Annual Report 2013

Marketing Review

Titanium Dioxide (TiO2) Mineral Feedstock Market

Kenmare is a major supplier of titanium mineral sand products to a global customer base operating in over fifteen countries. These include some of the world’s largest end-users, who process our minerals into final products that are considered ‘quality-of-life’ products. Our products consist of several grades of the TiO2 minerals, ilmenite and rutile, and the zirconium mineral, zircon.

Ilmenite and rutile are used as feedstocks to produce TiO2 pigment which accounts for about 90% of global titanium feedstock consumption. TiO2 pigment is a non-toxic inert product with one of the highest refractive indices relative to other dispersion media, which gives it a superior ability to disperse light. This makes it the preferred pigment for imparting a brilliant white colour, and offers ultraviolet protection and opacity when included in final products. TiO2 pigment is consumed in the manufacture of paints and other coatings, which account for around 50% of all TiO2 pigment demand. Within this segment, the manufacture of architectural coatings for the residential and commercial construction industry is the largest user of TiO2 pigment. Other end-use applications that consume TiO2 pigment include plastics and paper, as well as a diverse group of other uses, including cosmetics, food additives, ceramics, inks and textiles.

The balance of demand for titanium feedstocks is largely accounted for by titanium metal production and welding electrodes. Titanium metal’s unique properties, including its high strength-to-weight ratio, high melting point and resistance to corrosion, make it the preferred metal for a number of demanding applications including the manufacture of airframes and jet engines for the aerospace industry. It is also widely employed in equipment and materials used in chemical, water desalination and power generation plants, as well as a number of growing applications in the electronics, medical and leisure industries. Rutile and some grades of ilmenite are also used as a component of fluxes for coating welding electrodes, which are in turn consumed in the construction and ship-building industries.

The market for titanium feedstocks was subdued throughout most of 2013. The long and fragile global economic recovery, coupled with the drawdown of significant inventories of pigment and TiO2 feedstocks that accumulated during 2012, hindered the much anticipated TiO2 feedstock market recovery in the second half of 2013.

Although global pigment consumption is expected to have grown by around 9% in 2013, this was from a low base following a large contraction in 2012 and was largely met from the drawdown of significant producer inventories accumulated over the course of 2012. Much of the year was characterised by low pigment plant operating rates, inventory control and cost cutting across the supply chain as pigment producers took a cautious approach to the recovery in the pigment market and worked to reduce inventories. Global average pigment industry operating rates remained below 80% for most of the year and although pigment inventories fell from peak levels of over 100 days over the course of the year, they still hovered around 60 to 65 days for much of the second half of 2013, above the 45 to 50 days level considered necessary to achieve price traction.

Year-end 2013 inventory rates are likely to have increased temporarily above the 60 to 65 days level as pigment production typically outpaces sales volumes over the year-end holiday period. This inventory build should reduce over the coming months of 2014 as we enter the Northern Hemisphere painting season. After two consecutive years of below par demand, expectations are high for a stronger 2014 painting season. Overall, pigment producers expect to operate their plants at higher rates in 2014 than in 2013.

Increased pigment consumption in 2013 did not translate into any significant improvements for feedstock producers due to the low pigment plant operating rates. Demand for feedstocks continued to be weak throughout most of 2013, albeit with some improvements in the second half of the year. Reduced demand for high grade feedstocks such as rutile was more acute as some pigment producers sought to prioritise production at lower cost ilmenite consuming plants. Additionally, the existence of some lower priced legacy titanium slag contract volumes in 2013, and carry over inventories from 2012, encouraged pigment plants to favour the use of slag ahead of rutile and other high grade feedstocks to reduce raw material costs. It is understood that most of the outstanding legacy slag contracts will expire in 2014.

Demand for high grade feedstocks from the titanium metal and welding electrode sectors was also weak in 2013. The weakness in the titanium metal market was attributed to the production delays in the roll out of new wide-body jets, coupled with large inventories of titanium scrap in the supply chain built up during 2012. In addition, there was lower demand for titanium metal from developers of desalination plants as a number of projects in the Middle East were completed in the previous year. It is anticipated that there will be further weakness in this sector in 2014 before resumption to strong growth rates from 2015 onwards.

The demand for feedstocks for the welding electrode sector was also subdued in 2013 due to the lower levels of global construction and shipbuilding activity, but should see a resumption of growth in 2014 given the improving economic outlook, particularly in North America, Asia and the Middle East.

Given the weak demand conditions, titanium feedstock prices weakened considerably over the course of 2013 due to destocking in the supply chain, excess supply and cautious buying behaviour in the pigment and other end-use markets. Prices of all feedstock are well off peak levels, down around 65% in the case of the high grade feedstocks such as rutile, and by around half in the case of ilmenite, but with some relative stability in recent months.

China remains the main driver of the global sulphate ilmenite market given its huge import dependence and offtake growth in the past five years. The double-digit growth in pigment demand in China of past years stalled in 2013 and preliminary data points to a low single-digit growth rate. The reported volume of imported ilmenite to China at around 2 million tonnes was also lower than in 2012 as a result of reduced plant operating rates and a shift to the consumption of more domestic ilmenite. New Chinese supply entered the market in the last two years, but some of this new supply tapered off in the second half of 2013 due to low prices. Supply of Vietnamese ilmenite to China also reduced considerably in 2013 due to a combination of export restrictions imposed by the authorities and sub-economic price levels for a number of producers. While demand for imported ilmenite to China is presently weak, it is expected to improve over the course of the year to meet the numerous additional pigment and slag capacity expansions that will enter the market.

