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Item 1. Business

2021-02-18 compared with 2020-02-20 · 174 added, 451 removed, 138 unchanged (82% of the section changed)

We are a leading global producer of carbon black.

Carbon black is a form of carbon used to improve certain properties of materials into which it is added.

It is used as a pigment and as a performance additive in coatings, polymers, printing and special applications (specialty carbon black) and in the reinforcement of rubber in tires and mechanical rubber goods (rubber carbon black).

We are one of the largest global producers of carbon black and our business is divided into two segments:

Orion Engineered Carbons S.A.

(“Orion”, “Company”, “we”, and “our”,”OEC”) is a Luxembourg joint stock corporation ( société anonyme or S.A.), incorporated on July 28, 2014 as a Luxembourg limited liability company ( société à responsabilité limitée ).

The Company's registered office is located at 6, Route de Trèves, L-2633 Senningerberg (Municipality of Niederanven), Grand Duchy of Luxembourg.

Our principal executive offices are located in Houston, Texas, U.S.

The Company is a leading global manufacturer of carbon black products.

Carbon black is a powdered form of carbon that is used to create the desired physical, electrical and optical qualities of various materials.

Carbon black products are primarily used as consumables and additives for the production of polymers, printing inks and coatings (“Specialty Carbon Black” or “Specialties”) and in the reinforcement of rubber polymers (“Rubber Carbon Black” or “Rubber”).

Our core competencies include the ability to engineer the physical properties of carbon black to meet the functional needs of our customers.

The Company is one of the largest global producers of specialty and rubber carbon black.

We operate a global supply chain network comprised of 14 production sites (including a joint venture in Dortmund, Germany) in 10 countries.

In addition to our headquarters in Luxembourg, we have our principal executive office in Houston, Texas (U.S.), as well as offices in Frankfurt (Germany), Cologne (Germany), Shanghai (China), Seoul (Korea), Tokyo (Japan) and other locations.

Our principal research and development (“R&D”) center is located in Cologne (Germany).

We also have laboratories to support our customers in Carlstadt, New Jersey (U.S), Shanghai, China and Yeosu, South Korea.

We are a premium supplier of carbon black generating long-term benefits for stakeholders while remaining committed to responsible business practices with a focus on team culture, reliability and sustainability.

Our business is organized into two reportable segments:

Specialty Carbon Black and Rubber Carbon Black.

We operate a global supply chain network currently comprising 13 wholly owned production facilities in Europe, North and South America, Asia and South Africa and three sales companies, as well as one jointly-owned production plant in Germany.

Our business segments are discussed in more detail later in this section.

Our internet address is www.orioncarbons.com.

We make available free of charge on or through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the U.S.

Securities and Exchange Commission (“SEC”).

Information appearing on our website is not a part of, and is not incorporated in this Annual Report on Form 10-K.

Products and Applications

We have a diversified carbon black production platform across the Specialty Carbon Black and Rubber Carbon Black operating segments.

In 2019, we offered more than 280 specialty carbon black grades and approximately 60 rubber carbon black grades under a number of well-recognized brand names and trademarks.

Our product portfolio is one of the broadest in the industry.

Our product and geographic diversity exposes us to a wide variety of applications and industries, which in turn lowers our dependency on individual customers or regions.

Our overall product portfolio benefits from higher margin specialty, certain technically superior grade rubber carbon black products (technical grade rubber black) and stable margin rubber carbon black products.

We continuously strive to meet our customers’ changing demands and adjust our products accordingly, as well as to enhance our product portfolio with innovations.

In our Specialty Carbon Black segment, we have launched over the years several new post-treated specialty carbon black grades for coatings and printing applications, as well as several new high purity carbon black grades for the fiber industry and conductive carbon black grades for polymers, printing and new markets, such as for battery electrodes.

In our Rubber Carbon Black segment, we have developed in the past two product families:

PUREX ® for mechanical rubber goods (“MRG”) applications, which complies with high cleanliness requirements, and ECORAX ® for tires, which is characterized by improved tire properties of wear and fuel consumption.

Specialty Carbon Black

We are one of the largest global producers of specialty carbon black with an estimated share of global industry sales of approximately 24% in 2019 measured by volume in kmt.

We manufacture specialty carbon black at multiple sites for a broad range of specialized applications.

Specialty carbon black imparts specific characteristics, such as high-quality pigmentation, UV light protection, viscosity control and electrical conductivity.

In 2019, our Specialty Carbon Black segment generated $508.5 million in revenues, 251.0 kmt in volume, $122.2 million in Segment Adjusted EBITDA and Segment Adjusted EBITDA Margin of 24.0%.

The Specialty Carbon Black segment has a product mix divided into four sectors:

Coatings, Polymers, Printing and Special Applications.

In 2019, Polymer applications accounted for about 69% of our volume measured in kmt, Printing accounted for nearly 15%, while Coatings, Special Applications and cross-sector sales to distributors represented the remainder.

Our Specialty Carbon Black segment generates higher margins per metric ton than our Rubber Carbon Black segment, with the highest margin per metric ton in Coatings.

We believe the key driver of attractive margins in specialty carbon black is innovation supported by our innovation group, which works in close coordination with our customers and technical marketing support.

We provide assistance to our customers through the whole value chain, including product formulation, technical support, product handling, packaging, logistics, supply chain management and final application.

We are recognized by our customers as a leading innovator and manufacturer of customized products fitting specific application needs.

Our specialty carbon black customer base is relatively diverse, with the top five customers accounting for approximately 26% of the Specialty Carbon Black segment volume in 2019.

