This year has been dubbed “the year of elections”. By the end of 2024, 64 countries will have or have had new governments or administrations including the EU, US, Japan, UK, France and India. Businesses worldwide are anticipating what the possible policy changes will be and will mean for them. Especially critical industries could become crucial for an economic recovery.
To fully understand the challenges, we must recognise the geo-political disruptions have changed the world. From our global perspective at RHI Magnesita we clearly see that a series of shocks – including the pandemic, regional wars, the rise of protectionism measures on climate change and immigration – have collectively battered long-established supply chains and global trade networks. The industrial sector, especially heavy and basic industry in most global economies has been in stagnation for more than two years; a recovery is not at sight. Service and IT sectors cannot in the long-term balance out the industrial stagnation or even downturn. A prolonged, much more uncertain environment is testing the way we plan and manage global businesses. The global economy of the past 40 years is no more; industries must be prepared to find new answers and solutions.
The mission-critical refractories industry is feeling this seismic shift keenly. Alarm bells should ring with policymakers and industry leaders around the world, if this industry were to suffer materially.
Refractories are highly engineered materials designed to withstand very high temperatures well in excess of 1,200° C. They coat the inside of blast furnaces, crucibles and kilns which produce steel, aluminium, cement, glass, chemicals and many other materials that make-up the building blocks of modern societies. They are a very small part of the cost base but completely essential to the industrials sector which is the backbone of economic growth.
Another year that started with hopefulness for the refractory industry has taken a turn in recent months. Continuing poor macro-economic conditions, new economic policy measures and trade barriers have resulted in a market downturn in almost every geography due to the downturn of user industries. Even regions such as India, South East Asia and the Middle East, which we had anticipated to be “bright spots”, have also shown signs of short-term demand weakness.
Western economies are experiencing an industrial recession due to shrinking demand from the construction, transport and machinery sectors. The structural reduction of the industrial sector in China, the largest consumer and producer of metals, glass and cement, has led to an imbalance in world trade. The country is going through a deep structural shift from a supply-driven economy to a demand driven economy – this is painful, it will take time, and it will cost a lot of money, patience and adjusting – for the Chinese as well as for the entire world. Low domestic consumption has accelerated Chinese steel, metals, glass, and refractory exports, which cannot be easily absorbed due to low demand in destination economies.
Some analysts and commentators do not forecast any improvement in the demand situation for at least the next 12-18 months. This would then result in more than three years of continued downturn or industrial recession. Others are even beginning to question whether demand will ever return to prior levels.
The global demand downturn is further complicated by the recent increase in sea freight costs, transit times and reduced freight reliability arising from the Red Sea crisis, low water levels in the Panama Canal and port congestions. Rising bauxite and alumina prices due to a supply shortage for example, have resulted in cost inflations of alumina-based products, to reflect the higher cost of raw materials. The same is about to happen in magnesite based raw materials too. Developed markets continue to face the incremental challenge of labor cost inflation which is still not being absorbed.
With raw materials making up ca. 70% of total cost of goods, we must pass these inflationary cost increases on to our customers to reasonably protect our already thin margins. Industry-wide, capital expenditure and innovation efforts are already at a dangerous minimum.
The repercussions of a wide spread closure of unprofitable refractories plants or production lines could be severe. If, and when, the turning point for an economic recovery comes, world leaders will be bitterly disappointed if steelmakers are hamstrung by shrunken refractories supply capability . So, one would assume that the issues impacting the future of the refractories industry would be high on policymakers’ agendas. Yet still, the refractories industry – the essential ingredient for making our cars, houses, plastics, even paper – does not have the public attention it justifies.
In Europe, Ursula von der Leyen’s new EU Commission announced in September signalled a commitment to reinvigorate Europe’s industrial strategy, but this will be futile if the needs of the refractories industry aren’t taken into account.
For example, RHI Magnesita is calling for a review of the Critical Raw Materials Act to include high-purity magnesia and dolomite, two key refractories precursor minerals, in an effort to ensure that refractories production in Europe remains financially viable and innovation continues.
But as politicians change and policies get modified, I also encourage our industry to help itself:
We today have a self-inflicted overcapacity problem which must no longer go unaddressed. A number of major producers have been progressively building out new greenfield plants in a flat, no-growth industry with pricing challenges. We estimate that excess capacity is running at some 40% above demand and, shockingly, growing. For example, India alone is seeing an addition of almost 300 kt of new greenfield capacity in the next 2-3 years. Reasonable growth of customer demand in India has led to a frensy race for new capacities by many refractory players in India jointly producing very large overcapacity. How rational is this in the context of the macro challenges outside of our industry’s control? RHI Magnesita has been pursuing growth via an M&A strategy while focusing on bringing new innovations and greener production methods to the industry.
Value-add instead of old-style mass production must become a priority. Innovations including refractories recycling or refractory life extension through digital data usage must become more widespread to improve the sustainability of our product and help our customers improve theirs. The opportunity if we focus on innovation is still there.
The Governments and policy makers can help here as well. Within RHI Magnesita’s own sustainability agenda we have ambitions to take a lead on hydrogen adoption and carbon capture and utilisation – neither of which will be possible without policy intervention to support new technologies, risk capital to allow first-mover industrial installations, as well as new infrastructure that will benefit a wider industrial decarbonisation journey and help the industrial sector to grow again.
Refractories are an overlooked ‘critical’ global industry, a facilitator of the building blocks of modern society. Today, macro crises have led us to a highly challenging juncture. It is essential that we adapt quickly to help power a global economic recovery, and for this we need horizontal and vertical private sector collaboration and public sector recognition, support and engagement.