Although the refractories industry experienced additional consolidation in early 2002, the situation appears to be changing as the economies in several key markets--notably the U.S. and western Europe--begin to improve.

Low prices and poor economic conditions in the worldwide steel industry forced additional consolidation in early 2002. Although worldwide output of steel was up 6% compared to 2001 levels, most of the increase was attributed to higher production volumes in Asia, particularly China, which saw a 20% increase in steel production over the previous year.

The worldwide cement, lime, non-ferrous metals, glass, environment, energy and chemical industries also remained subdued. Although the situation was not quite as harsh as in the steel industry, there was still a trend toward consolidation of producers. Many producers also increased their capacities in the newly industrialized and emerging economies in Asia (particularly China) and eastern Europe, where new plants are being built and many existing plants are being modernized.

All of these trends affected refractories producers, many of which posted flat to slightly lower sales for 2002. However, the situation appears to be changing as the economies in several key markets--notably the U.S. and western Europe--begin to improve. Many companies cited improved sales in the first and second quarters of 2003 and expectations that sales for the year would be higher overall.

Steel Tariffs Boost U.S. Production, Anger International Community

In the U.S., production of raw steel was up slightly in the first half of 2003 compared to the same period in 2002. Imports were also down, posting a 20.4% drop compared to the previous year, largely due to the new steel tariffs implemented in March 2002. However, while the tariffs are being credited with boosting steel production in the U.S., they continue to be a source of heated debate on the international front. The World Trade Organization ruled in July 2003 that the duties violate global trade rules, and the European Union announced in September that it is moving ahead with plans to impose $2.2 billion in retaliatory duties on U.S. exports, ranging from footwear to fruit and vegetables, which could price those products out of the market. As a result, President Bush is considering whether to continue the heavy tariffs until early 2005, as was the initial plan, or scale them back to pacify the international community.

According to Charles W. Connors, president and CEO of Magneco-Metrel in Addison, Ill., and chairman of the American Steel Coalition, which represents small and medium-sized businesses that support the steel tariff remedy, the tariffs are preserving more than 1.1 million U.S. jobs in both steel manufacturing and upstream processes--including the manufacture of refractories for the steel industry.

"My company, which is a steel industry supplier and customer (employing 143 people in Illinois, northern Indiana and eastern Ohio), came close to bankruptcy, losing $2 million in 2001 and $300,00 in January and February 2002. One more month with such losses and we would have been out of business," he said. He credits President Bush's Steel Program, launched in March of 2002, with the survival of his company and thousands like it, and urged the President to keep the steel safeguard in place until March of 2005 as promised.

University of Maryland Professor and former Director of Economics for the U.S. International Trade Commission, Peter Morici, said the tariffs are having their intended effect as U.S. steel makers are seizing on the three-year program by streamlining and revamping their operations to increase competitiveness.

"If you take away the tariffs now, a lot of the progress that has been made will be dashed, and consuming industries will be harmed," Morici said. "It is in the long-term best interests of steel consumers to have a healthy domestic steel industry. Otherwise, ready availability of steel products at affordable prices, as we now have, will not be the case."

The American steel industry was injured as a result of repeated surges of low-priced, subsidized steel imports dumped illegally on American shores suppressing domestic steel prices to unsustainable 20-year lows. Domestic producers were unable to compete with foreign producers subsidized by their respective governments. The President's Steel Program was implemented to give the domestic steel industry a much-needed period of relief from the flood of imports and to provide the industry with the opportunity to restructure and consolidate.

Despite what the tariffs' critics have said, many in the U.S. steel industry insist that maintaining the tariffs for the remaining 17 months is the best way to ensure the health of the domestic steel industry and the steel supplying businesses that depend on its existence. It is unclear what action, if any, the Bush Administration will take on this issue.

