Iluka Sees Uncertainty Weighing on China Zircon Demand -- Commodity Comment

Iluka Resources, a leading global producer of mineral sands, has reported a decline in production for the 2024 calendar year, with its core products zircon, rutile, and synthetic rutile (Z/R/SR) falling more than 20% compared to 2023. The company's full-year Z/R/SR production was 496,000 tonnes, beating guidance but still 22% lower than the previous year's haul of 639,000 tonnes. Sales also fell by 3.8% year on year to 475,000 tonnes, with subdued demand in key markets and seasonal weakness contributing to the decline. Unit cash costs of production were lower than expected, at $1,290 per tonne.

Iluka expects total Z/R/SR production to decrease slightly in 2025, to 495,000 tonnes, and predicts an uptick in production costs, from $640 million in 2024 to $680 million in 2025, including an additional $25 million in operational readiness costs at its Balranald deposit in New South Wales. The company noted that the fourth quarter experienced anticipated seasonal weakness, with the ceramic industry in China scaling back production until the Lunar New Year, producers of fused zirconia facing lower demand, and ZOC producers reporting stable conditions.

Iluka's shares fell 7.9% to $4.90 in early trading on the ASX after the company reported its 2024 result, extending declines of more than 25% over the last 12 months. Citi said sales volumes were 12% behind its forecasts, and revenue 17% lower than expected. The realised zircon price was 11% lower than Citi's forecasts, with weaker pricing expected again in the current quarter. Unit cash costs of production were lower than Iluka guided for the year, reflecting slightly higher finished goods production and cost minimisation initiatives. However, costs of production are expected to rise due to operational readiness costs at its Balranald deposit.

Iluka's mineral sands business generated $252 million of operating cash flow in 2024, with a working capital build of approximately $225 million. As of December 31, 2024, Iluka's mineral sands business had a net cash balance of $90 million, and the rare earths business $205 million. The federal government agreed to contribute an additional $400 million in financing support for Iluka Resources' Eneabba rare earths refinery in Western Australia, with the project now fully funded.

The uncertainty in China's real estate industry can impact the demand for zircon, as the real estate sector is a significant consumer of ceramic products, which in turn rely on zircon for their production. If the real estate industry in China faces financial pressure or slowdown, it could lead to reduced demand for ceramic tiles and other products, ultimately affecting the demand for zircon. This uncertainty can create a headwind for Iluka's sales, as China is a major market for zircon products.

To mitigate the impact of this uncertainty, Iluka could consider the following strategies:

1. Diversify its customer base: Iluka could focus on expanding its customer base beyond the Chinese market to reduce its reliance on a single region. This could involve targeting other growing markets, such as India or Southeast Asia, where the demand for ceramic products is expected to increase.
2. Optimize pricing strategies: Iluka could adjust its pricing strategies to better reflect the market conditions and demand fluctuations. For instance, it could offer discounts or promotions during periods of weak demand to stimulate sales and maintain market share. Conversely, during periods of strong demand, Iluka could increase prices to capitalize on the higher demand and improve profitability.
3. Invest in new product development: Iluka could explore new applications for zircon and develop new products to tap into emerging markets. This could help the company diversify its revenue streams and reduce its dependence on the traditional ceramic industry.

In its quarterly operational report, Iluka mentioned that it is closely monitoring developments in the Chinese real estate industry and the potential impact on its customers and suppliers. This indicates that the company is aware of the uncertainty and is taking steps to mitigate its effects on sales and pricing strategies.

The key factors driving the demand for zircon in the ceramics industry are the increasing urbanization and construction activities worldwide, particularly in Asia-Pacific. However, global economic uncertainty can impact the ceramics industry and, consequently, the demand for zircon. For instance, the ceramics industry is facing challenges such as increasing costs throughout the supply chain, logistics disruptions, and energy supply shortages in some tile-producing countries. These factors can affect the profitability of ceramic producers, potentially leading to a decrease in demand for zircon.

To address these challenges, ceramic producers are closely monitoring market developments and exploring advancements in zircon processing technologies, such as plasma fusion, which can enable higher efficiency and product diversification, potentially offsetting some of the negative impacts of global economic uncertainty on the zircon market.

In summary, Iluka Resources has reported a decline in production and sales for the 2024 calendar year, with the uncertainty in China's real estate industry weighing on the demand for zircon. To mitigate the impact of this uncertainty, Iluka could consider diversifying its customer base, optimizing pricing strategies, and investing in new product development. The key factors driving the demand for zircon in the ceramics industry are the increasing urbanization and construction activities worldwide, particularly in Asia-Pacific. However, global economic uncertainty can impact the ceramics industry and, consequently, the demand for zircon. To address these challenges, ceramic producers are closely monitoring market developments and exploring advancements in zircon processing technologies.