Reflections
Partners in Capital Growth
NOVEMBER 2014
Titanium
On metal markets, growth and China
Metal markets seem to have a theme these days. With
China’s growth rate weakening, European economies
unable to pull out of their sluggishness and North America
showing only a weak version of what a full recovery could
be, no wonder prices for metals are weak – as well as the
share prices of the companies that extract, process and
sell them.
However, there is more to this story than just weak
economic growth due to lackluster private and public
demand. In a word, there is China. What is striking when
looking at metal markets, be it Nickel (see Reflections
September 2014), Titanium in this issue, Iron Ore to be
covered in a future issue or many other metals is the
magnitude of the development of Chinese capacity at all
stages of the processes, from extraction to consumption.
It is not unusual to see Chinese capacity in a sector go
from none or very little prior to 2005 to 30, 40 or even
50% of world capacity today.
This extraordinary growth was a major factor behind our
good economic times in the 2000s, and the rise in the
prices of commodities: with such a level of capital
investment Chinese demand was prodigious, and local
and foreign suppliers were keen to oblige by developing
further their production capacities.
Today, the pace of Chinese investing has slowed down
but also the invested capital has to produce a return.
Increased production capacity in and outside of China
together with weak overall demand is weighting on
markets, depressing prices.
This will likely have two consequences:
• First, it will squeeze out the weakest market participants
(the least efficient, the most expensive and now the
more polluting) forcing reductions in total capacity. An
added pressure is the forced phasing out of
environmentally most damaging processes as remedial
8 Price Street, 3rd Floor, Toronto, ON M4W 1Z4 t 416 363 3050 toll free 1 800 665 1757 f 416 368 4330 w www.takota.ca
costs increase, especially at the refining/processing
stage, with the concomitant search for new, cleaner and
cheaper processes that have the potential if successful
of disrupting the economics of metal production and
challenge even the largest producers.
• Second, over-supplied markets lead to low and volatile
prices. Uncertainty as to future prices removes the
incentive to explore, plan the development and invest in
new capacity especially at the extraction stage –
economically the highest risk stage in the metal
production process. Should the situation perdure, it is
not difficult to foresee a time where scarcity will
develop, especially as the trend is for new finds to be of
declining metal content quality – raising the issue of not
only meeting future increases in demand but also how
to replace the resources being currently depleted.
Future increases in demand are inevitable as the growth
of most metal consumption is closely linked to economic
growth. Even though growth in the developed world
remains feeble, the same cannot be said of the
developing world where not only the trend toward
urbanization is strong (more cities means more metal
needs) but also population growth by itself increases
demand.
So the story for now is of a massive increase in demand
in the 2000s that pushed up prices and incited the
development of new production capacity. Of a slowing
down of demand after 2008 (with a brief resurgence in
2011 we will cover later) and especially for commodities
after 2011 at a time new capacity was coming on stream
that created over supply and falling prices. And for the
future, of an inexorable growth in demand the industry
may not be able to meet if in the meantime prices remain
such that venturing capital to develop new resources is
unappealing. Then increasing scarcity would push prices
up again and start a new cycle.

