Issue Date: May 15, 2017
Orion Engineered Carbons is in the black
Orion Engineered Carbons has no aspirations to be something it is not. It makes carbon black. Its strategy is simple, too. Whenever possible, it makes and sells the most sophisticated grades of carbon black it can.
Orion was founded in 2011 when two private equity firms, Rhône Capital and Triton Partners, bought Evonik Industries’ carbon black business for about $1.2 billion. Three years later, the newly independent firm launched a public offering on the New York Stock Exchange.
Along with other players such as Cabot Corp. and Birla Carbon, Orion is among the world’s largest carbon black producers. Carbon black is essential for reinforcing rubber goods, especially tires. It’s also blended into plastics, printing inks, and paints, lending black pigmentation as well as properties such as strength, electrical conductivity, and protection from ultraviolet light.
Producers normally make carbon black via the incomplete combustion of coal tar distillates, residual fuel oil, and other gunky raw materials. They can control the size of the carbon black particles, which run between 10 and 500 nm. They can also aggregate the particles into larger structures and modify their surface chemistry.
The carbon black grades used for rubber, particularly tire reinforcement, lie on the commodity end of the business. That market is mature. Plus, the tire industry’s growing practice of replacing some carbon black with precipitated silica to decrease rolling resistance shaves a few decimal points off growth each year.
But what Jack Clem, Orion’s chief executive officer, finds vexing about tire carbon black is the abundance of competition. “That competition tends to depress price,” he notes.
“We were providing the cash for them to build a methionine plant in Singapore or something. It’s all ours now.”
—Jack Clem, CEO, Orion Engineered Carbons
Specialty carbon blacks, in contrast, are found in plastics and paint applications. The market grows at higher rates—perhaps 4–5% annually—and is more profitable. Making specialty carbon blacks is largely a matter of tighter purity and manufacturing controls than are needed for tire blacks.
With more than a quarter of the global market, Orion is the largest player in specialty carbon blacks. “We have always considered the strength of our business, relative to competition, as being the technical capability,” Clem says, pointing to assets such as an R&D center and pilot plant in Cologne, Germany.
Specialties represent about 38% of Orion’s sales, but they yield 61% of its profits. Not surprisingly, Clem is sharpening Orion’s focus on this business.
Over the past few years, the company has closed rubber carbon black plants in France, Portugal, and South Korea. It has also installed equipment at rubber-grade plants in Texas, Ohio, and Sweden that allows them to produce specialty blacks. Overall, Orion has converted about 40,000 metric tons per year of capacity. Last year, it produced about 240,000 metric tons of specialty blacks and nearly 900,000 metric tons of rubber blacks.
Orion is also trying to improve profitability on the rubber side of the business with products that offer improved value. For instance, last year, it introduced carbon blacks meant to reduce rolling resistance in tires. Clem says these could appeal to customers that want to manufacture tires with better fuel efficiency without an expensive switch to silica.
Evonik wasn’t making this kind of investment in the carbon black business, Clem says, but the private equity owners cultivated it. To Evonik, carbon black was a cash cow but not strategically important. Since being on its own, Clem says, Orion has plowed about $380 million of its profits back into the business. Had Orion stayed part of Evonik, more than $300 million of those funds would have gone to other businesses, Clem estimates.
“We were providing the cash for them to build a methionine plant in Singapore or something,” he says. “It’s all ours now.”
Stock analysts like what they are seeing from Orion. Many point to the company’s 10% volume growth in specialties, an indication that it is increasing market share, as a big accomplishment for 2016. “The underlying fundamentals of the business appear very upbeat for 2017,” Northcoast Research analyst Kevin Hocevar noted in a recent report.
In late 2015, Orion completed the purchase of a carbon black plant in Qingdao, China. It’s a former Evonik joint venture that was not included in Orion originally. Clem says future Orion acquisitions will be similar. He doesn’t have an appetite to step out of the carbon business into adjacent areas of business, like Cabot did a few years ago with its purchase of the activated carbon maker Norit.
“We like our business,” he says. “We like the growth prospects of our business. We think we do it well.”
- Chemical & Engineering News
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