We have been supplying most of our key industry customers for more than 30 years.

Product and Application Portfolio

We have a broad Coatings product portfolio, which includes products used for pigmentation in black coatings and enhancement of other coatings (for example, in automotive basecoats and architectural coatings), for conductivity and for tinting in all other coatings, as well as for paints and for light tinting in transparent coatings (for example, for metallic effects and wood glazing).

The variety of our

manufacturing processes allows the creation of specialty carbon black with different morphological and chemical properties, thereby giving some of our products unique characteristics.

The following table provides examples of our Coatings applications.

Coatings Automotive General Industrial Architectural & Decorative

Applications Automotive original

equipment manufacturing

Automotive refinish

Automotive parts Wood, coil and plastic coatings

Protective and marine

Aerospace Packaging Architectural

Attributes Pigmentation, high

jetness and blue

undertone, conductivity High-performance tinting

Conductivity Tinting

Brands PRINTEX ®

SPECIAL BLACK

We believe that the global Coatings industry consists of a few key suppliers that account for approximately half of the global Coatings capacity.

Over time we have demonstrated to leverage our application technology platform to play a substantial role in our Coatings customer's product innovation process and to meet their demanding requirements.

The customized nature of Coatings products leads to attractive margins in the industry.

We supply many of the Coatings industry’s key industry players and mid-sized customers and have longstanding relationships with several major global customers.

Carbon black is manufactured in a highly controlled process to produce particles and aggregates of varied structure and surface chemistry, resulting in many different performance characteristics for a wide variety of applications.

The Company manufactures specialty carbon black for a broad range of specialized applications such as polymers, printing systems and coatings applications.

The various production processes result in a wide range of different specialty carbon black pigment grades with respect to their primary particle size, structure surface area and surface chemistry.

These parameters affect jetness, tinting strength, undertone, dispersibility, oil absorption, electrical conductivity and other characteristics.

Carbon black is an additive that enhances the physical, electrical and optical properties of our customer’s end products.

We have several post-treated specialty carbon black grades for coatings and printing applications, as well as several high purity carbon black grades for the fiber industry and conductive carbon black grades for polymers, coatings and new markets, such as for battery electrodes.

Our specialty grades of carbon black are used to impart color, provide rheology control, enhance conductivity and static charge control, provide UV protection, enhance mechanical properties, and provide formulation flexibility through surface treatment.

These specialty carbon products are used in a wide variety of applications, such as coatings, inks, plastics, adhesives, toners, batteries, and displays.

We have a broad Coatings product portfolio, which includes products used for pigmentation in black coatings and enhancement of various other coatings (e.g., automotive base coats and architectural coatings), for conductivity and for tinting, as well as for paints and for light tinting in transparent coatings (e.g., metallic effects and wood glazing).

The diversity of our manufacturing processes allows for the creation of a wide range of specialty carbon black grades with different structures and chemical properties, thereby allowing our products to impart unique characteristics to our customer’s products.

Over time we have demonstrated the ability to leverage our application technology platform to play a substantial role in our Coatings customer's product innovation processes and to meet their demanding requirements.

We supply the full range of Coatings industry participants, ranging from leading global players to mid and small sized customers and have longstanding relationships across the spectrum.

We have been serving several of the key industry players for more than 30 years.

The Coatings market is relatively fragmented, although our top five customers accounted for approximately 38% of Coatings volume in 2019.

Product and Application Portfolio

Polymers are the largest end-use market for specialty carbon blacks.

Our Polymer portfolio is one of the broadest in the industry and, supported by an application technology platform, enables us to cover most of the product demand spectrum.

Our Polymers portfolio is tailored to meet specific industry and customer needs.

For example, potable water pipes made of polyethylene, agricultural films, cables and other articles exposed to UV radiation (sunlight) need to be protected against polymer degradation and subsequent deterioration of mechanical strength.

We offer tailor-made products that not only provide efficient UV protection but also provide additional benefits, such as good processing properties and easy handling.

Products offered also meet special performance criteria, including food-contact compliance and spin-fiber quality.

In addition to UV protection, our portfolio includes products from standard- to high-performance grades designed and modified to provide electrical conductivity, antistatic and reinforcing properties to many different polymer articles, including high-voltage cables, films, boxes and high pressure pipes.

Our portfolio offering targeted at fiber products and technology represents a growth area and provides a combination of a broad range of jetness with good spinnability.

Certain of our polymer products have a bluish undertone, which makes these grades especially attractive for high-performance fibers in textiles, with luxury touch and feel.

Ultra clean products provide good process stability during the small and thin fiber manufacturing processes.

The following table provides examples of our polymers applications.

Polymers Pipe Wire & Cable Films Blow &

Molding Fiber Thermal

Insulation Other

Applications Pressure pipes (water, gas) Irrigation Sewage pipes Conductive pipes/hoses Power cables (LV to HV) Jacketing Agricultural Packaging Geomembrane Foil Laminations Packaging Housing Container Automotive Textile Industrial Non-Woven Construction Thermosets TPE profiles Plastics

Attributes Dispersibility UV protection Conductivity Dispersibility UV protection Conductivity Dispersibility UV protection Coloring Dispersibility UV protection Conductivity Dispersibility Coloring IR absorption Thixotrophy Dispersibility Coloring Reinforcing UV protection

Brands PRINTEX ® AROSPERSE HIBLACK ®

PRINTEX ® HIBLACK ®

PRINTEX ® AROSPERSE HIBLACK ®

PRINTEX ® AROSPERSE COLOUR BLACK

LAMP BLACK AROSPERSE PRINTEX ® AROSPERSE HIBLACK ® LAMP BLACK

Due to the diverse nature of Polymer applications (construction, general industrial, engineering, consumer goods, automotive and packaging), the customer base for Polymers tends to be wide-ranging from regional and international master batch producers to global integrated petrochemical and polyolefin producers.

