Carbon black firms find steady ground amid pandemic's uncertainty

If anything, 2020 kind of feels like one big dizzy bat race.

The coronavirus pandemic has sent the industries spinning, and businesses are forced to find the finish line on unsure footing and unfamiliar terrain.

But it wasn't supposed to be this way. It was supposed to be an extension of 2019, which saw some market softening, but overall turned out to be pretty solid.

Last year, the global market for carbon black was around 13.7 million metric tons, and had a value of about $16.2 billion, according to the Carbon Black World Data Book issued by Notch Consulting Inc. By end market, carbon black broke down:

• passenger car tires—28 percent;
• truck/bus tires—24 percent;
• other tires—22 percent;
• manufactured rubber goods/non-tire rubber goods—19 percent; and
• specialty blacks (all non-rubber)—7 percent.

This year was supposed to be similar. It was supposed to be stable and, if nothing else, predictable.

"To use a sports term, we were looking at a rebuilding year," said Paul Ita, a consultant with Notch Consulting. "I don't think anyone was coming into this year thinking it was going to be a gangbuster."

Cancarb Ltd., part of Tokai Carbon Co. Ltd., came into 2020 expecting to see slight drops in demand from the automotive market, and was preparing to adjust accordingly.

"We started to see shipment volumes softening from the onset of the second half of 2019 as automotive builds began to slow down," Cancarb President Peter Donnelly said in an emailed statement. "We certainly felt the impact of the global slowdown in the auto sector, but this was partly offset by the fact that we sell our thermal carbon black into a myriad of applications in many industries, including ceramics and refractories."

Cabot Corp. was expecting to see consistency from 2020. The automotive market, which had been slowly softening, was beginning to stabilize and early indicators showed that the year was going to be a good one.

"As the 2019 calendar turned to 2020, we were seeing a stable market globally," Cabot said in a statement. "The automotive market was not terribly strong, but not terribly weak either, and customers who had destocked at the end of 2019 were restocking for 2020, so the year got off to a strong start."

But if 2020 has been anything, it's been unstable. At least through the first three months of the year.

Carbon black makers—and others along the automotive industry supply chain—began to feel the economic impact of the coronavirus early in 2020 as Asia grappled with its spread, and manufacturing there slowed and stopped.

"We first experienced the impact of COVID-19 in China with the extension of Lunar New Year holiday closures into February," Cabot said. "Many of our customers' plants in China were closed or running at low rates for most of February. We began to see improvement as we moved through March, and by April China volumes for the domestic tire market were back to more normal levels."

Then the automotive industry sputtered its way through the first few months of the pandemic in Europe and North America. More tire makers and auto suppliers were forced to suspend operations both to protect their work forces and adjust to the decreased demand for products.

That weighed on the carbon black makers. "In Europe and the Americas, we experienced solid demand from January through early March," Cabot said. "By the end of March, many of our tire and automotive customers across these regions began to stop operations and demand was reduced over the last two weeks of the quarter. This led to weaker volumes, mainly in our Reinforcement Materials segment."

Despite the drops in demand, Cabot said it was able to maintain all of its operations, but production has been scaled back "to align to the lower customer demand."

The same is true for Cancarb, which has continued with production, adjusting to demand as necessary.

"As the auto and tire sectors began to slow down or completely close plants, this quickly translated into customers postponing orders and, hence, our sales volume has been reduced," Donnelly said. "We have scaled back production accordingly and have had a corresponding impact to sales and operating income from the lower sales volumes."

Weakening market demand in the automotive and pipe markets throughout North America and Europe had a particularly pointed impact on Orion Engineered Carbon L.L.C.'s Specialty Carbon Blacks segment in the first quarter of 2020. Volumes in the segment fell 8.8 percent to around 58,000 metric tons.

In terms of production, Orion was able to maintain operations globally, ensuring a steady supply to its customers. As demand waned, Orion said it adjusted.

"Where demand slowed," Orion CEO Corning Painter said in a statement, "our people have been flexible allowing us to drive operational and safety improvements with everyone pitching in.

"Orion executed well in the first quarter, and we were on track for strong financial results until the latter half of March when many tire customer plants shut down. Still, we delivered adjusted EBITDA of $63.8 million despite the shutdowns, an abrupt halt in consumer spending and miles driven, and a sharp decline in oil prices."

