Sales of carbon black, which dipped sharply last year, have revived this year as the world economy has rebounded from recession. Future growth of the material is expected to closely track that of the rubber industry, in which it is widely consumed. As for carbon black prices, they have dropped since reaching all-time highs in 2000, but are on the rise again as producers seek better margins.

World capacity for carbon black was about 8.5 million metric tons in 2001, while consumption of the material in the U.S., Western Europe and Japan totaled 3.8 million metric tons in 2000, according to SRI Consulting, Menlo Park, Calif. Approximately 70% of the world production of carbon black is used as a reinforcement in tires for automobiles and other vehicles, SRI reports, while about 20% goes into other rubber products such as hose, belting, mechanical and molded goods, and footwear. The remaining 10% is used as a pigment in printing inks, paints and plastics. SRI pegs the average growth rate of the carbon black industry at 1-2% per year, roughly paralleling the expansion of the rubber business.

Carbon black is typically produced by the partial oxidation of hydrocarbon liquids or gases at temperatures in excess of 2,000°F. Depending on their particle sizes, structure, purity and methods of manufacture, carbon black products may be classified as furnace black, lampblack, bone black, acetylene black or thermal black. More than 90% of the world's production of carbon black is furnace black, a commodity material. The remaining categories have specialized applications and command higher prices than furnace black.

The "big three" producers of carbon black in terms of global production are Degussa AG, Dusseldorf, Germany; Cabot Corp., Boston, Mass.; and Columbian Chemicals Co., a Marietta, Ga.-based subsidiary of Phelps Dodge Corp. Other leading market participants include Engineered Carbons Inc., a Borger, Texas subsidiary of Ameripol Synpol Corp.; Sid Richardson Carbon Co., Fort Worth, Texas; Taiwan-based China Synthetic Rubber; Tokai Carbon in Japan; and India's Aitya Birla Group.

Carbon black "is a business that has continually been plagued by overcapacity," says a market researcher who follows the industry. Last year, when Columbian announced a temporary halt in production at its El Dorado, Ark. carbon black plant, which has a 54,000 metric ton per year capacity, the company cited "continued overcapacity" of carbon black in North America as the reason. (The company declines to say when it might restart the unit.)

The overcapacity problem combined with sagging demand have put a strain on profits. Cabot, for instance, estimated that its 2001 carbon black sales were down 3% from the previous year, mostly due to lower volumes. Overall, the company reported a 20% decline in pretax carbon black profits between 2000 and 2001, attributing the result to a weak economy, particularly in North America, plus rising feedstock costs.

To boost their own profitability, Degussa and Engineered Carbons combined their North American carbon black operations last April to form a new 50:50 joint venture called Degussa Engineered Carbons, headquartered in Parsippany, N.J. Degussa declines to discuss how the new business is doing.

Carbon black producers have been challenged by the costs of complying with strict new environmental regulations to control air and water emissions at their production plants. (Some studies have linked carbon black with cancer, but the industry strongly disputes the link.) Degussa cites these added environmental costs as one reason it recently raised its carbon black prices in Europe.

Meanwhile, other products, most notably silica, are being touted by their producers as environmentally more benign substitutes for carbon black in tires. Silica is also said to promote lower rolling resistance in tires, which saves fuel. Silica may soon capture up to 25% of the carbon black market in tires, according to the industry analyst. Degussa has hedged its bets about the future by producing carbon black, tire-grade silica, and chemicals called silanes, which are needed to compatibilize silica with rubber.

As 2002 has unfolded there have been "significant improvements in the carbon black business," says Trey Hamblet, chemical group manager for Industrial Information Resources, a Houston, Texas-based market research firm. In a report to shareholders, Cabot notes that its carbon black volumes for the second quarter of 2002 increased 7% globally over the same period in 2001, and terms itself "cautiously optimistic" that the product is pulling out of last year's slump. In another upbeat sign, Hamblet says his firm has tallied some $283 million in new carbon black capital and maintenance projects in the U.S. and Canada, with the majority slated to start up by the end of 2003. Cabot, meanwhile, has announced a $25 million, 50,000 metric ton per year expansion of the Shanghai, China carbon black facility it owns with a Chinese joint-venture partner. The new output will go onstream by early 2004.

Prices of carbon black, which retreated from the highs they reached in 2000 (see chart on pg. 16C1), have trended upward this year. Degussa's European price hikes, which took effect on October 28, ranged from 4.5—7%, depending on the type of product. Earlier this year, Columbian boosted tags for all grades of its carbon black worldwide, saying that prices had been "unsustainably low for some time."

By most accounts, profits in carbon black will continue to be under pressure. "I think you're going to see some of the smaller players drop out of this business over the next few years," says the carbon black industry analyst. Annual increases in carbon black sales during this period, he predicts, will continue at the recent average of 1-2%.