We supply many of the plastics industry’s customers and supply leading customers in each region.

While the Coatings market is relatively fragmented, our top five customers accounted for approximately 36% of our Coatings related volume in 2020.

Our Polymers portfolio provides products to a diverse range of end markets including pipe (e.g., gas, oil, municipal water, sewage), construction, energy distribution (e.g., power cables), automotive, agriculture, and consumer packaging.

Certain products within this portfolio provide UV protection against polymer degradation for material such as pipe used for potable water, injection molding, agriculture films and cables.

Other products include standard-to high-performance grades designed and modified to provide electrical conductivity, antistatic and reinforcing properties to many different polymer articles, including high-voltage cables, films, boxes and high-pressure pipes.

Certain of our polymer products have a bluish undertone, which makes these grades especially attractive for high-performance fibers used in textiles, giving them a luxury touch and feel.

The Polymer applications are used in a wide variety of industries and, as such, the customer base for Polymers tends to be wide-ranging from regional and international master batch producers to global integrated petrochemical and polyolefin producers.

Many of these producers are the leading suppliers in each region.

We have been serving certain of our key customers for more than 30 years.

Our top five customers accounted for approximately 27% of Polymers volume in 2020.

Product and Application Portfolio

We have a broad Printing product portfolio with a large number of grades for different printing technologies and applications.

We apply different process technologies to offer highly specialized products that meet specific requirements, including compliance with food-contact regulations and specially formulated products with different coloristic properties (such as undertone, optical density and gloss), rheological effects and dispersibility functions.

We have a broad Printing product portfolio that provides numerous grades for different printing technologies and applications.

We apply different process technologies to offer highly specialized products meeting specific requirements, including compliance with food-contact regulations and specially formulated products that require unique attributes such as color undertone, optical density and gloss.

We focus on Printing products with the highest potential for specialty applications, such as packaging and specialty niches.

Consequently, relatively low-end newspaper and other print media applications represented only a small portion of our overall specialty carbon black sales in 2019.

Producers must meet and balance numerous technical properties.

These properties include ease of dispersion, processing, handling, formulation requirements, final product performance hold-out, rub resistance and, most importantly, coloristic properties, such as optical density, gloss, light-fastness and color tone.

Our specialty carbon black product portfolio supports printing ink manufactures in achieving these attributes.

Packaging inks require special rheology, dispersion and wetting behavior properties.

For example, UV curing inks on nonporous substrates require special surface chemistry for wetting, flow, color and stability.

The following table provides examples of our printing applications.

Packaging Print Media

Printing High-end

Packaging Packaging Display

Advertising Publication

(magazines) Special

Applications Books, Posters,

Brochures Newspaper

Applications Liquid inks

Screen Liquid inks Heatset

Screen Heatset

gravure Screen

curing Sheetfed

UV curing Water-based

flexo Coldset

Attributes Coloring

Wettability Coloring Coloring

Wettability Coloring

Low abrasion Coloring

Wettability Coloring

Brands NEROX ®

The global Printing industry has been undergoing consolidation over the past few years.

Currently, the industry is dominated by a few key players.

Sourcing decisions are largely based on specialty carbon black product attributes.

For low-end applications, decisions are made based primarily on price.

For high-end applications, the required degree of product and technology know-how makes purchasing decisions less price sensitive.

We play an important role in helping our customers develop customized Printing solutions and are recognized by customers as a preferred strategic and technical partner.

Some of our manufactured products used in UV curing inks require special surface chemistry for wetting, flow, color and stability.

UV curing inks are used in products such as special applications for print media, books, posters and brochures.

Our products also support printing ink manufacturers in achieving specific attributes in their products such as optical density, gloss, light fastness and color tone.

These attributes are found in products and services such as display advertising, magazines and high-end packaging.

The global Printing industry has been undergoing consolidation and currently the industry is dominated by a few key players.

Sourcing decisions are largely based on the attributes of specialty carbon black products.

For high-end applications we focus on the required degree of product and technology know-how that make purchasing decisions less price sensitive than the low-end applications which are normally based on price.

We are recognized by customers as a preferred strategic and technical partner.

We have been serving certain of our key customers for more than 30 years.

Due to the relatively consolidated nature of the Printing industry, our top five Printing customers accounted for approximately 63% of Printing volume in 2019.

Special Applications

The Special Applications product category comprises applications not included into our Coatings, Polymers and Printing portfolios, such as, silicones, non-woven textile, building materials, battery electrodes metallurgical, agrochemicals and carbon brushes.

Our top five customers accounted for approximately 37% of Special Applications volume in 2019.

We sell most of our specialty carbon black products directly to our customers and only a smaller part of our sales is made via external channel partners and distributors.

External channel partners and distributors generally sell our products in smaller lots to smaller customers, who do not negotiate with us directly.

These sales are made across all our specialty carbon black applications, including Coatings, Polymers, Printing and Special Applications.

We are one of the largest global producers of specialty carbon black with an estimated share of global industry sales of approximately 24% measured by volume in kmt in 2019.

Cabot and Birla are the other two large global producers of specialty carbon black.

