start seeing shortages of carbon black as early as 2016.

"The industry has caught up with our expectations," Horning said. "As Dickens said, it's the best of times and the worst of times, and it's very difficult to be in the carbon black industry right now."

King prepared a projection of the carbon black market through 2025 for the countries (Canada, Mexico and the US) under the North American Free Trade Agreement. The model assumed that tire production would grow at a rate equal to the Gross Domestic Product, plus 65% capacity utilization by manufacturers building their first US plants.

Looking at a shortage

The projection showed a shortfall as of 2018, with a projected shortfall of 375 million pounds by 2025.

"In the long run, markets do not stay in disequilibrium," Horning said. "Our mindset has been that supply-side market forces alone would balance the carbon black market."

A raw material shortage is inevitable, necessitating either an increase in NAFTA carbon black production or carbon black imports, according to Horning.

"However, the data on imported tires suggests some impact by demand-side market forces as well," he said.

Current capacity utilization in the US carbon black industry is 84%, according to King and Horning. Carbon black imports are at best a question mark, Horning said.

"When oil was $100 a barrel, you could import carbon black competitively," he said. "The price of oil is the X factor of what will happen in the future."

Meanwhile, changes in the domestic tire manufacturing industry are putting new pressures on carbon black producers, according to King and Horning.

Capacity utilisation in all sectors of tire production is in the 70-80 percent range, they said, but tire size and structure are also changing.

"Tires are wider with smaller sidewalls," Horning said. "This creates more demand for tread blacks, but less for carcass blacks."

The most popular rim size, once 14 and then 16 inches, is 18 inches this year, according to Horning.

Demand for silica as a replacement for carbon black to achieve lower rolling resistance is impacting carbon black demand to some extent, he said.

"However, we welcome that to some degree," he said. "I don't think we can make enough tread black to satisfy demand.

"Considering the domestic tire production that has come on-stream or is about to go on-stream during the last five to seven years, there is a staggering amount of tires to be built," Horning said.

Concern over duties is pushing Asian tire makers to North America, and those producers also are following the auto assembly plants, he said.

Logistics concerns

Meanwhile, logistics and shipping continue to be a challenge in the carbon black industry, according to Horning.

Carbon black is transported mainly in railroad hopper cars, with some shipments in hopper trucks, he said.

Sid Richardson has the largest fleet of hopper cars in North America, with 972 as of 2016 and plans to lease at least another 50 in 2018, Horning said.

"We could probably use a thousand more," he said. "They're worth their weight in gold. We wish our customers were faster in returning them, or the railroad companies faster in getting the product to customers."

Hopper cars cost $100,000 a piece, and payback isn't very fast, Horning said.

Sid Richardson also has 34 hopper trucks, 32 of which are 19 or 20 years old, according to Horning.

"Most trailers are retired prior to this age," he said. "Sid Richardson trailers see less miles than hopper truck service provider trailers."

New trailers cost more than $87,000, which means that total fleet replacement would cost Sid Richardson more than $2.8 million, he said.

Hopper trucks are much speedier than hopper cars, according to Horning. "You can have a hopper truck 500 miles down the road in 24 hours," he said.

But hopper trucks have only about one-third the capacity of hopper cars—45,000 pounds compared with 125,000. It would be helpful to increase the load efficiency of the hopper car fleet to offset poor service from the railroads, he said.

"Shipping carbon black will become a concern," Horning said. "Costs will rise to cover purchases of new equipment and the competitive cost of drivers due to shortages."

But even if logistics and shipping problems are solved, there still remains the environmental costs US carbon black producers are facing, said Horning.

All five domestic major carbon black makers have signed consent agreements with the US Environmental Protection Agency to reduce toxic emissions from their plants.

Three of them—including Sid Richardson—signed their agreements only last December.

"We're now at the discovery phase," Horning said. "There is a whole wish list of equipment to meet EPA guidelines."

The expense of complying with the environmental consent agreements will hamper investments in production capacity for the next few years, according to Horning.

"The government wants everyone to be done by 2022," he said. "Pressure from the EPA for tall gas scrubbing will drive costs up. But once that is installed, the industry may be able to consider expansion projects."