Going through cycles is typical of the metals industry.
However, predicting how the cycle may play out this time
is probably more difficult for industry participants, due to
the disrupting effect of the enormous increases in both
China’s consumption and production capacity.
Titanium
The Titanium market provides a decent illustration of this
phenomenon. Our interest derives from the actions of one
of our small holdings; a “cash-box” company we bought
when it was basically holding only cash and its share
price was less than the per-share value of the cash being
held. Such investments can be very profitable as long as
either the company returns the cash to shareholders, or
invests it wisely.
This company recently acquired a mining company
owning an idled Titanium mine and is redeveloping it at
minimal cost using the existing infrastructure. Assessing
the new prospects for that company implies having a
better understanding of the Titanium ore market and of
the opportunities – and risks – it might hold.
In this Reflections we attempt to explain some of the
characteristics of the Titanium market and some of our
conclusions.
Qualification
This paper presents a synthesis of publicly available
information on the titanium market, sourced from
operating companies, industry analysts, news media and
academic studies as referenced specifically or generally
in end notes. Its purpose is solely to highlight some of the
characteristics of this complex and not too transparent
market.
Most Titanium is extracted from mineral sands (see
below) for which “There are neither prevailing
benchmarks nor readily sourced representative traded
prices for mineral sands products as most volume is sold
on a direct producer-customer basis. […]. Like most
mineral commodities, zircon and titanium prices vary
depending on supply and demand fundamentals.
However, prices are set directly between a small pool of
producers and consumers and are not influenced by
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Reflections
external speculative positions as is often the case with
1
LME metals” (such as nickel).
As a result, there is little public information available on
actual volumes and prices. The difficulty is compounded
by the variability of the ores offered, the multitude of
processes and locations where the ores may be
transformed, and the variations in quality and applications
of the final products, all affecting the prices realized at
each stage and rendering the evaluation of prospective
revenues difficult. Furthermore, given that numbers from
different sources often do not match, all the numbers
quoted should be viewed as orders of magnitude rather
than precise numbers.
Overview
Titanium is thought of as a metal, but it is mostly used as
a pigment.
Surprisingly, very little of mined titanium ends up at
2
titanium metal. Most of it (about 90%) ends up as
Titanium Dioxide (TiO2), a pigment used for its brilliant
whiteness, its opacity, its resistance to ultra-violets, and
its non-toxic properties. Of the remaining 10%, about half
ends up as titanium metal, used in the aerospace and
other industries for its strength, low density and
resistance to corrosion. The last 5% is mostly used in
welding applications.
Mineral sands
Titanium is mostly extracted from mineral sands. When
weathering erodes rocks into sands, the chemical and
physical decomposition process yields sand grains of
various composition and densities. If these sands are
then subjected to wave or wind action or less frequently
river currents, the lighter grains like quartz and feldspar
will be easily displaced, leaving behind the heavier grains,
usually those containing metallic elements. Under the
right conditions, these heavier grains accumulate along
coastlines or riverbeds into deposits of “mineral sands”.
1
www.iluka.com . Iluka is one of the largest producers of titanium and
zircon ores. Its website has a wealth of information on the industry.
2
Numbers vary between 86% and 95%.
 Reflections

“The size of mineral sands deposits vary, but are typically Ilmenite, a titanium iron oxide ore (FeTiO3) and the most
100 to 200 meters wide, 5 to 20 meters thick, and 2 to 20 abundant commercial source of TiO2, with a TiO2 content
1
kilometers long” . They are found today in fossil of 35-65%.
coastlines “several hundred meters to tens of kilometers –
Rutile, a naturally occurring form of TiO2. Despite its high
or occasionally hundreds of kilometers – inland from the
1 TiO2 content (92-98%), rutile needs to be processed
present coastline” . Major deposits have been found in
before it can be used industrially. Sources of natural rutile
Australia, India, southern Africa and southern USA.
are limited; the largest known deposit is in Sierra Leone.
A mineral sands deposit is described by its grade, which
Minor sources of titanium include Anatase, also a
measures the percentage of heavy minerals contained in
naturally occurring mineral form of TiO2 but with a slightly
the deposit, typically from 1 to 20% of the deposit but
different crystalline structure that makes it of lesser
exceptionally up to 90%. In turn, heavy minerals contain
quality for some applications; Leucoxene (65-91% TiO2),
both economically attractive components such as metallic
a natural alteration of ilmenite; and Perovskite, a calcium
minerals from which metals can be extracted, and
titanium oxide (CaTiO3) with sizeable deposits in Russia
uneconomical minerals that have to be separated and
and the US.
discarded.

The economically attractive components of heavy

minerals may include titanium minerals (1-60%), zircon
(1-50%), and in smaller proportion rare earth elements,
tungsten, thorium (radioactive), industrial diamonds,
garnets and so on. The uneconomical components
include trash minerals (minerals either unattractive or
present in too small a concentration to justify extraction -
quartz, garnet, chromite, monazite) and slimes (minerals
and heavy clays too fine to be processed economically).
Titanium feedstocks commercialization
After mining, the ores are processed locally to remove
undesirable elements and isolate the commercially
valuable elements, which may include in addition to
titanium minerals zircon, garnets, phosphates, rare earth
minerals and so on. Some concentration process may be
applied to the resulting titanium ore to reach a required
TiO2 content for export.