As a result of the consolidated nature of the printing industry our top five Printing customers accounted for approximately 66% of our Printing volume in 2020.

We are one of the largest global producers of specialty carbon black.

Cabot Corporation and Birla Carbon are the other two large global producers of specialty carbon black.

Each of the top three producers of specialty carbon black leverages R&D and applications technology platforms to tailor products to customer needs and to introduce its products into new application niches.

Rubber Carbon Black

We are one of the largest global producers of rubber carbon black.

Rubber carbon black sales are largely regional, since transportation costs are high relative to sales price.

In 2019, our largest rubber carbon black customer accounted for approximately 20% and the second largest customer for approximately 10% of our rubber carbon black segment net sales with no other customer exceeding 10% of our segment net sales.

The largest rubber carbon black customer (Michelin) accounted in addition for approximately 13% of the Company's overall consolidated net sales with no other customer exceeding 10% of our Company's net sales.

In 2019, our Rubber Carbon Black segment generated $967.9 million in revenues, 772.1 kmt in volume, $145.2 million in Segment Adjusted EBITDA and Segment Adjusted EBITDA Margin of 15.0%.

Rubber carbon black is primarily used for reinforcement of rubber compounds and to adjust specific performances of rubber articles.

Based on the application of rubber carbon black, we have divided the Rubber Carbon Black segment into two categories:

Tires and Mechanical Rubber Goods (MRG).

Product and Application Portfolio

Our rubber carbon black products are used in tires and mechanical rubber goods (“MRG”).

Rubber carbon blacks are used to enhance the physical properties of the systems and applications in which they are incorporated.

Rubber carbon blacks have traditionally been used in the tire industry as a rubber reinforcing agent to increase tread durability and are also used as a performance additive to reduce rolling resistance and improve traction.

In MRG, such as hoses, belts, extruded profiles and molded goods, rubber carbon blacks are used to improve the physical performance of the product, including the product’s physical strength, fluid resistance, conductivity and resistivity.

We offer a broad Tire product portfolio, which includes high reinforcing grades and semi-reinforcing grades.

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Other reinforcing grade carbon blacks are also used in different components of the tire carcass.

In addition to standardized grades, we produce advanced grades tailored to meet specific customer performance requirements, such as ECORAX ® grades designed to lower rolling resistance and HP grades for truck tires and high- and ultra-high-performance passenger car tires.

Semi-reinforcing grade carbon blacks are used in several components of the tire carcass like sidewall and bead area.

In addition to standardized grades, we produce advanced grades tailored to meet specific customer performance requirements, such as ECORAX® grades designed to lower rolling resistance and high performance grades for truck tires and high- and ultra-high-performance passenger car tires.

Semi-reinforcing grade carbon blacks are used in several components of the tire carcass like the sidewall and bead areas of a tire.

We cover the full portfolio of standard semi-reinforcing grade carbon blacks and have a portfolio of special semi-reinforcing grade carbon blacks, which fulfill special customer requirements using special production technology.

These special semi-reinforcing grade carbon blacks are part of our ECORAX® product family.

Given the highly consolidated nature of the tire industry, our top ten customers represented slightly more than 85% of our tires volume in 2019.

Given the highly consolidated nature of the tire industry, our top ten customers represented approximately 89% of our Tires volume in 2020.

A significant portion of our Tire products are sold to leading tire manufacturers.

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Mechanical Rubber Goods

Product and Application Portfolio

We produce a wide range of mechanical rubber goods products for a variety of end-uses, including automotive production, construction, manufacturing of wires and cables, as well as certain food, consumer and medical applications.

Our MRG products can be divided into four main groups:

(i) standardized ASTM furnace grades, (ii) specialized ASTM furnace grades, (iii) specialized non-ASTM furnace grades and rubber carbon blacks from special production processes lampblack (Durex O) and (iv) thermal black (N990) and gas black (CK3).

In the field of special ASTM and non-ASTM blacks we offer an extensive portfolio of “PUREX ® ” grades.

These grades are mainly used in automotive rubber parts like window sealings and hoses.

These grades have an exceptionally high purity, high consistency and can be dispersed well in rubber compounds.

The grades of the PUREX ® family aiming at the adjustment of special requirements like smooth surface, special surface appearance of sealing systems, electrical resistance and other specific requirements.

The trend towards light weight construction of cars and the resulting use of aluminum require more attention to electrical resistivity of MRG parts.

The following table presents examples of our mechanical rubber goods applications.

Mechanical Rubber Goods

Transportation

and Others Automotive Conductive & Isolation Food &

Applications Conveyor belts Construction profiles Mechanical rubber goods Extruded and other profiles Damping elements Hoses Transmission belts Molded goods with high resistance Seals rubber- to-metal bonding Unvulcanized sheets and adhesives Electrically conductive and antistatic rubber goods Profiles Tubing Hoses Sealings

Attributes Tensile strength Tear and abrasion resistance Reinforcement Filler loading Compression Smooth surfaces Processability Consistency Processability Injection molding and calendaring Low hysteresis Reinforcement Processing Scorch safety Tensile strength Electrical conductivity or antistatic behavior Dispersion Filler loadings

Brands CORAX ®

PUREX ® DUREX ® CORAX ® N990

CORAX ® PUREX ® DUREX ®

CK 3 PRINTEX ® CORAX ® PUREX ®

PUREX ® CORAX ® N990

We serve customers across the entire value chain and MRG applications, including compounders, parts and component manufacturers and automotive system suppliers.