There are signs that the market has bottomed out but some further volatility is possible in the first half of 2014. Signs of improvement in Western markets are becoming evident as demonstrated by announcements of increased sales volumes by major pigment producers in the last quarter of 2013. Most of the expectations of improvement in the industry hinges on continued and sustained economic growth in North America and Europe, while growth in emerging markets is expected to remain strong, albeit at lower levels than in recent years. Leading economists forecast a marked pick-up in global GDP growth in 2014 and further modest acceleration in 2015. As pigment demand has historically correlated well with economic growth, the forecast for stronger global GDP growth provides for some optimism for improved demand conditions in the coming two years and the return to the long term trend of around 3% compound annual growth rate.

Despite the slow and challenging markets in 2013, the demand for Kenmare’s products held up reasonably well with some volatility quarter on quarter. Year-end inventories for two of the Mine’s ilmenite products were in line with or below normal working levels. In the case of the third ilmenite product, inventories were higher than normal due to a shipping delay of a large ilmenite parcel that slipped to early January 2014. Sales volumes for 2014 to date have started reasonably well, with a more regular offtake pattern starting to emerge.

Over the last two years, Kenmare has managed to convert and secure volume-based agreements with shorter term price negotiation mechanisms for most of its existing and new output from the Mine expansion. This will enable Kenmare to more closely align the price movements with the current and expected improvements in market conditions for its products. With a large part of the increased output from the Mine expansion already allocated, we will continue to ensure that we have the correct mix of sales volumes allocated to existing and new customers, as well as to the spot market. We are also working to secure a balanced mix of sales to pigment customers and ilmenite upgraders, and a good geographical spread to all key regional markets.

Supply and demand analyses for titanium feedstock products indicate that there may be some oversupply in the short term given the start-up of new projects in Africa and the Middle East. History has demonstrated the uncertainty associated with the timing of start-up of new project supply and the speed of demand recovery, both of which can play a large part in reversing market conditions more quickly than expected. However, Kenmare is confident that, with its expanded capacity, it is well positioned to benefit from the medium to longer term expectations of a market supply deficit while having the ability to weather short term volatile market conditions through strong customer relationships. The fundamentals of continued growth in pigment demand based on increased economic activity driven by urbanisation in emerging markets and resumption of solid growth in the more traditional markets in North America and Europe, should support solid offtake of the Mine’s production for the future.

Zircon Market

Zircon is a zirconium mineral generally produced as a co-product of titanium minerals mining. It is an important raw material for the ceramics industry as an opacifier and frit compound for decorative wall and floor tiles and sanitary ware. It is also consumed in the foundry and refractory industries and in a growing number of chemical applications, which include fused and chemical zirconia. The largest consuming regions for zircon are Mediterranean Europe and Asia, and in particular China. India, the Middle East and South America are also important growth markets.

As with the titanium feedstock industry, demand conditions in the zircon market in 2013 were also below expectation. A pick-up in demand and some moderate upward pricing pressure in the first eight months of 2013 suggested that a steady recovery was underway. However offtake slowed in the final four months of the year and some moderate pricing instability returned to the market by year-end due to competitive tensions amongst producers to conclude some year-end sales. It is now clear that the stronger first half year conditions were driven more by re-stocking following a stabilisation of prices rather than any significant change in underlying demand. Some speculation by traders mainly in China also contributed to the first half demand boost as they bought ahead of expectations of higher fourth quarter prices.

Zircon demand conditions in 2013 were also uneven across geographical markets with reasonably strong conditions in China and North America offset by more subdued market conditions in Europe, South America, the Middle East and North Africa. Overall global zircon demand is expected to have declined marginally in 2013 compared to 2012, and remains about 30% below peak 2011 levels driven by substitution, principally in the ceramics sector. However, 2014 is expected to see a return to growth given the improved outlook for the global economy. Europe’s recovery is expected to be slower than in other regions given that the two main ceramics producing countries, Italy and Spain, are struggling to come out of recession. Ceramic tiles and sanitary ware producers in these countries are becoming increasingly focused on export markets to offset the ongoing weakness in their domestic economies. Elsewhere growth is expected to be more robust.

As with TiO2 pigment demand, zircon demand is closely correlated to GDP growth and construction activity. Urbanisation trends and per capita income growth in emerging economies are the principal drivers of growth in demand for products that consume zircon such as ceramic tiles. There is also a strong preference for use of ceramics tiles as wall and floor covering in most of these emerging markets. While consumption of zircon for refractory and foundry applications is expected to be relatively stable, faster growth can be expected in specialty chemicals, zirconium metal and chemical zirconia as a diverse range of new end-use applications are developed in the coming years. 3D printing in the ceramic industry also offers some interesting possibilities for increased zircon consumption.

Despite the weaker than expected market conditions in 2013, Kenmare had good offtake support from its zircon customers and year-end inventories were drawn down to minimal levels. Kenmare expects improved market conditions in 2014, with an improving demand environment and continued strong support from customers.