Long-Term Prospects Are Promising

If the turnaround in the U.S. steel industry can be sustained, long-term prospects for refractories in the U.S. appear promising. A new study from The Freedonia Group, Inc. forecasts that demand for refractories in the U.S. will increase 2.2% per year to $2.4 billion in 2007 (see Table 1).¹ This is a dramatic improvement from the 1997 to 2002 period, which saw declines of nearly 3% per year. The brighter outlook for refractories is based on improved fundamentals for many of the major end use markets, particularly iron and steel following that industry's collapse starting in late 1997. Since the iron and steel market represents nearly half of all refractory demand, the turnaround will benefit most refractories producers.

The Freedonia Group study notes that the massive rationalization and consolidation that has occurred in the U.S. refractories industry, and the decline in consumption per unit of output, has largely played itself out, and that consumers are unlikely to become significantly more efficient users of refractories for the foreseeable future. The widespread consolidation and this newfound stability in the rate of consumption means that refractory supply and demand are now more closely aligned than they have been for some time. As a result, the outlook for surviving refractory producers is much brighter than the relatively modest growth prospects might indicate.

Among the refractory forms, preformed shapes and castables are expected to see the best growth, while from a materials perspective, non-clay materials will outperform clay refractories. More specifically, the switch to better performing refractories will lead to the best opportunities for silicon carbide, zircon and zirconia refractories. However, similar to the industry as a whole, many individual refractory materials will not recover to 1997 levels until after 2007.

Among the various refractories markets, the Freedonia study forecasts that best growth opportunities in percentage terms will continue to be found in less traditional end uses, such as waste-to-energy generation and restaurants with in-house bakeries and stone ovens. However, given the small size of these markets, their impact on aggregate refractory demand will be minimal. Much more crucial to the overall health of the refractories industry will be the turnaround in U.S. steel production.

Kiln Furniture Offers Modest Growth Opportunities

According to a recent report from Business Communications Co., Inc., the total worldwide market for kiln furniture is also expected to grow, increasing from $186 million in 2002 to $211 million in 2007.² The U.S. share of the world market will increase from 22.7% to 24.1% as the U.S. market grows at an average annual growth rate (AAGR) of 3.8% through 2007 (see Table 2). This modest growth is due in part to the unexpected events occurring in the U.S. since the September 11, 2001 terrorist attacks and the recent Iraq war. The kiln furniture market depends largely on the general economoy and consumer spending sentiment and is therefore subject to variations with economic movement.

Due to the relatively long lifetimes of kiln furniture, the need for new kiln furniture is rather limited. However, the need to lower energy costs and improve productivity through faster firing cycles will continue to spur the growth of lighter weight kiln furniture, which consumes less heat and is therefore more fuel-efficient.

In recent years, the use of low-temperature firing cordierite kiln furniture--which is primarily used to fire products such as ceramic tableware--has been increasing rapidly in the Far East, including Taiwan, South Korea, the Philippines and India, as more ceramic production has been shifted to these lower-cost regions. A significant increase in automobile exports from South Korea in recent years has also increased that country's consumption of high-temperature alumina kiln furniture.

Editor's note: The foregoing information (except where noted) was compiled from publicly available information in annual reports and news releases, as well as from interviews with companies listed in the 2003 Refractories Giants (see http://www.ceramicindustry.com/FILES/HTML/CI_2003_CI_Giants/0,1067,,00.html). The information on the U.S. steel tariffs was obtained from the American Iron and Steel Institute (www.steel.org).

References:

1. "Refractories," August 2003, 261 pp. The full report is available for $3900 from The Freedonia Group, Inc., 767 Beta Dr., Cleveland, OH 44143-2326; (440) 684-9600; fax (440) 646-0484; e-mail pr@freedoniagroup.com; or www.freedoniagroup.com.

2. "RGB-273 Kiln Furniture," August 2003. The full report is available for $3350 from Business Communications Co., Inc., 25 Van Zant St., Norwalk, CT 06855; (203) 853-4266, ext. 309; e-mail publisher@bccresearch.com; or www.bccresearch.com.