The mechanical rubber goods industry is fragmented in nature and supports a large number of suppliers.

The industry, however, is undergoing a consolidation process.

We produce a wide range of MRG products for a variety of end-uses, including automotive production, construction, manufacturing of wires and cables, as well as certain food, consumer and medical applications.

In the area of MRG products that fall within the standards of ASTM International (“ASTM”), a global standard-setting body for a wide range of materials including carbon black, and non-ASTM blacks, we offer an extensive portfolio of “PUREX®” grades.

These grades have an exceptionally high purity and high consistency and satisfy special requirements needed for smooth surfaces and electrical resistance.

These grades also disperse well in rubber compounds used in parts like window seals, automotive hoses, transmission belts, damping elements and electrically conductive and antistatic rubber goods.

We serve customers across the entire value chain and the full range of MRG applications, including parts and component manufacturers and automotive system suppliers.

The MRG industry is fragmented in nature and supports a large number of suppliers.

Our top ten global customers accounted for approximately 50% of our Mechanical Rubber Goods volume in 2020.

We have a diversified geographic presence with significant exposure to the European, North and South American and Asian MRG markets.

We supply various key industry customers and have longstanding relationships with several of them.

We have been serving certain key customers for more than 30 years.

We are one of the largest global producers of rubber carbon black in the world while Cabot, Birla and Black Cat were the three largest global producers of rubber carbon black in 2019.

Rubber carbon black sales are largely regional, since transportation costs are high relative to sales price.

As a result, the global rubber carbon black industry is more fragmented compared to the specialty carbon black industry.

The smaller regional suppliers participate mainly in standard tire and mechanical rubber goods applications and are less prevalent in more specialized products for the higher-end tire and mechanical rubber goods applications.

Procurement and Raw Materials

In 2019, raw materials accounted for 75% of our cost of sales.

Approximately 79% of the cost of raw material used in the production of carbon black is related to petroleum-based or coal-based feedstock known as carbon black oil, with some limited use of other raw materials, such as nitrogen tetroxide, hydrogen, natural gas and acetylene.

Carbon black oil comes from three main sources:

(i) fluid catalytic cracking bottoms, a by-product of fuel producing refineries, (ii) steam cracker tar, a by-product of ethylene producing crackers, and (iii) certain coal tar products.

Efficient procurement of carbon black oil is an important factor in achieving optimal production costs and profitability.

Our carbon black oil procurement strategy entails global sourcing of carbon black oil, using proprietary optimization tools to maximize value.

We have a diversified geographic presence with significant exposure to the European, North and South American and Asian MRG markets, supplying numerous leading industry participants.

Drivers of Demand

Besides general global economic conditions, certain specific drivers of demand for carbon black differ among our operating segments.

Specialty carbon black has a wide variety of end-uses and demand is largely driven by the growth and development of the coatings, polymers and printing industries.

Demand for specialty carbon black in the coatings and polymers industries is mainly influenced by the levels of industrialization, automobile original equipment manufacturer (“OEM”) demand, infrastructure development, consumer spending and construction activity.

Demand for specialty carbon black in the printing industry is mainly influenced by developments in print media and packaging materials.

Demand for rubber carbon black is largely driven by the growth and development of the automotive tire, commercial tire and MRG industries.

Demand for rubber carbon black in tires is mainly influenced by the number of replacement and original equipment tires produced, which in turn is driven by (i) vehicle trends, including the number of vehicles produced and registered, and the number of miles driven, (ii) demand for high-performance tires, (iii) demand for larger vehicles, such as trucks and buses, (iv) consumer and industrial spending on new vehicles and (v) changes in regulatory requirements.

Demand for rubber carbon black in MRG is mainly influenced by vehicle production and design trends, construction activity and general industrial production.

Demand in the developed Western European and North American regions is mainly driven by demographic changes, customers’ high-quality requirements, stringent tire regulation standards and relatively stable tire replacement demand.

Demand in developing markets, such as China, Southeastern Asia, South America and Eastern Europe, is mainly driven by the growing middle class, rapid industrialization, infrastructure spending and increasing car ownership trends.

The growth in vehicle production in turn drives demand for both original equipment tire manufacturing and replacement tires in developing regions.

Customer Contracts

Most of our long-term contracts contain formula-driven price adjustment mechanisms for changes in raw material and/or energy costs and in some instances, foreign exchange rates.

We sell carbon black under the following two main categories of contracts based on price adjustment mechanisms:

• Contracts with feedstock adjustments (indexed contracts).

This category includes contracts with monthly or, in some cases, quarterly automatic feedstock and/or energy cost adjustments, which cover approximately 70% of our global volumes.

• Non-indexed contracts.

This category includes short-term contracts (usually shorter than three months) where sales prices of our carbon black products are not linked to carbon black oil market prices.

Many of our indexed contracts allow for monthly price adjustments, while a small portion (by volume sold) allow for quarterly price adjustments.

These contracts have enabled us to reduce the impact of fluctuations in oil prices on our margins;

however, rapid and significant oil price fluctuations have had and are likely to continue to have significant effects on our earnings and results of operations given (i) not all contracts contain price adjustment mechanisms and (ii) the value of our productivity improvements rises and falls with oil price movements.

See “ Item 1A.

Risk Factors—Risks Related to Our Business—We are subject to volatility in the costs and availability of raw materials and energy, which could decrease our margins and adversely affect our business, financial condition, results of operations and cash flows .” Sales prices under non-indexed contracts are reviewed on a regular basis to reflect raw material and energy price fluctuations as well as overall market conditions.

