REFRACTORIES MARKET OVERVIEW: Increasing Industrial Investment Boosts Refractory Demand

After another slow year of industrial investment in 2003, refractories producers are finally starting to see an upswing in their major markets. According to The Refractories Institute (TRI), a survey of its members in the first quarter of 2004 indicated that sales were up slightly or up over 5% for the majority (82%) of the 22 respondents-"a major turnaround from the anemic surveys of the past couple of years."¹

U.S. Steel, Aluminum Industries See Higher Shipments

Data on U.S. aluminum and steel shipments support this positive trend. According to The Aluminum Association, Inc., total North American aluminum product shipments were at 12.21 billion pounds for the first six months of 2004, up 6.8% from the same period in 2003. Additionally, producers shipped 8.54 billion pounds of aluminum mill products, a 9.8% increase from the first half of 2003.² Steel shipments were also higher in the first half of the year, increasing 10.9% to 57.6 million net tons, compared to the 51.9 million net tons shipped during the same period in 2003.³

Although the Bush Administration decided to prematurely drop the Section 201 tariffs on steel imports in December 2003 (15 months ahead of the original March 2005 deadline), the 21 months that the tariffs were in place reportedly gave the steel industry-and refractories producers-a much-needed boost. In recent testimony submitted to the steel caucus of the U.S. Congress, David Sutherland, president and chief executive officer of IPSCO, Inc. (a leading steel supplier in the U.S. and Canada) and chairman of the American Iron and Steel Institute, noted that the tariffs were effective in establishing a climate that "facilitated dramatic changes" in the industry that will allow the industry to compete on a global scale going forward. These changes included revamping and repairing furnaces and modernizing facilities, which has given refractory suppliers increasing business over the last couple of years. But perhaps even more importantly, they have positioned the steel industry to pursue additional investments in the future.

"Our industry, through the actions of individual companies and entrepreneurs, has truly recreated itself. As a result, we look at our future-as a high tech and global industry-with a renewed vigor," Sutherland said.

However, the U.S. steel industry isn't out of the woods yet. After imports fell nearly 30% in 2003, they surged 33% in the first half of this year, outpacing a 17% increase in U.S. consumption.⁴ As a result, the steel industry has urged Congress to continue closely monitoring the situation to prevent surges of illegally traded imports from again destabilizing the U.S. steel market.

Increased Global Demand Offers New Opportunities

Outside the U.S., rapid growth in several key regions could help support a continued worldwide demand for refractories.

For example, the Brazilian newspaper Valor Economico reported in August 2004 that the Brazilian foundry industry has begun to invest again after a long stagnant period.⁵ Production of iron, aluminum and steel goods in the first half of 2004 reached 1.344 million metric tons (mmt), a 21.6% increase over the same period in 2003. Even at this increased rate, Brazilian foundry producers are struggling to meet heightened demand, particularly from the automotive industry, which indicates that production levels should remain high for quite some time.

According to refractories manufacturer RHI Group, the steel industry in both Western and Eastern Europe (particularly Russia) continues to experience good capacity utilization, which is boosting the company's sales in those regions. As further evidence of Russia's growing economy, the European and Asian information group Interfax reported that Russia's aluminum exports from January to May 2004 soared 35.3% to 1.732 mmt compared to the same period in 2003.⁶

Of course, the region that everyone is watching is Asia, where refractory demand in the iron and steel, ceramic, and petrochemical industries has surged in the past few years. RHI reported that modernized and new production capabilities, especially in China, increasingly require technologically sophisticated refractories solutions.

According to Charles Semler, Ph.D., a refractories consultant and contributing editor to Ceramic Industry, refractory production in China has increased 51% since 2000. "In 2003, it was 14.4 million metric tons (mmt), which is more than four times the U.S. refractory tonnage of roughly 3 mmt. The average refractory consumption rate by the Chinese steel industry is about 20 kg/ton of steel produced, which is more than twice the U.S. refractory consumption rate," he says. Semler also reports that "as the increase in steel production continues in China, it can be expected that the country's refractory production will continue to increase, exceeding 15 mmt for 2004."⁷

It is unclear whether the increased demand for steel and refractories in China will lead to increased exports for other countries or will primarily be filled through domestic production.

Energy Remains a Double-Edged Sword

Over the last several years, refractory producers have largely been able to improve their operating margins through more efficient manufacturing processes, increased diversification and, in some cases, plant closures and layoffs. However, a number of challenges still face the industry, including the rising costs of freight, raw materials and energy. While there's no question that these increased costs are putting pressure on the bottom line, high energy costs are also boosting the demand for high-performance refractories.

For example, refractories producer Rath AG reported that sales of its ceramic fiber have increased in 2004, as plants upgrade their furnaces to save energy and increase production efficiency. Companies are also reporting an upturn in repairs and relines of glassmaking furnaces for largely the same reasons, in addition to increased glass demand.

Further industrial investments are likely as plants continue to look for ways to become more competitive on a global scale.

Editor's note: The foregoing information (except where noted) was compiled from publicly available information in annual reports and news releases.