TROX - Tronox

[ValueSlant]

Post reorg equity that recently announced deal to become the first fully vertically integrated producer of tio2. Great industry tailwinds, post reorg catalysts, and cheap valuation.

I did a full write up here:

http://valueslant.com/2011/11/09/tronox-trox-going-vertical/

Would be great to hear any thoughts

[Buckeye]

Hey ValueSlant

 

Here's a qute from Valuewalk's GIBI confrence-

 

Lisa Hess

 

Titanium prices should rise 300% due to production bottlenecks and increase demand

 

Recommend 2 stocks to buy:  ILU:AU Iluka and TROX (Tronox)

 

 

[ValueSlant]

Hey ValueSlant

 

Here's a qute from Valuewalk's GIBI confrence-

 

Lisa Hess

 

Titanium prices should rise 300% due to production bottlenecks and increase demand

 

Recommend 2 stocks to buy:  ILU:AU Iluka and TROX (Tronox)

 

Thanks, that should help get the word out on this one.

[infinitee00]

I have a sizable position in Tronox and have been adding more, so it was good to see Barrons article on Tronox.

 

http://online.barrons.com/article/SB50001424052748703496404578171460444417012.html?mod=BOL_twm_fs ( paywall, but one can get a free preview using google search)

 

 

I do believe that demand for TiO2 is going to pick up once again in the next few years and TROX being the only vertically integrated TiO2 producer can benefit from that rise. Also it helps the thesis that there is no new capacity being added in the near future, at least not until late 2014- early 2015 by Dupont (i.e. for Tio2 manufactured using the Chloride process. Most Chinese manufacturers who are expanding capacity use the inferior sulphate process to produce TiO2, demand for which is low in rest of the world).

 

Thoughts/comments are appreciated.

 

[no_free_lunch]

My biggest concern is product substitution.  With such a sharp increase in prices it seems plausible:

 

"Following months of cost pressures, paint makers have started a silent war against high-grade TiO2 by switching to substitute products. Valspar has trimmed its TiO2 usage this year by ‘mid-single-digit’ percentages, opting for cheaper from-China sulphate-based TiO2. Sherwin is weighing similar options, having already introduced sulphide-grade TiO2 in its factories in Latin America. PPG is one notch higher, not just targeting 4% to 6% lower TiO2 usage this year but even considering manufacturing the pigment. If that sounds whimsical, PPG ran its own TiO2 manufacturing facility till 1971, when, according to a Chemical & Engineering News archive, it was wound up because of unfavorable market conditions. "

..

"Interestingly, competition’s building up at home as well. Not many know how Dow Chemical is spending money on developing TiO2 alternatives. Its EVOQUE polymer technology launched last year reduces the amount of TiO2 needed for paints by 20% while improving resistance"

 

http://beta.fool.com/nehams/2012/11/21/when-dirt-cheap-valuations-do-not-mean-a-buy/17014/

 

 

I am not sure if substitution will just continue or if they have already implemented it where possible.  The situation is certainly complicated and competing with China doesn't usually end well.

[infinitee00]

Yes, I read that fool article and I think the threat of substitution was overblown in that article.

 

Sulphate based Tio2 ( the type of TiO2 produced by Chinese manufacturers) is cheaper but has much lower quality. According to an industry report I read, the sulphate process is outdated. The report goes on to claim that the process "...has a long process flow, high energy consumption, large pollutant emissions and low-quality products and has been included in China's national list of restricted technologies, processes and products".

 

Paint manufactures understand the risk to quality and consequently to their brands if they produce lower quality products. We have to ask the question why aren't the paint manufacturers switching entirely to sulphate based TiO2? Why limit usage only too few % points? There's surely enough sulphate based TiO2 manufacturers in China. In fact sulphate based TiO2 producers have excess supply and have been producing surplus TiO2, so why not take advantage of that and reduce cost drastically? TiO2 users may very well use a somewhat mixed approach for the short term to lower costs but unless they can come up with a substitute of equal or better quality, demand for chloride based TiO2 is going to remain strong.

 

We also have to consider that manufacturers have seasonal depleted inventories and will have to start buying again. Kronos management even came out saying that "... the fiscal impracticality of planning expanded TiO2 production – largely because of the long lead time and high capital costs associated with adding significant new production – will ultimately create a prolonged shortage, especially as economic conditions improve."

 

You also have to consider that historical TiO2 demand in the world has followed historical GDP growth rates. So even if TiO2 buyers bring down their consumption a few percentage points by substituting other materials, the fact that there won't be any new addition to TiO2 capacity for some years means that in a few years their will be shortage of TiO2 production capacity as the world GDP grows ( that's a big assumption, but I don't have any indication to believe that world GDP will shrink).

 

As for substitution products like EVOQUE, the 20% seems like the best case scenario. I doubt that will be the case in reality. Also just because something reduces consumption and hence the cost does not mean it will be adopted widely enough to make a dent in the demand for TiO2.  Substitutes generally have a long struggle before they are adopted widely. Adoption of substitutes have a long lead time and I don't see the big paint companies using these substitutes widely without a long testing period or proper market/feasibility/quality study. For the big paint companies, quality of their products is paramount and I don't see them sacrificing that for a substitute that may reduce cost but may not improve quality. In any case,  I have not seen any data to indicate mass adoption of the product although I may not have looked at the right places here and may be mistaken. If you find anything on adoption of such substitutes, please post it here.

 

In any case, I do not see a secular decline in the demand for TiO2 nor a big threat from substitutes and do not foresee drastic loss of demand in the next few years.

