Through a Glass, Industrially
Owens Corning has many a finger in many a hot pie, none currently hotter than the pgm group metals– principally platinum and rhodium – that are the catalysts of their and other industries. Dave Andres looks at the uses, the issues and the outlook.
How would you compare the industrial uses that you are now responsible for – glass and chemical – with your experiences in the automotive industry? What’s similar – what’s different?
Dave Andres: The major difference between the auto industry and the glass industry is that platinum metals are a direct material in the auto business – used in catalytic converters, oxygen sensors, spark plugs and electronics.
In the glass business, platinum metals are a capital item – the furnace bushings, which convert molten glass into glass fibre, are made of platinum / rhodium alloys because of the two-metal alloy’s high temperature structural performance and its corrosion resistance to molten glass.
While the value of the metal being managed is very large in both businesses, in the auto industry it felt like you were always a buyer – every day – and supply relationships with the producers were an essential piece of the procurement strategy. In the glass fibre and insulation businesses, there is much more flexibility with our metal book in terms of both market timing our purchases and active metal leasing strategies that maximise the value of our ownership position.
Where are the areas of growth – both in applications and in geographic regions?
Owens Corning’s market position is very strong in glass fibre and insulation. Glass fibre has a wide range of end uses, which helps insulate us from a drop in any one specific market. For example, we’ve just announced a new glass fibre product for the wind energy industry that allows turbine manufacturers to increase blade length and deliver 12% more power.
The US housing market, another big user, has been incredibly robust for more than five years and still remains historically strong. Of course, Asia is a growth region for Owens Corning in both building materials and glass fibre. We recently announced the tentative acquisition of Asahi Fiber Glass, which would help us grow our glass reinforcements and compounding business in Japan. Both our glass fibre and building insulations businesses are positioned to grow in the China market as well.
If the price of one or more metals were to spike even higher, how feasible is it to consider substitution? How much flexibility is there?
The engineering and technical work to substitute between platinum and palladium in catalytic converters is very well known. GM seemed to have the best results with both overall metal loadings and the speed to adjust and certify switches between the two. GM also worked well with the washcoat industry to implement new developments.
In glass, Owens Corning is very active in developing new bushing designs at our Science & Technology Center. Today’s bushing composition is platinum and rhodium, and we have the capability to flex our rhodium percentage – within some limits – and are working on some interesting ideas with various materials that have the potential to extend the life of our bushings or reduce the amount of platinum and rhodium in our designs.
Material substitution is not the easiest work. With market prices for platinum above$1200 and with rhodium near $6000, if there were viable alternatives, industrial users would have already switched. The auto industry has done an effective job minimising the amount of PGMs in the converter, but there’s a lot of inorganic chemistry and material science involved to convert vehicle exhaust chemistry into carbon dioxide, nitrogen, and water. We have similar challenges in the glass business with the high-temperature environment necessary to produce the high-quality glass fibre we manufacture.
How do you feel about the impact of investors on the market – the use of ‘commodities as an asset class’ – which has resulted in generally low lease rates and consistently high spot prices?
I think the relatively new participation from passive investors like pension funds has raised the price level in a lot of commodity markets. This is very passive money that will often buy a basket – like the Goldman Sachs Commodity Index – and just continue to add to their position as their pension fund contributions grow. It’s largely one-way money until pension withdrawals start or they change their view on being in these types of markets.
I think the easy money has been made and, if future returns do not meet expectations, we could see fund managers cool very quickly to commodities and return to their core investment portfolio of equities, bonds and fixed income investments. Those outflows of money could move some commodity prices sharply lower if there isn’t any underlying physical demand for that particular commodity.
Are any hedging mechanisms used to protect against spikes in prices?
I was involved setting up GM’s hedging program in the early 1990s. I’ve been told by most of the trading industry that GM was ahead of everyone in the auto industry in recognising that hedging tools are an effective way to reduce the price volatility of raw materials and energy, which in turn minimises the earnings and cash flow volatility of the company.
Owens Corning has a more active hedging process in terms of both policy and the engagement of the company’s top leadership. Our natural gas and power exposures are significant, as many of our manufacturing processes are very energy intense. We use similar hedging strategies because FAS133 and Sarbanes-Oxley regulations very much guide how major corporations put in place the proper controls, governance and policies.
Given your experience with hedging, looking ahead, what are your expectations for prices?
I’ve been a little surprised that commodity prices have trended as high as they have for as long as they have. I’m more of a fundamentalist in terms of thinking what would move prices 20-to-30% higher or 20- to-30% lower. The platinum metals have such few key players on the supply side and only a few key consuming markets that price moves can be volatile and occasionally violent. I’ve seen the unobtainable become plentiful in a short period of time.
The growth of South African production will likely determine the level of platinum prices. The technical ability of the auto industry to achieve tailpipe emissions standards without increasing metal loadings will drive rhodium prices.
Both metals have been trending higher – partly because of fund and speculative interest – but it’s hard to make a case how prices could move 20-to-30% lower without an innovation event in the auto industry or a major material substitution event. When we first started discussing this interview, rhodium prices were around $1,500 – in the space of a few short months, it’s traded up to the $6,000 level. And if tomorrow’s headline read ‘rhodium cures baldness’, who knows where the price would go?
But in general, my expectation is that platinum will trade sideways and rhodium will eventually find its way to a stable market price again – I would imagine it needs to work its way lower from these levels.
Do you think there would be any advantages for industrial users in having a range of fixings in specific products that have industrial uses, such as sponge?
Speaking for consumers, we want fair, credible neutral pricing references that represent today’s ‘fair value’. Surveys and posted prices always make us nervous because there’s an inherent bias in the number. A separate fixing for sponge would establish a fair method for determining the value of sponge vs. ingot – but we are talking about $1 or $2 on a metal that’s trading well above $1,000 in the case of platinum and over $300 in the case of palladium.
Dave Andres is the Global Precious Metals & Global Energy Leader at Owens Corning. He also leads the company's risk management committee. He joined Owens Corning, headquartered in Toledo, Ohio, in October 2004 as Global Metals Leader, and assumed his current responsibilities early in 2006.
Prior to joining Owens Corning, Dave was Purchasing Director at General Motors, where he was responsible for Precious and Non-Ferrous Metals in GM's Worldwide Purchasing Group and managed GM's corporate hedging process. While at GM,he was on the NYMEX Metal Advisory Committee and was appointed as a Congressional Fellow with the Brookings Institution, working with the U.S. Congress in 1990.
Owens Corning was founded in 1938. A Fortune 500 company for more than 50 years, Owens Corning is a world leader in composite solutions and building materials systems, with products and services ranging from insulation, roofing, siding and stone, to glass composite materials used in construction, transportation, infrastructure and other high-performance applications.