Mineral sands are mined wet (with dredges) or dry (by
scrapping the deposit). The various elements are then
separated, the refuse being used to refill the extraction
site.
Certain titanium minerals (Ilmenite) have been found as
hard rocks in Canada (Quebec – Rio Tinto), China,
Norway. These are usually more expensive to mine.
Titanium may also be obtained as a by-product of iron ore
processing.
Titanium minerals
Titanium is only found in nature in association with other
elements. Commercially, titanium is mostly obtained from
sand deposits (“feedstocks”) rich in its most common
compound, the mineral titanium dioxide (TiO2). The main
sources of TiO2 are:
The commercial value of the cleaned titanium feedstock
will be primarily dependent on its TiO2 content. Low TiO2
content feedstocks are costlier to process into finished
products and, unless upgraded, do not easily allow for the
production of the highest quality end products. As a
result, they can attract only 20% of the price of higher
TiO2 content feedstocks.
Additional considerations will be factored in the valuation
of a feedstock, such as the presence of other chemical
elements beneficial or harmful to future processing, the
physical characteristics of the feedstock (size and shape
of particles), distance and ease of access to export
facilities (harbours) and shipping costs to the production
site of end-users.

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Processing feedstocks into Titanium end products
TiO2 pigment. There are two main processes to
transform feedstocks into commercial grade titanium
dioxide pigment, the sulphate process, which uses low
TiO2 content feedstocks (ilmenite) and the chloride
process, which uses high TiO2 content feedstocks (rutile,
and upgraded or modified ilmenite).
While the sulphate process has been in existence the
longest, it is costlier at high volume, produces much more
waste and is more environmentally damaging than the
chloride process. However, low TiO2 feedstocks are more
abundant and cheaper. China, which has built its capacity
using the sulphate process, is now building its chloride
process capacity and has started to close its most
inefficient sulfate capabilities.
In the West, most producers use the more efficient
chloride process, and so prefer high TiO2 content
feedstocks. About 50% of pigment is produced by the
1 a TiO2 content of 88-95%. These upgraded feedstocks
chloride process .
These alternative routes give TiO2 producers, depending
on their plants’ capabilities, opportunities to arbitrage
between feedstocks, processes and end products based
on current prices and demand. For example, when
demand or prices are weak TiO2 producers favour less
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Reflections
Another important difference between the two processes
is in the quality of the end product. The sulfate process
leads to lower quality TiO2 pigments because it produces
both rutile and less desired anatase crystals. The chloride
process yields only rutile crystals. Modern refinements to
the sulfate process have improved the quality of sulfate
pigments so that now, for 80% of applications, pigments
from either process may be used. In 20% of applications
though, especially heat-treated coatings like in the
automotive industry, only chloride pigments are used.
There are a number of “chemical bridges” that allow low-
grade ilmenite feedstocks to also be used as feedstock to
the chloride process. Ilmenite is first transformed mostly
by removing iron into higher TiO2 content intermediary
feedstocks such as titanium slag, which is produced by
smelting ilmenite and has about 80-90% TiO2; upgraded
titanium slag (UGS) which has up to 95% TiO2; and
synthetic rutile, a chemically modified ilmenite, which has
may then be used in either process.
expensive feedstocks like ilmenite as opposed to rutile,
which can be 5-8 times more expensive. Conversely,
when demand and capacity utilization is high, higher TiO2
content feedstocks are favoured. Feedstock suppliers
then have an interest in supplying higher grade
 Reflections

intermediary products so as to capture the much higher
prices commanded by higher grade feedstocks.
Titanium metal is produced solely from high TiO2
content feedstocks (mainly rutile) via an expensive,
lengthy and delicate batch process (the Kroll process)
that leads to the production of titanium sponge. Titanium
sponge is then transformed into titanium metal or alloys
via melting and milled as required.
While titanium metal has many attractive physical
qualities, its use is limited by its high cost – due to the
high cost of its production. Alternative processes that
would be less capital intensive and less costly to operate
are currently being tested (Cambridge process). Success
would reduce the cost of titanium metal, increase its
demand and increase the need for high quality
feedstocks. The graph below illustrates the main
processing routes to arrive at titanium end products.

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 Reflections

Titanium end products

As noted above, around 90% of titanium feedstocks are used to produce titanium dioxide pigment. It is used to
provide whiteness, and when added to other pigments to provide opacity (covering power in paints). By also providing
UV protection, TiO2 pigments slow colour aging and protect the underlying material.

About 5% of titanium feedstocks are used to produce titanium metal. New metal accounts for about 60% of total
titanium metal consumed, the balance being provided by recycled scrap metal. About 30-40% of all titanium metal
(numbers vary greatly depending on source and year) is used in the aerospace industry for its strength to weight ratio.
At equal strength, titanium is half as heavy as steel and is therefore widely used for airframes and jet engines.