 

[no_free_lunch]

Infinitee00,

 

First thanks for taking the time to respond to me in such detail.  You definitely know your stuff and I am just trying to catch up.

 

There is a fair bit of new supply that may come online over the next few years, as outlined in this article.  I guess it is just a question of how much actually comes on and whether there is discipline in deploying the supply.

 

http://www.paintsquare.com/news/?fuseaction=view&id=7938

 

"

Still working to secure its global supply of titanium dioxide, PPG Industries has agreed to license some of its chloride-based technologies to Henan Billions Chemicals Co. Ltd. and buy back the finished product from the Chinese company.

 

The world’s No. 2 paint and coatings company announced Tuesday (June 26) that it had signed a Memorandum of Understanding with Billions to license the technology for use at that company’s titanium dioxide (TiO2) refinement facilities in China.

 

Billions is China’s largest exporter of titanium dioxide and produces 120,000 metric tons of the pigment annually. Located in Jiaozuo City, Henan Province, Billions had 2011 sales of about $300 million.

 

PPG has had operations in China since the 1980s, and the Asia/Pacific region is critical to the company’s growth. Sales in Asia/Pacific exceeded $2 billion in 2010. Last year, PPG created PPG Management (Shanghai) Co. Ltd. to serve as its country headquarters in China.

 

...

 

In April, PPG announced a licensing and purchase agreement for titanium dioxide production with Argex Mining of Montreal. Cheap and abundant just a few years ago, the pigment is now in historically short supply.

 

In December, PPG announced that it would scour the globe for new sources of titanium dioxide.

 

That was followed by an April announcement of a “technical collaboration” between PPG and Argex Mining Inc., of Montreal, to develop a new TiO2 product for paints and coatings. Under that deal, Argex would use PPG’s technology to produce the product, the parties said.

 

The new agreement with Billions “provides further evidence of PPG’s commitment to utilize our existing expertise to expand and secure additional global supply of titanium dioxide,” said Charles F. Kahle II, PPG chief technology officer and vice president, coatings research and development.

 

..

 

DuPont Chemical, the No. 1 global producer of titanium dioxide, has also been working for the last year to expand global production by hundreds of millions of pounds annually.

 

And in June 2011, AkzoNobel, the world’s largest paint and coatings company, announced a partnership with Guangxi CAVA Titanium Industry Co. Ltd. to build a new TiO2 plant in Qinzhou, China.

"

 

 

It is very hard to analyze this situation given that there are so few numbers available.  Yes, new capacity will come online, but when and how much?

 

I did some more digging on Argex and I really cannot find a timeline on when they will start real production.  They indicate on their site that they plan to start with 15k tons, and scale to 195k tons.  195k is about 4% of global production so global demand growth could absorb that I suppose.  They also say that right now they are doing about 10kg a day :). 

 

The chinese manufacturers are just a big unknown, both for a timeline on the chloride based process and subsitution amounts.  I suspect that in regards to substitution that you are correct, there are limits to the amount that they can substitute.  As far as the chloride production, even if they switch their entire 120k over, that is only 2.5% net.  The market could absorb that in one year.

 

The other big question mark, is the ability of Dupont to scale their production up.  According to this article they are planning to bring 350k tonnes online.  That is about a 7% increase, or roughly 2 years of growth?  Perhaps we can rely on them to be smart about match production to supply?

 

http://www.reuters.com/article/2011/05/11/dupont-idUKN1123780520110511

 

"The company will spend $500 million to increase production at its Altamira, Mexico, plant by 200,000 metric tonnes per year.

 

The new capacity is expected to be online by 2014.

 

DuPont will also upgrade its four other titanium dioxide plants in Mississippi, Tennessee, Delaware and Taiwan to add another 150,000 metric tonnes per year."

 

 

So between these 3 known sources, it seems we are looking at ~700k new production?  That's about 14% additional capacity which will be fine as long as their is market discipline.  All in all, I am starting to talk myself into this one. 

[infinitee00]

Thanks for posting the link. I agree with you about the timeline. I think the management of Dupont came out saying that they are expecting their extra capacity to come online by end of 2014 or beginning of 2015. I cannot remember the source ( maybe at one of the quarterly conference calls of TROX or KRO) but I remember it being mentioned that to expand capacity it takes about 2-3 years for existing plants and 4-5 years for greenfield projects to complete. The TiO2 producers have learned from their experience of the past 2 decades about the dangers of capacity expansion and unless demand is sustainable, I do not see significant amount of capital flowing into capacity expansion.

 

As for the 14% of new capacity, other than the DuPont expansion, I did not see any timeline mentioned in those reports neither have I seen that mentioned anywhere in the media, so I am wondering how much of it is expected anytime soon. Even after the 10% drop in TiO2 prices in the last 6 months, Dupont management claimed that it is still going ahead with the planned expansion, which to me (assuming they have some insight into future demand) means that TiO2 will be in short supply for the next few years at least. To me, a bet on Tio2 is also a bet that ultimately housing and auto industries will recover. How far that bears out remains to be seen.

[MYDemaray]

Will be interested to see what affect this has on expansion plans, if any:

 

http://www.nytimes.com/reuters/2013/07/23/business/23reuters-dupont-results.html?ref=business&_r=0

[GrizzlyRock]

Yea my guess is that at the very least this delays the capacity coming online.

 

Looks like DuPont just grew weary of what is naturally a super-cyclical biz. Gin rummy management...