Raw Materials

Raw materials for our products are, in general, readily available and in adequate supply.

The principal raw material used in the manufacture of carbon black is comprised of residual heavy oils derived from petroleum refining operations, the distillation of coal tars, and the production of ethylene throughout the world.

Approximately 56% of our carbon black oil supply is covered by short- and long-term contracts with a wide variety of suppliers.

The pricing of carbon black oil is typically indexed to the price of fuel oil.

In general, we benchmark against Platts indices in the sourcing regions e.g.

USGC, New York, Rotterdam and Singapore.

In some areas the Gasoil index is used.

While the majority of our purchases are based on underlying fuel oil indices, the ultimate carbon black oil price also depends on carbon black oil specific quality characteristics, differentials (premiums or discounts to Platts indices), freight costs and region-specific supply and demand as well as regulatory factors.

Carbon black oil procurement is an important factor in achieving best-in-class production costs.

Characteristics of Production Capability

Production Know-how

With exception of our plant in France, we produce rubber carbon black at all, and specialty carbon blacks at many, of our production sites.

We have the production know-how to manufacture a wide range of specialty carbon blacks and rubber carbon blacks worldwide.

We believe we are currently the only supplier with core production competencies across all leading production processes (furnace black, gas black, lamp black, thermal black and acetylene black).

This provides us flexibility to offer a wide range of specialty carbon black and rubber carbon black products that are best suited to customers’ needs.

Location of Production Facilities

Our production sites are strategically located throughout the world in all major regions.

This is important for our rubber carbon black business, which is largely regional.

Since specialty carbon black’s freight costs represent a smaller component of the final cost (relative to rubber carbon black), it is commercially viable to ship specialty carbon blacks across geographic regions from our key production sites in Germany, South Korea, China and the United States.

The regional spread of our production network also offers access to high-growth regions globally.

Flexibility of Asset Base

We have implemented a flexible and intelligent production and supply chain network under the concept of operating all regional production sites as one large virtual plant.

This allows us to shift production of specialty carbon black and rubber carbon black among different plants in order to optimize costs and plant utilization.

In most cases, more than one plant is approved by our customers for specific products, which not only increases production flexibility but also ensures a higher supply security for customers.

Natural gas is also used in the production of carbon black.

These raw material costs generally are influenced by the availability of various types of carbon black feedstock and natural gas, supply and demand of such raw materials and related transportation costs.

Changes in our raw material supplier’s operating conditions and demand for their products could reduce the availability of certain very specialized feedstocks.

We are one of the leading global producers of rubber carbon blacks.

We compete with four companies that operate globally and numerous other companies that operate regionally, a number of which export product outside their region.

The smaller regional suppliers mainly participate in standard and MRG applications and are less likely to provide specialized products used in higher end tire and MRG applications.

Competition for our rubber carbon black products is generally based on product performance, quality, reliability, price, service, technical innovation, and logistics.

We enjoy a long-standing reputation within the industry for carbon black product and process technology, applications knowledge, and innovation.

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This creates significant opportunities for product and process innovation.

The final properties of the carbon black product depend on the mixture of raw materials used and to a large extent on the configuration and operating conditions of the specific reactor and the further processing of the initial product in beading, drying and after-treatment steps.

Minimal changes to just one of the many process parameters can result in completely different carbon black products with different properties and potential end uses.

We maintain multiple product applications and process development centers in Europe, Asia and the Americas.

Further product innovations are a key competitive factor in the industry, even after decades of R&D in this field.

We maintain product applications and process development centers in Europe, Asia and the Americas.

Our Innovation Group is divided into applications technology and process development teams.

The applications technology team works closely with our major clients to develop innovative products and expand the applications range for carbon black products.

Success in applications development deepens our understanding of customer and industry requirements gained through these interactions.

The process development team works closely with our manufacturing and procurement teams to enhance company competitiveness.

This team focuses on efforts that lead to improved production processes, improved product quality and improved cost structure.

Our leading competence center is located in Cologne (Germany) to support and enhance our global innovation group activities.

The process development team works closely with our manufacturing and procurement teams to improve production processes, product quality and cost structure.

Our leading center of excellence is located in Cologne (Germany) to support and enhance our global Innovation Group activities.

This center includes carbon black technologists, applications technology laboratories and process development staff, co-located with our pilot process development facilities.

Staffing in our Cologne technical center includes physicists, chemists and engineers who can effectively and efficiently collaborate to create and analyze various carbon black properties with a goal to develop new products to meet customer requirements.

Common processes and information technology tools further enhance coordination and communication with our regional technical centers located in South Korea, China and the United States.

Common processes and information technology tools further enhance coordination and communication with our regional technical centers located in South Korea, China and the U.S.

Applications Technology

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These interactions enable us to develop tailored solutions and meet unique customer requirements.

Our applications technology teams bring together a deep knowledge of carbon black technology with an understanding of the key applications practiced by our customers.

Our applications technology team brings together a deep knowledge of carbon black technology with an understanding of the key applications practiced by our customers.

This team has access to extensive laboratory and testing facilities using similar formulations, processing and test methods employed by our customers.

Applications technology plays a supporting role in the process of new product launch by providing technical data and presentations, training and support and establishment and monitoring of quality targets.

The application technology team works closely with customers to provide support during the qualification cycle, which can be long and may last over one year.

Customer collaborations often include cooperative testing with customers’ staff in our facilities.

Applications technology provides a key customer and market interface and translates specific customer needs into carbon black product attributes.

