Ceramic Industry

<strong>ADVANCED CERAMICS MARKET OVERVIEW</strong>: Advanced Ceramics Markets Present Significant Growth Opportunities

December 1, 2006
From ceramic armor to electronics to aerospace, many markets in the advanced ceramics sector are posting double-digit gains, with further growth expected over the next several years.

Above: A Mack truck cab outfitted with Ceradyne's new FlexKitTM Armor System. Photos courtesy of Ceradyne, Inc. and Mack Trucks, Inc.


After regaining some momentum in 2005, the advanced ceramics industry now appears to be charging full-speed ahead. Companies are reporting double-digit gains in revenues, increased earnings and higher selling prices in virtually every advanced sector, from armor to electronics to aerospace. Following is an overview of some of the fastest-growing segments of the advanced ceramics industry.

Armor

In late September, the U.S. House and Senate passed a record $532.8 billion defense spending bill for 2007. President Bush signed the bill into law on October 17.* Among other expenditures, the bill includes $5.9 billion for purchasing "modularity-related equipment," including armored Humvees, soldier protective armor, trucks, advanced night vision and communications equipment, light arms, and artillery.

With the proven track record of ceramic armor, a significant portion of this funding is likely to trickle down into the ceramic industry. After seeing growth of 46.5% in the first half of 2006 compared with the same period in 2005, Ceradyne conservatively estimated that its sales for the year would be up 38 to 40%, with a significant portion of that increase coming from ceramic armor. While the company continues to diversify its product line, it projected another double-digit sales increase in 2007 based largely on receiving additional orders from the U.S. Army for its lightweight ceramic body armor, particularly its enhanced small arms protective inserts (ESAPI) and enhanced side ballistic inserts (ESBI).

Calgary, Alberta, Canada-based Ceramic Protection Corp., which makes body and vehicle armor for law enforcement and military use, said that it also expects to benefit from increased defense spending both at home and abroad, despite the recent cancellation of a supply agreement from Phoenix, Ariz.-based Armor Works Enterprises, LLC. Other ceramic manufacturers are also receiving substantial military contracts.

With the overall demand for ceramic armor from both the military and private security sector unlikely to decline any time soon, continued innovations will likely provide the best opportunities for new contracts. For example, Ceradyne recently won an order from Mack Trucks, Inc. to create a lightweight ceramic truck cab prototype that will provide all the protection of metal armor at half the weight. The truck cab is outfitted with Ceradyne's FlexKitTM Armor System, which is composed of uniformly designed rectangular "bricks" of armor that are incorporated into the cab of the truck to allow for maximum flexibility. Unlike older vehicle armor designs, which can't be repaired on the battlefield, the FlexKit system can be repaired by one person simply by replacing the damaged brick(s). The windshield of the truck cab is also manufactured using the FlexKit armor process. It is made up of uniform rectangular pieces of bulletproof glass that make on-the-spot repair easier.

Saint-Gobain recently completed delivery of multiple sets of a new window laminate system based on large sapphire sheets for integration into armored vehicles for government use. The sapphire is produced at Saint-Gobain Crystals' Milford, N.H., facility. "Saint-Gobain is the only producer of transparent ceramic material that offers complete laminated systems to withstand multiple hits by armor-piercing threats. As a result, we shipped the first commercial order for multiple sets of our Sapphire Transparent Armor System," said Jeff Rioux, market manager for Saint-Gobain Crystals. The Sapphire Transparent Armor Systems were developed in a cooperative effort between Saint-Gobain Crystals and Saint-Gobain Sully, a manufacturer of laminated glass ballistic windows.

Additional innovations-and opportunities-will undoubtedly emerge through increased defense spending on research and development.

*Information on the bill, H.R. 5122, can be found at thomas.loc.gov.

Electronics

For many companies serving the electronics sector, 2006 has seen the return of record sales and profits. In February, Morgan Electro Ceramics announced that it would expand its Bedford, Ohio, manufacturing facility by 20,000 square feet to support continued growth in the computer, electronics, medical and defense markets. The expansion was expected to be complete by the end of 2006.