Another 45-55% of titanium metal is used by other industries, mostly to prevent corrosion in chemical, power and
desalination plants, for offshore oils and gas drilling components and for consumer goods (sporting equipment,
medical equipment and supplies).

Finally, about 8-15% of titanium metal is used for military applications (aircrafts, navy due to immunity to seawater
corrosion, armaments).

The remaining 5% of titanium feedstocks is used in other applications like welding.

Titanium Applications and Attributes:

PIGMENT – ~90% Opacity (and whiteness) – high refractive index

Paints & coatings - Plastics - Paper - Inks - UV protection – prevents fading, peeling and cracking
Non-toxic – safe for use in cosmetics and pharmaceuticals

TITANIUM METAL – ~5% High strength to weight ratio – fuel efficiency benefits in
Aircraft engines and frames - Military applications aviation
Chemical & desalination plant components Medical & Corrosion resistant – resistant to chemicals, sea water and
sporting equipment other elements

WELDING FLUX CORD WIRE – ~5% Slag formation – shapes, holds and protects weld from
Ship building - Fabrication - Steel construction atmospheric conditions

Source: Above: Iluka; below: Merchant Research and Consulting Ltd., Iluka

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 Reflections

Titanium market
The growth in demand for pigments (90% of final demand) has been broadly in line with world Gross Domestic Product
1
(GDP) growth at around 4% per annum over the last ten years .

Metal and other end uses (10% of final

demand) have experienced growth at around
1
12% per annum .

Pigment consumption per capita is highly

correlated to GDP per capita up to a point
where saturation seems to set in and demand
growth becomes solely a function of overall
growth. The graph below shows that
consumption in the western world has reached
a plateau, while consumption per capita in
developing countries, including China, is still in
its infancy; however, the sheer size of the
Chinese market and its tremendous
development over the last decade means that
China’s total demand for pigment already
3
accounts for 35% of total world consumption :

Source: Iluka.

Source: Rio Tinto

3
As a significant share of this pigment will be ending in exported products, these numbers would not reflect internal consumption. This only
increases the future potential of the Chinese market.

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 Reflections

Source; Rio Tinto, 2014

Rio Tinto’s forecast is for demand growth to follow a similar path to the one previously followed by steel, a product
whose demand is also closely correlated to economic development:

Any growth in pigment demand will have to be met by feedstock producers. As mentioned above, feedstock production
may be divided into two streams, high and low grade. As can be seen from the two graphs below, while 80% of high-
grade feedstock is produced by 5 companies specializing in high-grade products, the production of low-grade
feedstock is more fragmented with considerable production and supply attributable to small producers in China,
Vietnam, India and elsewhere.

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 Reflections

Furthermore, the demand for high-grade feedstock is expected to increase especially as China builds up its chloride
process capacity; the economic argument for doing so is presented below by Sierra Rutile, owner of the largest known
rutile deposit in Sierra Leone:

Notes: Upper graph: TiCl4 (titanium tetrachloride) is an intermediary step for both the chloride process and the
production of titanium metal. Lower graph: CAGR means Compound Annual Growth Rate

This seems to point to the maintenance of a sizeable

premium for high-grade products, and of a premium for
low-grade feedstocks whose intrinsic characteristics
would allow them to be efficiently upgraded.

A number of sources, such as Rio Tinto, foresee a tight

future balance between supply and demand with a
possibility of insufficient supply beyond 2016-2017 due
to the lack of investment in new extraction facilities.

Source: Rio Tinto estimates, Sept. 2014

CAGR figure is for demand growth over the period.

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 Reflections

However, the industry is currently working through excess downstream inventories accumulated as prices rose by
more than 300% peaking in 2011:

4
As seen by Credit Suisse :
2012-13 mineral sand collapse was oversized due to downstream inventories
Our view is that the trouble for mineral sand products in 2012 was caused by high downstream
inventories, which was a product of steeply rising prices in the preceding period. Spiralling prices in
2011 drove downstream overstocking by global pigment consumers and tile manufacturers to beat
the next price rise. Growth then slowed globally as sovereign debt crises overwhelmed Europe and
China's stimulus ended. Downstream sectors found themselves heavily over-stocked in with
feedstock and finished products as the northern hemisphere painting season failed and property

