Cabot looks into expansion, M&A for next phase of growth

NUREMBURG, Germany—Leading carbon black manufacturer Cabot Corp. has seen a substantial growth in demand for rubber carbon black products and is evaluating various options, including expansion plans as well as tuck-in acquisitions, to address the rising demand.

"Our main challenge right now is that we want to help, but we cannot help everyone," Jaume Campana, vice president and regional business director for the reinforcement materials segment in EMEA, said in an interview with ERJ.

"We have been trying to support the tire and industrial rubber product customers, even not our own, as best (as we can) since this crisis started in February," Cabot official said, referring to the Russian war on Ukraine and the subsequent sanctions and restrictions on trade with Moscow.

As a result, the company has been operating its four European plants at high utilization rates and now is considering further options to meet the demand, which has picked up following the COVID-19 lull.

"We have different options and ideas, which I cannot disclose due to confidentiality reasons," he said.

But the ideas vary from expansion projects to M&A plans, he added.

In terms of investing in a new plant, Campana said it is costly to build a plant in the region, particularly when it comes to emissions control measures and regulations.

"We have been talking to regulators and politicians and we all agree that carbon black is a necessary material in a variety of everyday applications," he said.

We also all agree that the production of carbon black is an energy-intensive process and have not yet seen any support or tax relief to address high costs and unregulated imports.

"If you were to invest in a new plant, you're talking about $300 (million) to $400 million of investment and even then, you will need to find a location where you have good access to feedstock," Campana said.

The feedstock issue, according to Campana, is an important point that has not been stressed enough.

"The feedstock landscape is quite complex. We use byproducts from the oil distillation and steel and plastics production processes, and the disruption caused by the war has made certain streams more difficult to procure in good quality," he said.

Cabot, however, is managing such impacts well due to strong execution across its global network.

"So, when you make a decision to make a new investment, you need to make sure of the supply of good feedstock and right now everything is scrambled," he added.

Looking at the European market environment, Campana sees challenges in terms of transport crisis as well as the rising costs of energy, especially the increase in the price of natural gas which is a key ingredient for the production of carbon black.

But the silver lining, he said, is that Cabot has come out of the challenges stronger.

"We are coming out strong in terms of our relationship with our customers and our ability to ensure their security of supply," Campana said.

In fact, Cabot is seeing a spike in the number of customers who are asking for long-term multi-year contracts, despite the rising prices.

"I think the price increases are needed due to higher costs and higher maintenance fees due to high utilization rates," Campana said.

Cabot also sees a carbon black supply shortage emerging in the U.S., driven by lack of capacity and the absence of Russian imports.

"Up until now, a certain amount of carbon black—around 600-700 kilotonnes per annum—was coming from Russia, but that is not happening anymore," Campana said, adding that although Russian carbon black is not sanctioned, many companies have stopped using the products due to ethical reasons.

The problem of capacity shortage also is exacerbated by the fact that one competitor is now closing a U.S. site, the recovery after COVID-19 is fully underway and the rubber sector is still growing in that region.

"In that region, it's a question of whether anyone is interested in investing in a carbon black plant and I don't see it happening in the U.S. itself," Campana said. "That is simply because it is expensive to invest in a carbon black plant in the U.S. It is a very big decision, in view of the Environmental Protection Agency requirements and the costs involved."

An option to address tightness would be to import from other geographies, for instance from Mexico, where Cabot already is present and is exporting from to the U.S.

In terms of short-term outlook of the global market, Campana said he expected the environment to remain strong as "customers continue to produce tires."

"As you know the tire market is 70 percent replacement, or even higher. Despite the recession and the high oil and gas prices, people are going on holidays with cars, especially when you see the chaos in big airports. Furthermore, inventories were down during COVID, and we see customers rebuilding inventories.

"So, the replacement market looks strong, although there is a lot of uncertainty with regards to a possible recession and the high inflation," he added.

The OEM market, on the other hand was very weak and Europe saw a 17 percent year-on-year drop in car sales in May.

"However, when we speak to our customers whose specialty is to supply to the OEM market, they say they can see the light at the end of the tunnel, meaning that the orders are increasing.

This could partially be due to the fact that the chip shortage crisis, which crippled the automotive industry for the most of 2021, is finally easing.

"If you talk to OEMs, they will tell you that their order books are full, and these are orders taken a year ago," Campana said. "So, a combination of strong replacement and if you can call it a rebound in OEMs gives us confidence about 2022."