John Gilbertson, chief executive officer and president of AVX Corp., noted that the company's results for its 2006 fiscal year, which ended in March, reflected "the highest revenue and net income since the end of the tech bubble in fiscal 2001. Overall demand for our products has improved throughout the year and increased the industry capacity utilization, which, in turn, has helped stabilize prices. Better pricing, coupled with our moves to lower the cost of manufacturing, have positively impacted our results."

These trends have continued through the year, and many companies are optimistic that demand in 2007 will remain robust. A recent survey of silicon wafer suppliers revealed that total wafer shipments are expected to experience robust growth over the next several years, with an average compound annual growth rate of more than 10% from 2005 to 2009.1

"We are currently seeing unprecedented demand, driven by the end market electronic applications. The silicon segment that is experiencing the greatest growth is 300 mm, which is anticipated to be over 30% of total silicon volumes in 2007," said Tatsuhiko Shigematsu, chairman of the SEMI Silicon Manufacturers Group (SMG) and technology officer of SUMCO Corp. It is unclear how the current shortage of polysilicon might affect this outlook (see the glass market overview), but the high demand for electronics is likely to translate into higher sales for all component suppliers in this market.

Despite the optimistic outlook, competition in this sector remains fierce. As a result, companies continue to focus on reducing costs to protect their margins. Even those workers in low-manufacturing-cost countries aren't immune to job cuts. For example, KEMET Corp. announced in October that it would reduce the headcount at its Monterrey, Mexico, facilities by approximately 400 people in an effort to reduce costs. "These plants will remain at full production. This action is not a result of a loss of market share, but represents an element of our ongoing strategy to reduce cost and improve our competitive position in the world electronics market," said Per Loof, chief executive officer.

While the industry as a whole is fairly lean after the downsizing that occurred over the last few years, companies will continue to look for ways to streamline their operations in the years ahead.

MLCCs. Photo courtesy of Murata Electronics.

Energy

From natural gas and oil to nuclear energy and fuel cells, the energy sector is providing a wealth of opportunities for advanced ceramics. Carbo Ceramics, which manufactures ceramic proppants and supplies fracture diagnostic services for use in the hydraulic fracturing of natural gas and oil wells, saw a sales increase of 13% in 2005, and an additional 18% growth in revenues in the first half of 2006. The company noted that the volume of ceramic proppant sold in North America increased by 14% from the first six months of 2005, driven primarily by an increase in the U.S. natural gas rig count and related fracturing activity. The North American increase was partially offset by a 26% decrease in overseas shipments due principally to decreased sales volume in Russia. While proppant sales in Russia reached their highest level since last year's third quarter, activity in the region remains slow due to an increase in freight costs and tariffs on imported products. The company is addressing this situation through the construction of a manufacturing facility in Kopeysk, Russia. Excluding results in Russia, sales volume in overseas export markets increased 12% from the previous year, with strong activity in China, West Africa and North Africa offsetting a decline in sales in the Middle East.

Exploration associated with ultradeep petroleum wells and deepwater fields could also open new markets for ceramics. Numerous deepwater fields are already in operation, and many more are planned for the Gulf of Mexico, offshore Brazil, West Africa and elsewhere. According to John Barratt of Natural Carbon LLC, ceramics are already being used in subsea equipment. "This represents an emerging high-value market for ceramics, particularly given the high cost of these wells and the myriad problems associated with repairing corroded components inside a deepwater production system," he says.2

While nuclear energy remains a source of significant debate, existing nuclear facilities in the U.S. and elsewhere are finding better ways to encapsulate nuclear waste-and are turning to ceramics and composites to do the job. Ceradyne received its initial order in September for boron carbide/aluminum metal matrix composite (MMC) components from Transnuclear for more than $1.5 million. The MMC components are for dry storage of spent nuclear fuel and are scheduled for delivery by the end of second-quarter 2007. Ceradyne's new subsidiary, Ceradyne Canada, in Chicoutimi, Quebec, will manufacture the components from MMC ingots, which will be produced by Alcan Inc. using its patented MMC casting process. The components will be integrated into Transnuclear's NUHOMS® Systems, which are used by U.S. nuclear-powered utilities for spent fuel storage.