For the carbon black industry, COVID-19's economic punch was repeated. In a typical recession, one sector may suffer but others will be stronger. In the tire market, for instance, if OEMs have a down year, chances are the aftermarket will be robust.

But not this time around.

Tire market battered
The U.S. Tire Manufacturers Association's revised tire shipment figures are evidence of just how deeply the COVID-19 pandemic has cut into the tire market, and subsequently, the carbon black market. In April, the USTMA said 2020 shipments could fall to their lowest levels in decades—to 273.6 million units. That represents an 18 percent drop compared 2019.

And that's a stark contrast to the association's early March projections. Before the coronavirus' economic impact was evident, USTMA said it expected U.S. tire shipments to increase this year.

But the newest outlook shows that's not the case anymore. And the original equipment sector is expected to take the biggest hit. USTMA now estimates a full-year drop of 24 percent in the OE sector, compared to 2019.

By individual category, the USTMA's latest forecast indicates:

• OE passenger tires could drop 24 percent to 35 million units, from 46.3 million;
• OE light truck tires likely will fall 18 percent to 4.8 million units, from 5.9 million; and
• OE medium truck tires are expected to plummet nearly 31 percent to 4.5 million units, from 6.5 million.

What makes the coronavirus' impact so devastating for the tire market is that it has reached into the replacement tire market simultaneously. Shelter-at-home orders kept drivers off the roads, and their lack of travel was compounded by layoffs and furloughs.

"What we have now is really rare because, not only is nobody buying a car, but nobody—and I mean nobody—is driving," Ita said. "This is a really rare kind of double-hit. There is no replacement demand and there is no OE demand. I don't think we have ever seen a situation that is quite this stark, quite this dire."

All of that adds up to a crunch on the replacement tire market.

USTMA's latest prediction assumes the same. USTMA expects 2020 replacement tire shipments to trail 2019. By category, it predicts:

• Passenger tires to be down 17 percent to 184.4 million units, from 222.6 million;
• Light truck tires to fall 16 percent to 27.3 million units, from 32.5 million; and
• Medium truck tires to slip 7 percent to 17.6 million units, from 18.9 million.

The European Tyre & Rubber Manufacturers' Association's analysis of the first quarter echoed the USTMA's findings.

Compared to 2019, Europe's passenger and light truck tire shipments were down 12.8 percent for the quarter to 48 million units, ETRMA said. In March alone, those shipments were off 26.4 percent.

The truck tire aftermarket fared the best among the categories tracked by ETRMA, with shipments falling 5.6 percent to 2.83 million units. March, however, saw a 15.1 percent decline in truck tire shipments when compared to the same month last year.

Silver linings
Still, every gray cloud is said to have its silver lining, and the economic storm brought on by the coronavirus is no different.

"Certainly, the current market situation is a challenging one, though our focus begins with the health and safety of our employees and their families," Cabot said, praising its employees for their dedication and flexibility during the uncertain times. "What gives us great optimism is the way our colleagues, customers and partners around the world have quickly adapted to the circumstances and continue to manage through the challenges each day. We feel confident in the resiliency of our colleagues, our customers and our industry."

In the tire market, those bright spots have been the commercial tire industry—which includes retreading—and the ag tire market.

Growing food and delivering essential goods remained key components of everyday life, even as many other facets of business and manufacturing halted, so ag tire and commercial tire makers continued operations, Ita said. Another silver lining for carbon black makers was manufactured rubber goods, which continued to see steady demand from essential industries.

"Looking around, anything you see as essential is still running," he said.

That's a good thing for carbon black companies supplying makers of rubber goods that support those industries.

"We are starting to see the beginnings of recovery for the tire markets in recent weeks," Cabot said. "At the same time, we are seeing a number of applications that are growing or potentially benefiting from the COVID-19 environment. Specifically, strong demand remains in the agricultural space as well as applications such as packaging, and specifically food packaging. These are important markets for both our carbon black and masterbatch products lines."

Sometimes, it's the most difficult of circumstances that bring out the best in people. That has been true for Cabot, which has seen its employees step up and help their communities, friends and neighbors with acts of kindness.

