Carbon black seemed on track for recovery last year after a slump in the business in 2001. But a new round of feedstock and energy rate hikes in late 2002 and early 2003 has made a big dent in carbon black profits, prompting producers to shut plants in North America and Europe and boost their prices by hefty margins. Suppliers of carbon black are now focusing their expansion efforts on Asia, particularly China, where they see the brightest prospects for growth.

Cabot Corp., Boston, Mass., is the world's largest producer of carbon black, with about a quarter of global sales, according to Anand Mehta, an industry analyst with The Freedonia Group, Cleveland, Ohio. The number two and three carbon black players, which Mehta says have slightly under a quarter of world sales between them, are Degussa, Düsseldorf, Germany, and Columbian Chemicals Co., a Marietta, Ga.-based unit of Phelps Dodge. Other leading participants in the market are Engineered Carbons Inc. (ECI), Borger, Texas; Continental Carbon, Houston, Texas; Sid Richardson Carbon Co., Fort Worth, Texas; China Synthetic Rubber in Taiwan; Tokai Carbon in Japan; and India's Aditya Birla Group.

Carbon black is typically made by partial oxidation of petroleum-based feedstocks at temperatures in excess of 2000º F. It is used as a reinforcing agent in tires and industrial rubber products, and as a pigment in printing inks, toners, paints, coatings and plastics. The largest sector of the carbon black market, 80-90% by most estimates, is composed of furnace blacks—relatively low-cost, commodity materials typically used in tires and other rubber products. The remaining carbon black grades, known as special blacks, are higher priced and geared to pigment and other specialty applications outside the rubber field.

Several important carbon black facilities have recently shut down. In November, 2002, Degussa Engineered Carbons, a Parsippany, N.J.-based 50:50 joint venture between Degussa and ECI, said it would close its 100,000 metric ton/year carbon black plant in Baytown, Texas within several months. In May, 2003, Cabot announced it would shut its 60,000 metric ton/year carbon black unit in Zierbena, Spain by this fall. Both companies cited overcapacity as the prime reasons for their moves. Cabot also attributed its decision to competition in Europe from low-priced imports from Russia and Egypt, and migration of tire production outside Europe. But plant shutdowns "are primarily a North American and Western European phenomenon," comments Mehta. Of eight expansions in carbon black capacity due onstream this year and next, he adds, three are in China, two are in India, one in Iran, and one in Thailand.

The world consumption of carbon black was 7.3 million metric tons in 2001, and is expected to increase at an average annual rate of 3.5% to reach 8.6 million metric tons by 2006, according to a Freedonia study of the industry. By then, the firm predicts that the Asia-Pacific region will account for 42% of carbon black sales, North America for 24%, and Western Europe for 18%. Freedonia forecasts that 2001-2006 average annual growth rates in carbon black demand will be 3.3% in North America, 1.4% in Western Europe, 1.3% in Japan, but a whopping 6.0% in China. The part of the Asia Pacific region outside China and Japan will grow at 4.8%, Freedonia says, while the rest of the world (Latin America, Eastern Europe, the Middle East and Africa) will show an average 4.1% gain.

Carbon black demand for the tire sector will grow a modest 2.8% annually from 2001 to 2006, Freedonia projects, while the nontire demand will move up by an average of 5.2% in the same period.

After dropping through 2001, carbon black prices reached a low of 30¢/lb in early 2002, but have been edging up since then (see chart). Producers of carbon black announced a 19% increase in tags in March, 2003, which followed a 10.5% hike in December, 2002. The rate rises were necessary, according to Columbian Chemicals president James P. Berresse, because "raw materials costs have escalated to the point that we no longer can absorb these increases in their entirety." Carbon black suppliers would like to push through more substantial increases, notes Mehta, but are constrained by their customers. "There's so much pressure on the producers from motor vehicle companies and tire producers to reduce costs," he says.

With rate hikes capped by the realities of the marketplace, producers of carbon black are seeking other ways to recoup their mounting feedstock and energy costs. Suppliers of carbon black often impose "adjuster" clauses (surcharges) on their contract customers indexed to the price of feedstocks. Now, "we see the industry probably going to natural gas adjusters in the future," says Steve Bayless, senior vice president for marketing and business development at Continental Carbon.

Since February and March of this year "we haven't had any more spikes in feedstocks and energy," says Bayless, "but these costs have leveled out at extremely high historical levels." In fact, he adds, "there's a lot more probability of these rates going up than going down in the near future."

All of which bodes poorly for purchasers of carbon black. Mehta estimates that prices of carbon black could reach 40¢/lb by the end of 2003, the highest they have been since the end of 2000.