According to Voice of America (VOA), the rising price of petroleum and the growing worldwide demand for energy is fueling a renewed interest in nuclear power as a source of electricity, especially as new fuel and reactor technologies are developed that make nuclear energy safer.3 While significant hurdles still need to be overcome, nuclear energy could provide a significant market for ceramics in the future.

Fuel cells remain another prospective growth market. While much of the hype surrounding fuel cells has quieted down over the past year, substantial research and development has continued behind the scenes. The GE Global Research Center in Niskayuna, N.Y., recently developed and delivered a 6 kilowatt prototype of a solid oxide fuel cell (SOFC) system to the U.S. Department of Energy (DOE)/National Energy Technology Laboratory. The prototype will be tested as part of a multi-year research program under the DOE's Solid State Energy Conversion Alliance Coal-Based Systems program. GE said the delivered prototype exceeded the DOE's key performance specifications for both efficiency and potential for low cost, and represented a major step forward in providing the fuel cell technology required for large-scale, commercially viable products for power generation.

"SOFCs represent one of the most promising fuel cell technologies for achieving unsurpassed efficiency and environmental performance in large-scale power generation plants," said Kelly Fletcher, advanced technology leader of sustainable energy programs at GE Global Research. "While significant technical challenges remain, the development of this prototype represents a demonstrable step toward meeting GE's goal of making SOFC technology commercially viable. GE's long-term objective is to make SOFC technology viable for large-scale power generation."

Ceramic Fuel Cells Ltd. (CFCL), an SOFC manufacturer based in Australia, believes that the market for fuel cell stacks and cells is now "commercial ready." The company said that the reduction in costs as a result of new technology has generated a fuel cell that is twice as powerful but much easier to manufacture. In October, the company began production on 1 kW stacks and was reportedly confident that the industry has matured enough to provide commercial opportunities.4



Automotive/Aerospace

Despite the challenges faced by the "Big Three" automakers in the U.S., the automotive market has been lucrative for some ceramic manufacturers. One reason is the trend toward "clean diesel," which is achieved through a combination of cleaner fuels and advanced filtration technologies, including ceramic particulate filters. General Motors Corp., Ford Motor Co. and Daimler Chrysler have all announced plans to introduce heavy-duty pickup trucks with clean diesel technologies. While this effort is largely being driven by new federal emission standards that will go into effect in January 2007, it is also seen as a way to lure consumers back into the large-vehicle market, which has been lagging due to high fuel costs. The new generation of diesel engines is more fuel-efficient.

In October, Corning Inc., whose Environmental Technologies segment offers ceramic technologies and solutions for emissions and pollution control, received a long-term contract to supply emissions control products for diesel engine maker Cummins Inc.'s Cummins Emissions Solutions unit. Corning's DuraTrap filters and Celcor substrates will be used in the exhaust treatment system for a range of Cummins medium- and heavy-duty engines.

Light-duty clean diesel engines are also becoming increasingly popular. Cummins Inc. recently announced that it will begin manufacturing a new family of light-duty clean diesel engines at its Columbus Engine Plant (CEP) in Columbus, Ohio, no later than 2010. Preparations for the manufacturing lines are scheduled to begin in mid-2007. DaimlerChrysler will be the major customer for the engine, which will be designed to power vehicles below 8500 pounds gross vehicle weight for a number of automotive applications.

The aerospace industry is also providing significant opportunities. The Aerospace Industries Association (AIA) reported that "a prolific flurry of orders in the final quarter [of 2005] sent aerospace industry statistics into record territory last year, shattering old marks for orders and backlog while also recording the largest number of shipments in history." Orders, shipments and backlog continued to show significant gains in the first half of 2006, setting the stage for another record-setting year.

"The continued strength in aerospace is a good sign not only for our industry, but the U.S. economy as a whole," said AIA President and CEO John Douglass.

The automotive and aerospace markets are also strong worldwide. According to The Freedonia Group, global bearings demand will rise 5.5% annually through 2010 based on higher manufacturing production and rising aerospace and motor vehicle output. Market advances in the developing world will significantly outpace demand in the U.S., Europe and Japan. China will register the largest gains, with growth in India, Thailand and Brazil also strong.5 Manufacturers of other ceramic components also stand to gain from these trends.

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