News from Notch Consulting, Inc.

As is perhaps obvious from the last two entries, I have been reviewing the thermal black market over the last few weeks. As part of that process, I have received an update on Severgazprom (Ukhta, Russia), which is the second largest thermal black producer in the world, behind Canada’s Cancarb.

Severgazprom is nearing completion on a major restructuring of its operations that began in late 2005. Severgazprom is a subsidiary of Gazprom, Russia’s state-owned gas, oil and energy conglomerate. Gazprom is the largest producer of natural gas in the world. Under the restructuring, Severgazprom’s divisions dedicated to natural gas extraction and processing have been moved out of Severgazprom and merged with several other Gazprom companies to create a single company that is responsible for gas extraction and processing — Gazprom Pererabotka Ltd. (or Gazprom Processing Ltd.).

Since October 1, 2007, Gazprom Processing is responsible for carbon black manufacturing. Under the current plan (which is not yet finalized), the marketing and sales of carbon black will be handled by Gazprom JSC for domestic contracts (i.e., within Russia) and by Gazprom Export Ltd. for export contracts, while Gazprom Processing will handle only the actual production. It is not yet determined whether pricing and contract terms will be set by Gazprom Processing or by the two sales organizations.

Gazprom Processing produces furnace black (700 series grades including N762, N772 and N774), thermal black (N990 and N991), and channel black (K-354), with a total capacity of 40,000 tonnes per year. There have long been plans to modernize the carbon black units, but this is just one very small business within this huge company, so the project has not found funding. The company has planned to shut down production of channel black because the unit is outdated (circa 1942) and demand for this product is very small. However, it is considered a strategic resource because it is used in tires for military aircraft, so the government has not approved the shutdown.

In contrast to channel black, Gazprom’s thermal black unit is producing near capacity, with most of these volumes either being exported to Western Europe (about 60% of production) or consumed within Russia/CIS (18%). The remainder is exported to North America, Asia and South America. The company expects to raise thermal black prices in January 2008, when the restructuring process is complete. Gazprom’s current thermal black prices are roughly 30% below market, so corrective action is clearly needed. Gazprom’s thermal black business benefits from receiving its natural gas feedstock at net cost, which results in much lower costs of production.

Our friends at Cancarb report that they recently completed a major capital project. Cancarb (Medicine Hat, Alberta, Canada) is the world’s leading producer of medium thermal black, a specialty carbon black produced from natural gas feedstocks. It’s used mainly in mechanical rubber goods (for parts calling for very high elasticity and a smooth surface), plastics, metallurgy and refractories.

The project involved a complete overhaul of the steam turbine for the plant’s cogeneration unit, as well as a standard maintenance turn-around for the plant’s five carbon black units. The plant was shut down for about four weeks while the overhaul was conducted, from mid-September until mid-October. All five of the plant’s production units feed into the same turbine, though the plant’s design allows the carbon black units to be isolated so they can by-pass the turbine if needed (i.e., the carbon black plant can be operated independent of the cogen unit, though obviously the cogen unit cannot operate without the carbon black units). There was no disruption in supplies, as inventories had been built up. The project had no effect on capacity, which is 45,000 tonnes/year. The cost of the project was not released.

Cancarb’s plant is very clean — it is essentially emission free and there is no “thermal puff” from the stack that is characteristic of other thermal units. The plant became particulate-free in 2004 when Cancarb commissioned a baghouse for the stack to capture particulates. Prior to the installation of the power plant, such a baghouse would have been impossible because the tail gas temperature from the reactors was above 1,200 C, much too high for any bag material. However, the energy extracted from the tail gas stream by feeding the steam turbine lowers the tail gas temperatures to just over 100 C.

Cancarb currently has five units (each of which has two reactors), and is considering adding a sixth if market conditions warrant. These units work best in pairs, so Unit 6 was always a possibility. When Cancarb added Unit 5 in 2000, it also installed the foundations and underground duct work for Unit 6, which would add another 9,000 tonnes.

After suffering through extremely high natural gas prices in the second half of 2005, the thermal black market strengthened in 2006 and 2007. Its price relative to competitive grades of furnace black has improved, since natural gas prices have remained relatively flat while CBO prices have spiked in 2007.

I have just returned from Carbon Black 2007, Perspective in Asia Pacific, held in November 6-9, 2007 in Seoul, South Korea. The Asian conference is held every other year, alternating with the Carbon Black World conference, which is held in North America or Europe. According to organizers, the conference attracted more than 200 people from 21 countries. The Perspective in Asia Pacific conference was excellent as always, providing a comprehensive overview of trends in the carbon black industry, including supply and demand, feedstocks, production technology and energy conservation. Notch presented a paper during Session One entitled “Overview of Global Carbon Black Supply & Demand,” which included data on the twelve largest producers, exporters, importers and consumers of carbon black worldwide, as well as capacity developments.

It was great to meet old friends and to make new ones. Much of the discussion, both in the sessions and during breaks, focussed on feedstock costs, only natural considering that WTI is now trading well above $90 per barrel and HS Resid (#6 Fuel Oil) is about $70 per barrel (USGC). Carbon black producers are responding by focusing on improving energy efficiency and yields by installing higher temp air and oil preheaters, adding cogen units, expanding their grade mix to include more specialty products, and trying to implement supply contracts that don’t leave them perpetually chasing oil. On the news front, I learned of several new capacity expansion projects in Asia, including a new producer planning to enter the industry next year. For clients, I will be updating the Expansions data in the Carbon Black World Data Book within the next few weeks to reflect these projects.

The future schedule for the Asian conference is as follows:
2009 — Dubai (sponsored by the Mideast Carbon Black Association)
2011 — Singapore (sponsored by Glencore Ltd.)
2013 — Bangkok (sponsored by Thai carbon black producers)

The next North American carbon black conference will be held October/November 2008, and the location has not yet been chosen. Possibilities are Dallas/Fort Worth, Las Vegas, Montreal, Vancouver, San Diego, Houston, Miami/Fort Lauderdale and Phoenix. I’m hoping for Vancouver or Montreal. The conference is sponsored by Intertech.