Material Insights · Understanding the Material World

Carbon black and Crude oil

Carbon black is made by partly burning heavy aromatic oil from crude refining, and tyre makers buy much of it on crude-linked formulas, so oil prices pass through to it with a lag of about a quarter.

Carbon black (chemical) and Crude oil (energy): 4 relationships.

How they are linked

1. Made from heavy aromatic oil

Physical flow · Strong · Crude oil to carbon black, through heavy feedstock oil

Most carbon black comes from the oil furnace process, which partly burns a heavy aromatic oil derived from crude refining.

  • about 90% of carbon black made by the oil furnace process (EPA)
  • 35 to 65% process yield, by feed and grade

A yield of 35 to 65% means each tonne of carbon black needs roughly 1.5 to 3 tonnes of feedstock oil, so feedstock is the largest material input. The yield depends on how aromatic the oil is, which is why producers prefer highly aromatic heavy oils.

Sources: US Environmental Protection Agency

2. Crude-linked price formulas

Cost and price · Strong · Crude oil price to carbon black price, with a lag

Carbon black makers sell much of their output to tyre makers under formulas that reset prices to crude oil indices, so feedstock costs pass through.

  • about 70% PCBL sales volume going to tyre makers, April 2022
  • 20 to 25% PCBL volume sold at spot prices, outside formulas, April 2022

Because the formula resets with a lag, producers tend to gain for a while when oil falls and lose for a while when it rises fast, while margins hold up over time. Spot sales outside the formula carry the full swing.

Sources: CRISIL Ratings; ICRA

3. Price link: feedstock cost

Cost and price · Medium · Both ways, crude leads by about three months

Feedstock oil follows crude, and contract prices reset to oil indices with a delay, so the link shows over a year rather than a month.

  • -0.07 monthly change correlation
  • 0.57 12-month change correlation
  • 0.28 fitted elasticity

Month to month there is no visible link, consistent with contract resets that lag oil by about a quarter. Over twelve months the correlation is 0.57, and the low elasticity of 0.28 shows that carbon black prices move much less than crude in percentage terms.

Sources: Material Insights (World Bank, FRED, IMF data)

4. Imported feedstock in India

Physical flow · High in India · Indian producers import heavy oil feedstock

India's largest carbon black maker relies mainly on imported feedstock oil, so it is exposed to global crude and freight prices as well as the rupee.

  • about 41% PCBL share of India's carbon black capacity, 2022
  • 70 to 80% PCBL raw material imported, 2022

PCBL, the largest Indian producer, imports most of its raw material. Crude-linked formulas with tyre makers have let it pass on much of this cost in past price spikes.

Sources: CRISIL Ratings; ICRA

For investors

Key learnings

  1. Carbon black is a heavy oil product in solid form: at yields of 35 to 65%, each tonne needs roughly 1.5 to 3 tonnes of feedstock oil.
  2. Crude-linked formulas with tyre makers pass oil costs through with a lag, so margins dip when oil rises quickly and recover later.
  3. The monthly price link is hidden by contract timing, but yearly moves correlate at 0.57 with crude.

What to track

  • Brent and heavy fuel oil prices: Lead carbon black contract prices by about a quarter (Daily · ICE, price reporting agencies)
  • Tyre production volumes: About 70% of PCBL's volume went to tyre makers in 2022, so tyre output drives demand (Monthly · ATMA, company results)
  • Share of spot versus formula sales: More spot sales mean more exposure to oil swings (Quarterly · company results)

For policymakers

Key learnings

  1. India's largest carbon black maker imports most of its feedstock oil, so crude and freight shocks reach tyre costs.
  2. Price formulas linked to crude spread oil risk along the chain to tyre makers and vehicle owners.
  3. Feedstock quality, not only quantity, matters, since yields range from 35 to 65% depending on the oil.

What to track

  • Imports of carbon black feedstock oil: Shows exposure of the tyre chain to oil import shocks (Monthly · Ministry of Commerce trade data)
  • Carbon black exports: Shows the sector's competitiveness on imported feed (Monthly · Ministry of Commerce trade data)

India

PCBL, with about 41% of India's capacity in 2022, imports 70 to 80% of its raw material and sold about 70% of its volume to tyre makers, largely on crude-linked formulas.

Sources

  1. AP-42 Section 6.1: Carbon Black (archived copy of the EPA document), US Environmental Protection Agency (1995)
  2. Rating rationale: PCBL Limited, 29 June 2022, CRISIL Ratings (2022)
  3. Rating rationale: PCBL Limited, April 2022, ICRA (2022)
  4. Price correlation, Material Insights, Material Insights (World Bank, FRED, IMF data)