INTERVIEW: Refractory product prices set to rise amid raw material inflation: RHI Magnesita

The cost of refractory products -- heat-retardant materials used in various industries -- is set to rise in the coming months, despite somewhat sluggish demand, amid disrupted supply of raw materials bauxite and alumina, and soaring freight costs, manufacturer RHI Magnesita told S&P Global Commodity Insights.

"Even though, as bauxite and alumina users, we are small -- global refractory manufacturing takes 2.5 million mt/year of bauxite compared to 280 million mt absorbed by the aluminum industry -- these markets are very relevant to us, and they are currently unbalanced, and the prices skyrocket," RHI Magnesita Chief Customer Officer Gustavo Franco said.

"We only saw similar spikes once before -- in the aftermath of the COVID pandemic, when buoyant demand was the main reason behind that disbalance. What we are seeing now is a sequence of supply-disrupting events," he said.

In the first quarter, a nationwide strike disrupted mining in key bauxite producer Guinea, which generally provides 25-30% of global supply.

In addition, China's domestic bauxite supply has thinned somewhat amid tighter controls on the explosives used to mine the ore. At the same time, pollution-targeting restrictions on refining operations have affected alumina output in the country.

Around half of the global refractory industry uses alumina as its main raw material, and 60% of refractory-grade alumina comes from China.

Platts, part of Commodity Insights, assessed the Australian alumina price at $478/mt FOB July 18, up 37% since the start of 2024.

"There are no productivity or efficiency gains that could mitigate the impact," said Franco, of the price increase, adding that for RHI Magnesita's customers it will likely materialize during the second half of the year.

"We need to explain to them what is happening in the robust alumina market and how it affects our raw material costs [making up 70% of the total] in order to justify refractory price hikes during the period of low demand," he added.

The current alumina price spike could translate into a 15-20% jump in refractory prices, Franco said.

RHI Magnesita, which is 70% self-sufficient in magnesite, the other key raw material in refractory production, said it doesn't aim to achieve the same level of backward integration in bauxite. Franco said that captive mining of bauxite currently covers 10% of RHI Magnesita's needs, but he added that expanding this would only be worthwhile if the objective is to extract metallurgical grade alumina.

Shipping costs

Franco also flagged the issue of soaring shipping costs this year.

He flagged the Red Sea crisis, which requires diversions and increased voyage times, along with traffic restrictions in the Panama Canal, and equipment malfunctions in Singapore, one of the busiest container ports in the world, as key factors in this.

"It is rare that you have all three elements -- the raw materials, the production and the consumer -- in the same location. Most of the raw materials have to be imported, and the finished products go everywhere in the world, making sea freight a very important cost component of the industry," Franco said. "Freighting used to make up 5% of our overall costs, but now it represents 10%-12%."

According to data from S&P Global Commodities at Sea(opens in a new tab), the Red Sea route bypass has increased transit times for shipments between Asia and north Europe by 30%, while Asia-West Mediterranean routes have risen by 60%.

The Platts Container Index was assessed at $3,921/40ft on July 17, up 263% from $1,081/40ft in mid-December 2023.

Franco said that using more secondary raw materials -- provided this becomes economical -- could be a way for RHI Magnesita to reduce exposure to fluctuations in consumables and transportation costs.

However, the cost of extracting inputs from used refractories currently exceeds that of virgin raw materials, even after the recent jump in alumina prices, because separating and sorting bricks remains a largely manual process.

RHI Magnesita said it aims to increase recycling to 15% by 2025, from 13% today, including investments in automation.