The significant price decline in titanium dioxide (TiO2) year over year (YoY) has prompted revisions in management strategies and a re-evaluation of management teams' willingness to be exposed to the boom and bust cycle that has occurred twice over the past several years, according to Fitch Ratings.

 

Paint demand driven by the recent housing recovery in the U.S. had led to increased TiO2 demand but with the housing crash, TiO2 demand bottomed. TiO2 recovered quickly after a brief shakeout period, and Chinese demand and prices hit record highs last year before demand cratered in the second half of 2012. TiO2 volumes have increased YoY, but prices have lagged.

 

TiO2 prices are depressed, but prices are cyclical and recovery is expected with more robust global economic growth. DuPont is the largest TiO2 producer worldwide, with roughly one-fifth of market share, and major competitors include Kronos Worldwide Inc., Tronox Ltd. and Huntsman Corp.

 

Rockwood Holdings Inc. had been looking to divest its TiO2 business for a while to focus on its growing and less cyclically exposed lithium and surface treatment businesses. This week, Huntsman agreed to buy Rockwood's TiO2 assets for $1.1 billion. Huntsman is a logical buyer given its large existing TiO2 business and considering its other businesses have significant business cycle exposure.

 

DuPont is considering its strategic options for DuPont Performance Chemicals, since it does not conform to the company's long-term strategic plan. DuPont's Performance Chemicals segment accounts for a significant portion of DuPont's operating income (over 25% in 2012 but lower in 2013 due to significant weakness in TiO2 market), and roughly half of its sales are from TiO2 products.

 

DuPont's long-term strategic plan is to focus on agriculture and advanced material science applications that provide steady, growing and superior margin operating income. TiO2 science is relatively well understood, and growth is limited to GDP in addition to operating earnings being cyclical.