Market changes, growth spur upgrades for Cabot

BOSTON—Cabot Corp. has been building and improving its rubber carbon black operations regularly, particularly in China and the U.S., for the last several years.

The result is no matter what comes along, it is usually prepared, or it can react quickly to handle changes.

Cabot's Reinforcement Materials segment, which oversees the production and sale of rubber carbon black, had record earnings in 2014 thanks to new product innovations and capacity expansions, according to John Reese, vice president of global strategic accounts.

“It's never one thing. It's a combination ... it's about having the right mix of providing the best products to support our customers, both locally and globally,” he said.

Those moves have put the Boston-headquartered firm in a good position to deal with customers' growing needs, especially as new tire plants shoot up in the U.S. and demand for high performance tires increases, Reese said.

Companies such as Giti Tire Group, Yokohama Tire Corp., Michelin, Bridgestone Corp., Continental A.G. and Trelleborg Wheel Systems are adding tire facilities, expanding others or converting structures in the U.S. to boost tire production in North America.

Those additions are bound to have an impact on carbon black producers, Reese said, especially from 2016-18. “As they come on line, our goal is to always participate in new capacity.”

Meanwhile, the U.S. Environmental Protection Agency has been emulating some of its counterparts in Europe and implementing stiffer wear and tire rolling resistance regulations.

That coupled with the need for better fuel economy has put pressure on tire manufacturers.

Tire producers are some of the prime customers of businesses that make carbon black, and Cabot has taken a proactive role in moving to help them both in North America and abroad, according to Reese and Jay Doubman, vice president and global business director, tires.

Key to this is addressing customer needs to develop better performing tires, they said. While rolling resistance and wear performance always have been differentiating characteristics of tires, they said the advent of tire labeling and more original equipment requirements have increased the importance of these issues.

“We've always known that both are important to our customers,” Reese said. “Now that they are being legislated, we've increased our efforts.”

In order to meet customers' needs, the Reinforcement Materials business expanded its manufacturing base and capacity during the past two years.

It opened a new zinc production facility using state-of-the-art technology in Xingtai, China, last year through a joint venture with the Risun Group, and in 2013 the firm purchased the remaining 60 percent interest in Mexican joint venture Nhumo S.A. de C.V. to strengthen its presence in North America.

Both will play important roles as Cabot continues to build its rubber carbon black growth plan in North America and Asia.

Reese noted that North American tire production is expected to grow during the next several years, which will create greater demand for rubber black. Becoming sole owner of the Nhumo facility “gives us greater access to the Mexican market with a fully owned factory and positions us to provide security of supply as our customers' demand for carbon black increases in North America.”

Cabot's new plant in China will allow the company to become a much bigger participant in that market, he said. “As China tries to penetrate better markets, tire companies will need to produce better tires there, which is where the Xingtai plant comes in.”

Other factors that likely will play big roles in the rubber carbon black market are the impact of antidumping duties levied by the U.S. Department of Commerce's International Trade Administration against tire manufacturers from China, pressure from U.S. governmental authorities on all carbon black producers to implement emission control measures at their plants, and creation of new products by rubber carbon black manufacturers.

Fortunately, Doubman and Reese said, Cabot is ahead of the game in terms of environmental issues and well prepared in North America if U.S. tariffs create a bigger opportunity for the company in the market.

On the environmental front, the company has been promoting and implementing sustainability efforts, such as installing advanced emission control and energy efficiency technology at its three carbon black plants as part of an agreement it made with the EPA in late 2013. The three factories are located in Louisiana and Texas.

Its two facilities in Louisiana are major rubber carbon black suppliers to the tire industry, especially in the U.S.

Cabot's plant improvements are expected to cost an estimated $84 million when complete, the EPA said. “We're actively engaged because it's the right thing to do,” according to Reese.

The agreement with the EPA was the first settlement reached following the agency's investigations of all carbon black manufacturing facilities in the U.S. as part of its initiative to cut air pollution.

In March, Continental Carbon Co. reached a settlement with the agency to implement a series of plant improvements aimed at reducing air emissions at its three U.S. facilities (see story, Page 11).

In terms of new products, Doubman and Reese said the company is at the forefront of innovation. Its latest offering is the Propel line, which primarily will be used for tire tread applications, they said.

Propel E7 carbon black is engineered to reduce tire rolling resistance and improve vehicle fuel economy, Reese said. Propel D11 carbon black “is designed to provide a high level of tread durability and is well suited for use in both short-haul truck and off-the-road vehicle tires.”

Other new technology is in the works, he said, “and we hope to have them out of the kitchen later this year. Our Platform program, which we've had in place since 2011, focuses on key areas of R&D for tire makers with our new products—particularly wear resistance and fuel economy. Carbon black plays a big role in the wear performance and rolling resistance of tires.”

Like most tire manufacturers in the U.S., the company puts a lot of emphasis on high performance tires, Doubman noted, adding that the firm is “pushing the envelope” in that area.

While both officials are optimistic that Cabot is in a strong position to grow now and in the future, one company executive was more reserved in his 2015 outlook for the firm during Cabot's end of 2014 earnings call.

“As we look ahead we expect a modest level of growth in 2015,” Chief Financial Officer Eddie Cordeiro said. “With declining oil prices in the first fiscal quarter, we anticipate that many of our customers will be managing their inven-tories down leading into the calendar year-end.”

Therefore, he said, the company expects its fiscal first quarter volumes to decline below the fourth quarter results, principally because of macroeconomic conditions, seasonal effects and inventory corrections.

“In addition to muted volume growth,” the executive said, “we're also seeing headwinds in 2015 related to lower raw material purchasing savings and weakening of various foreign currencies against the U.S. dollar. In addition, we are currently seeing an increasingly competitive environment as we negotiate contracts for 2015.

“All-in-all, if we do not see an economic recovery early in calendar 2015, we expect the year to be somewhat more challenging than 2014 for the Reinforcement Materials segment.”