Applications technology plays a supporting role in the process of new product launches by providing technical data and presentations, training and support, and establishing and monitoring quality targets.

This team works closely with customers to provide support during the qualification cycle, which can be long and may last over one year.

This close cooperation decreases the likelihood of customers switching suppliers once a product has been approved.

Process Development

We believe our process development capabilities represent a key competitive advantage.

Product customization relies upon extensive process capabilities.

Unique products and products that are difficult to replicate add value to customers’ end-products.

Our customers have come to rely upon a continuous improvement in product quality and performance.

Process development also enables improvements in manufacturing costs and efficiencies.

Our innovation group also operates pilot plants (small scale production facilities used for real-world trials of new carbon black grades) and a family of mini plants which include a smaller furnace reactor for basic studies as well as various facilities for chemical after-treatment, granulation and drying to tailor new products to specific customer requirements, especially in the specialty carbon black area

Spending on innovation, including both applications technology and process development, amounted to $19.9 million in 2019, $20.3 million in 2018 and $18.2 million in 2017 and was mostly directed towards the development of new specialty carbon black products, new applications for carbon black products and the improvement of process efficiencies as well as reduction of emission levels.

Marketing, Sales and Customer Contracts

We have an integrated sales and marketing process that combines key management, regional sales and technical marketing and applications support.

This allows us to focus on customer solutions tailored to particular industries or regions.

Our Sales department is organized into two main groups:

Key Account Management and Regional Sales.

The Key Account Management team deals with the largest customers and has dedicated sales people by global account.

The Regional sales team covers all other customers located in Europe, the Middle East and Africa, in the Americas and in Asia-Pacific.

The field sales force operates along geographical regions.

In addition to selling carbon black directly, we work with third-party distributors serving our markets with all required smaller volume lots.

Most of our long-term contracts contain formula-driven price adjustment mechanisms for changes in raw material and/or energy costs and in some, foreign exchange rates.

We sell carbon black under the following two main categories of contracts based on price adjustment mechanisms:

• Contracts with feedstock adjustments (indexed contracts).

This category includes contracts with monthly or, in some cases, quarterly automatic feedstock and/or energy costs adjustments, which cover approximately 75% of our global volumes.

• Non-indexed contracts.

This category includes short-term contracts (usually shorter than three months) where sales prices of our carbon black products are not linked to carbon black oil market prices.

Many of our indexed contracts allow for monthly price adjustments, while a small portion (by volume sold) allow for quarterly price adjustments.

We believe that these contracts have enabled us generally to maintain our Segment Adjusted EBITDA Margins;

however, rapid and significant oil or energy price fluctuations have had and are likely to continue to have significant and varying effects on our earnings and results of operations, partly because oil price changes affect our sales prices and our cost of raw materials and energy at different times and amounts, and partly due to other factors, such as differentials affecting the ultimate carbon black oil prices paid by us (versus a particular reference price index), actual carbon black oil usage amounts and our ongoing efficiency initiatives.

See “ Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Our Results of Operations—Raw Material and Energy Costs ” as well as “ Item 1A.

Outbound Logistics and Distribution

Our outbound logistics and distribution function has critical importance given the high cost involved in the transportation of carbon black, in particular rubber carbon black.

Each of our plants has different logistics demands based on the products manufactured and the region’s export requirements.

Unlike rubber carbon blacks, which are mostly sold regionally, specialty carbon blacks are sold globally, since freight costs typically represent a smaller component of the final price.

Europe, North America and South Korea, which export high volumes of specialty carbon black, have complex and demanding logistics requirements.

Other regions, such as South Africa and Brazil, are relatively self-contained with the vast majority of production sold within the respective countries.

The primary method of the carbon black transportation to customers is by truck and rail.

The majority of the regions use primarily trucks, with the exception of the United States, where rail transport accounts for approximately half of transportation modes.

We lease the majority of our rail cars and have a variety of third-party agreements with railroad companies for the management of vehicles.

Product quality test methods and applications testing are defined within the applications technology team.

Methods are developed centrally and deployed worldwide to relevant production and applications laboratories to assure consistency in measurements and reporting.

Intellectual Property

We consider intellectual property development and management as a source of strategic competitive advantage.

We initiate and maintain patents and trademarks on a number of our products and processes.

However, we often do not patent a production method or product to avoid disclosure of business specific know-how.

We proactively make careful assessments with respect to production process improvements and decide whether to apply for patents or retain and protect these improvements as trade secrets.

When we file a patent application, it is usually filed in the relevant countries with active competition and markets for our products.

In addition to patents, a significant part of our intellectual property is our trade secrets, general know-how and experience regarding the manufacturing technology, plant operation and quality management.

We rely on intellectual property laws, confidentiality procedures and contractual provisions to protect our intellectual property rights.

We regard our patents, trade secrets and other intellectual property as valuable assets and take action when we deem it necessary to protect them.

We proactively monitor competing patents and patent applications to ensure that we do not infringe the rights of other industry participants and/or challenge patent applications that may be without merit and would inhibit our ability to utilize our technology.

We initiate and maintain patents and trademarks, with varying expiration dates, on a number of our products and processes.

We sell our products under a variety of patents and trademarks we own and take reasonable measures to protect them.

In connection with the separation of our business from Evonik, Evonik assigned to us its intellectual property that was exclusively used in its carbon black business, as well as certain intellectual property rights that are still in use in its retained business.

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For additional information, see “ Item 1A.