"We are also extremely proud of our Cabot team across the globe who have stepped up to support their local communities during this challenging time, from donating personal protective equipment and contributing raw materials for the production of hand sanitizer, to helping supply food to children who are without access to school meals," Cabot said.

A sense of normalcy
Even with the good news, one question looms for carbon black makers: When will things return to normal?

Unfortunately, Ita said, there are no easy answers.

Initially, Notch Consulting had projected that demand for carbon black would grow slightly in 2020, compared to 2019. Last year, global demand for carbon black reached 13.7 million metric tons, and demand was expected to grow to about 14.2 million in 2020, according to Notch Consulting's Carbon Black World Data Book.

In North America, carbon black demand was around 1.9 million tons last year, and Notch Consulting had assumed that demand would grow slightly this year to about 1.95 million tons.

But the impacts of the coronavirus coupled with the plummeting prices throughout the oil industry this year changed that projection. Notch Consulting now estimates that global demand for carbon black will be somewhere around 10.5 million tons, while North American demand likely will be somewhere around 1.45 million tons.

"The other thing we all have to acknowledge is that nobody—nobody—knows what this (recovery) is going to look like," Ita said. "Even if we look to the financial crisis of 2008-09, it really is different because that crisis is not what we are looking at now. There were no limits on people leaving the house. Maybe people were reluctant to spend money, but it's nothing like anything that we are (experiencing) now."

For instance, a second wave of infections in the fall could result in an economic hit as big or bigger than the one the world faced this spring. If that's the case, it may be impossible for some companies to overcome.

"I don't know that many companies can survive that stress test," Ita said. "My fear is that people will not survive this downturn, even companies that were pretty stable. So far, the quarter results have been concerning, but have not been disastrous, so companies may have gotten through the first part of this crisis."

Orion, in particular, remains optimistic about the road ahead despite the economic challenges it currently faces.

"While uncertainties continue, society will emerge from this, and our end markets will rebound," Painter said. "In particular, we believe driving is going to be a popular mode of transportation, and we are working to be stronger than ever to serve our customers."

Forging ahead
For Cancarb, the economic downturn has been manageable so far. To maintain costs, the company has been following the recommendations of its parent company, Tokai Carbon, but has not had any layoffs.

In a May 12 financial statement, Tokai said the COVID-19 pandemic will require it to "minimize the capital expenditures, implement thorough cost reduction, reduce inventory to generate cash and secure higher financial liquidity."

While capital expenditures have been reduced, Cancarb is moving forward with plans to expand capacity at its Medicine Hat, Alberta, facility with the addition of a sixth production unit that will add 9,000 metric tons of capacity. The project timeline has not been altered as a result of the pandemic, and is slated for completion later this year, according to Donnelly.

"This will give us much more flexibility with operating and maintaining our other five units, but we are also optimistic that the research and development efforts that we are now engaged in will lead to an increase in our sales volumes in the very near future," he said. "We will be able to meet all of the volume requirements of our customers and will continue to focus on growing the thermal carbon black business along with the economic recovery."

The Medicine Hat expansion is part of a $40.1 million investment disclosed by Cancarb last year. That cost also included the purchase of a warehouse that will add 27,000 square feet of additional storage capacity, bringing the company's total warehouse space in Medicine Hat to 90,000 square feet.

Cabot also has found ways to weather the economic downturn, mainly by reducing short-term costs that won't hinder the company's ability to ramp up and meet demand once it returns.

"We eliminated all discretionary spending, stopped travel, curtailed production, tightened plant spending and our President and CEO Sean Keohane temporarily suspended his salary," Cabot said. "Finally, we have further reduced our capital expenditure forecast by $25 million such that our capital expenditures are expected to be approximately $200 million for fiscal year 2020."

Even as Cabot is working to maintain its financial stability, it is seeing many opportunities for growth. Continued investments in applications such as batteries and engineered elastomer composites (E2C) are setting the company up for growth, once the markets stabilize.

"Our recent acquisition of Sanshun, a leading carbon nanotube producer to the battery sector, will strengthen our position in conductive carbon additives," Cabot said. "We also announced the commercial deployment of the first E2C solution to help tire manufacturers unlock superior performance sustainably and economically. Both developments position us to capitalize on the transformational potential of these markets."