WASHINGTON—The problems the carbon black industry has faced in the last few years—short supply, logistics problems, difficulties in increasing capacity, competition from silica, and the costs of environmental compliance—are coming to a head in 2019, according to industry experts.
But demand is strong, as is the outlook for the industry this year, they said.
"It's going to be an interesting year, to say the least," said Greg King, vice president of sales and marketing for Tokai Carbon CB, formerly Sid Richardson Carbon Ltd. "New business continues to come online.
"But no new capacity—that's the problem," King said. "No one in our industry has expanded."
Overall demand for carbon black was very strong in 2018, thanks to solid long-term fundamentals such as global Gross Domestic Product growth, expansion of the global car parc and a continuing market trend toward sport-utility vehicles and other vehicles that use large tires, according to Bart Kalkstein, senior vice president of Cabot Corp. and president of its Reinforcement Materials segment.
"As we look at 2019, we see the situation in Europe improving with a rebound in the OE tire market likely as auto makers get past the emissions issue," Kalkstein said.
"We also remain hopeful that the U.S.-China trade dispute can be resolved relatively early in the year, which would restore confidence and growth in the broader Chinese economy."
Prices and costs
With tire makers such as Continental, Giti and Hankook either opening or preparing to open new manufacturing facilities in the U.S., there's no question that demand for carbon black will be robust, experts said.
But as King noted, finding the money for expanding carbon black capacity isn't easy at the moment. The major issue is the cost of complying with the environmental consent agreements carbon black manufacturers reached with the U.S. Environmental Protection Agency.
"We have to spend something like $100 million on the EPA agreement, and that's a lot of money," King said.
The work to comply with the EPA agreements is not only expensive, but causes some production interruptions, according to King. Because of the compliance costs, Tokai—like other carbon black makers—is adding a per-pound environmental compliance surcharge to its price, according to King. Even so, "that's not enough of a price increase on the base product to do any expansion projects at this time," he said.
The surcharge at Tokai amounts to 3 cents per pound, according to King.
In December, another carbon black maker, Orion Engineered Carbons, announced an environmental compliance surcharge of 1.5 cents per pound.
The "EPA surcharge" has been added to all of Orion's price agreements for all consumers in North America beginning April 1, according to Jose Briones, Orion marketing manager for rubber.
"While prices for specialty and rubber carbon black are increasing slightly, Orion will work with customers to meet their carbon black demands, specifically calling on reserve capacity on a case-by-case basis," Briones said.
Cabot was the first carbon black maker to announce a settlement with the EPA, in November 2013, according to Tom Miller, Cabot vice president and general manager—global tire.
"We subsequently implemented a surcharge for reinforcement materials customers to address the initial estimated cost of compliance," Miller said. "That surcharge has since been incorporated into the structure of our base prices." Miller did not say how much the surcharge was.
Surcharges are only one of the many pressures on carbon black pricing, according to Kalkstein.
"First, pricing moves in the general direction of feedstock prices, which has had quite some volatility recently," he said.
Pricing also reflects the supply/demand balance in each region or market, according to Kalkstein. Because the supply/demand balance is better now than in recent years, prices are now trending upward, he said.
"In several markets there also have been significant supply disruptions or feedstock shortages, and consequently we see many customers recognizing the value that Cabot brings from the standpoint of reliability and security of supply," he said.
Cabot is the only carbon black manufacturer to announce major production expansions recently. In June 2018 the company unveiled plans for a worldwide expansion, including a $120 million investment at its facility in Cilegon, Indonesia, which would increase the plant's capacity by 160,000 metric tons annually.
Cabot followed that announcement on Oct. 1 with the news that it acquired a Chinese carbon black operation, NSCC Carbon (Jiangsu) Co. Ltd., from Nippon Steel Carbon Co. Ltd.
Regarding the expansion project, Cabot so far has added nearly 100,000 metric tons to its global capacity through removing production bottlenecks, according to Kalkstein. The company will expand production at Cilegon in two phases, with construction on the first phase beginning this year, he said.
The NSCC project, with production capacity of 50,000 metric tons, is also well under way, according to Jay Doubman, Cabot senior vice president and president, Performance Additives.
"We are excited about this new capacity and its ability to provide our most advanced products to the Chinese market from in-country capacity," Doubman said.
The capacity expansions in Southeast Asia will not be enough to meet global carbon black demand, according to Orion's Briones.
Increasing carbon black capacity in the U.S. will be very difficult, he said. U.S. carbon black producers are facing shorter equipment life, higher repair and maintenance costs, and extra downtime because of EPA compliance agreements, and must concentrate on that rather than on expansion.
"Utilization rates are up around 88 percent and could climb to 90 percent by 2022," he said.
Silica vs. carbon black
Silica, the main competition for carbon black as a reinforcement material, has grown in popularity for use in high-performance, low-rolling-resistance tires.
Silica is a factor in the market, largely because of the demand for low rolling resistance in original equipment passenger tires, according to King. But it has made very little penetration in the truck tire market, he said.
"Silica is very expensive, and it takes three mixing cycles to blend into a rubber compound, compared with only two for carbon black," King said. "But it's not going away, because of rolling resistance requirements."
Kalkstein agreed with King that silica is not a viable substitute for carbon black in many applications.
"As Goodyear recently highlighted in an investor presentation, silica also has significant drawbacks in terms of tire manufacturing efficiency and complexity," he said. "Long term, we see a co-existence of the two materials, depending on the application."
The challenge of logistics
In a speech written by King and presented in 2018 by Gary Horning, Tokai (then Sid Richardson) national accounts manager, the company presented the continuing challenges carbon black manufacturers face with logistics and shipping.
Carbon black is transported mainly in railroad hopper cars, Horning said in the speech he presented at the Clemson University Global Tire Industry Conference in Hilton Head, S.C.
At the time Sid Richardson had the largest fleet of hopper cars in North America, owning 972 and leasing at least another 50, according to Horning.
"We could probably use a thousand more," he said. "They're worth their weight in gold." But hopper cars cost $100,000 apiece, and payback isn't very fast, he said.
The demand for hopper cars has not abated, according to King.
"We have to evaluate whether to buy or lease new cars," he said.
Implementation of electronic logbooks, along with shortages of truck drivers and equipment and increasing costs, have created logistics problems recently in both Europe and North America, according to Cabot's Miller.
"In North America, where rail is still a significant mode of transport, we saw an increase in transit times started in 2017 due to changes in the way certain railroads operate," he said.
"With ocean freight, we also observe changes taking place with consolidation of carriers and implementation of new environmental regulations driving up freight rates," he said.
In each of its operating regions, Cabot has a dedicated transportation team that seeks to maximize transport efficiency, according to Miller. A significant focus for each team is increasing coordination with carriers and customers, he said.