4
Mineral Sands Sector report, Credit Suisse, March 2014

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 Reflections

sales and fit-outs fell in China. The downstream customers ceased buying zircon or TiO2 feedstocks
while they unwound tile and pigment inventory in a sluggish market.
In 2014, the high prices of 2012 are history, and mineral sand customers have spent 18 months
destocking in the face of sliding prices and are now lean. We don't expect slowing economic growth
to have the same outsize effect on mineral sand demand as when the downstream sectors had
mighty inventories.
On the following graph, the industry would currently be at its cycle low. Typical is the lack of investments in new
feedstock production capacity as low current prices and uncertain future prices cannot justify investing in new projects:

However, demand growth from growing and urbanizing countries is inevitable. Any pick-up in worldwide growth would
only accelerate this phenomenon. Without new discoveries and investments in new feedstock producing capacity, it is
easy to see a shortfall developing, as Rio Tinto and other producers foresee. This would inevitably push prices up, and
given the ongoing shift in demand toward higher grade feedstock likely accentuate the price differential between
feedstock qualities.

As regards the balance for high-grade chloride feedstocks, many producers have been increasing their ability to
provide such feedstocks whose demand will increase as China and others build chloride pigment plants. So while
sources of naturally occurring high-grade feedstocks are limited, increased availability of upgraded chloride feedstocks
might limit price increases.

As regards the balance for low-grade sulfate feedstocks (ilmenite), how the Chinese market will evolve is key as
sulfate feedstocks producers are heavily dependent on demand from its construction market. Again from the same
March 2014 Credit Suisse report:
China demand for ... titanium feedstocks is ultimately tied tightly to construction. New buildings are
painted, requiring TiO2 pigment....
Our strategists note that Chinese sales appear to lead construction by about six months (Figure 3).
And right now, sales are pointing down. Construction is a huge slice of the Chinese economy,
providing demand to steel mills, cement factories, coal mines and railways. If construction growth rolls
over, then so will the Chinese GDP.
Construction is not the only sector looking weak – a suite of China economic indicators have started
2014 poorly. On top of the immediate risks, our China strategist also warns of the risks to shadow

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 Reflections

banking, with 2H14–1H15 being a peak season for trust fund maturation. The risk is that many poorly
conceived investments will default and the result will be a liquidity crisis.
However, despite the apparent risks to Chinese growth in 2014, none of our economists or strategists
are straying from the 7–7.5% GDP guidance for China. The premise seems to be that bad numbers
will lead to aggressive stimulus, and bail the country out.
So unless economists cast doubt on China's GDP forecast, we must assume construction growth will
continue, despite weak sales, and growth will also occur for ... TiO2.
Nevertheless,
The impact on ilmenite from a China growth freeze would be immense. China is by-far the biggest
market for sulphate ilmenite. It has enormous rock ilmenite resources domestically, mainly in Sichuan,
and it imports over 2Mtpa of ilmenite sand. Its sulphate pigment is used for every sector, coatings
(housing and machinery), paper, plastic.
Another development is the coming on stream of two large ilmenite mines in Africa (Kwale, Kenya, operator Base
Resources and Grande Côte, Senegal, operator MDL) which if successful could produce up to 800,000 tonnes of
ilmenite a year (2014 total sulfate ilmenite production is foreseen to be 6 to 6.5 million tonnes). Obviously, a large
increase in ilmenite supplies would delay any increase in prices due to increasing demand.

To conclude, it seems that both chloride and sulfate feedstock suppliers will be facing uncertain market conditions for
a while, with a higher level of risk for sulfate feedstock suppliers due to their heavy dependence on the Chinese
market, the lesser appeal of their product if not economically upgradable as downstream producers are moving toward
chloride pigment production (assuming they are successful at doing so), the likely large increase in product availability
and their usually smaller size compared to the largest five chloride feedstock producers who control about 79% of the
chloride feedstock market and 52% of the total titanium feedstock market.

Jean-Dominique Sellier
18 November 2014

Sources:
Aerolytics Macquarie Research Tronox Limited
Antaike Melior Resources TZMI
Base Resources Merchant Research & Consulting Roskill information Services
Credit Suisse Mineral Deposits Ltd U.S. Geological Survey
Iluka Resources Limited Outotec Oyj Umiti
International Titanium Association Rio Tinto Wellmet International
J.P.Morgan Sierra Rutile
Kenmare Resources Timet

Past performance is not indicative of future results of any particular investment. There can be no assurance
that a consistent return will be achieved, and an investor may in fact incur losses.
The third party information used in this document has been obtained from various published and unpublished sources
considered to be reliable. However Takota Asset Management Inc. cannot guarantee its accuracy or completeness
and thus do not accept liability for any direct or consequential losses arising from its use.

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