Risk Factors—Legal and Regulatory Risks—We may not be able to protect our intellectual property rights successfully and we are still subject to restrictions and risks associated with our intellectual property sharing arrangements with Evonik .”

Risk Factors—Legal and Regulatory Risks—We may not be able to protect our intellectual property rights successfully.”

Our business is generally not seasonal in nature, although our results of operations are generally weaker in the last three months of a calendar year.

Human Capital

We are a group of people who share one common passion:

carbon black.

Our success depends on attracting, recruiting and developing a diverse, talented global workforce.

We are committed to providing our employees with equal opportunities for learning and personal growth in an environment where creativity and innovation are encouraged.

To this end, our aspiration is to be the employer of choice in our industry.

With this in mind, we have reviewed our existing talent management programs and have started taking actions to augment and modify the existing programs to provide an effective platform for all of our employees to be trained and developed and to provide them with an opportunity to grow and achieve their individual aspirations.

Orion is made up of over 1,400 employees with operating assets, laboratories and offices in 23 locations across 13 countries in all 3 regions (Americas, Asia/Pacific (“APAC”) and Europe/Middle East/Africa (“EMEA”)).

Inspiring the entire Orion workforce to function as one team is critical to our success.

We believe this is possible when we accept and value each individual for who they are.

Indeed, valuing people is one of Orion’s core values which define who we are and the expectation we have of Orion colleagues in our interactions with other employees, customers, suppliers and within the communities where we operate.

Building on this foundation, we value our people irrespective of their nationality, race, gender, citizenship status, ethnic origin, sexual orientation, gender identification, religion or philosophy, disability and age, among others;

and we strive to put this into practice when hiring, developing and retaining talents.

At Orion, talent management and development are an interactive process between individual employees and the company so that the individuals can have a fulfilling career at Orion while taking on roles and assignments that are aligned with the company’s strategy.

We have upgraded our talent management and development program, focusing on specific actions to improve Attraction, Engagement, Learning and Development, and Retention.

In support of these efforts, we made significant investments in both a global e-learning training platform and a human resources system platform which include focused modules for learning and development, succession planning and performance management that will allow Orion to better train and develop all our employees.

A renewed focus on promoting from within has led to increases in internal fill rates and the involvement of business leaders across the organization in talent reviews to assess employees on performance and future potential.

These talent reviews have helped to uncover talent gaps, identify high potential employees, build bench strength, increase retention, and to identify our future leaders and innovators.

We uphold the freedom of association and fully recognize the right of collective bargaining.

Certain of our employees worldwide are represented through unions and works councils.

We value exchanging information and views with the local unions and works councils with the view to finding solutions to our common issues and ensuring success for both our employees and the company.

Environmental, Health and Safety Matters

Protection of humans and the environment, fair treatment of our partners and a clear alignment to the needs of customers are the essential components of our activities.

Therefore, we strive not only to comply with all applicable laws and voluntary obligations, but strive to continuously improve our performance and management systems.

Our integrated global management system with established standards and processes is based on the principles of the Responsible Care, ISO 9001 Quality Management System, ISO 14001 Environmental Management Systems, and OSHAS 18001 Safety Management Systems.

All our operating sites are third-party certified by ISO 14001 and ISO 9001.

Protection of humans and the environment, fair treatment of our partners and a clear alignment to the needs of customers are essential components of our activities.

Therefore, we strive not only to comply with all applicable laws and voluntary obligations, but to continuously improve our performance and management systems.

All of our operating sites are third-party certified by the International Organization for Standardization (“ISO”) ISO 14001 and ISO 9001.

The global management system outlines our processes and procedures practiced in relation to environmental protection, occupational and process safety, health protection and quality management including sustainable compliance, social accountability and product stewardship.

In 2019, OEC published its first sustainability report in which the main environmental, health and safety performance data are reported according the Global Reporting Initiative protocols.

The report is posted to the Sustainability portion of our webpage:

Our sustainability report is accessible on our webpage:

www.orioncarbons.com.

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Our production facilities require operating permits that are subject to renewal or modification.

We could incur significant costs, including fines, penalties and other sanctions, third-party claims and environmental cleanup costs, as a result of violations of or liabilities under environmental, health and safety laws and regulations or operational permits required thereunder.

We believe that our operations are currently in substantial compliance with all applicable environmental, health and safety laws and regulations.

Although our management systems and practices are designed to ensure compliance with laws and regulations, future developments and increasingly stringent regulation could require us to make additional unforeseen environmental, health and safety expenditures.

See as well risks described in “ Item 1A.

Risk Factors—Legal and Regulatory Risks—Our operations are subject to environmental, health and safety regulations.

We have been and may in the future be subject to investigations by regulatory authorities in respect of alleged violations and may incur significant costs to maintain compliance with, and to address liabilities under, these laws and regulations ” .

Environmental

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The most common method for controlling these gases is through combustion, which produces useable energy as a by-product.

Currently, eight manufacturing sites have the capability to beneficially utilize these gases through some form of energy co-generation, such as the sale or reuse of steam, gas or electricity.

In addition, we are evaluating initiatives to build additional co-generation facilities.

Currently, eight manufacturing sites, including one jointly owned production facility, have the capability to beneficially utilize these gases through some form of energy co-generation, such as the sale or reuse of steam, gas or electricity.

The primary air pollutants of concern include sulfur dioxide (“SO 2 ”), nitrogen oxides (“NOx”) and particulates.

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We control the particulate matter by using our bag filter technology.

With regard to air quality we are subject to emission control provisions at the national as well as at the EU level.

The EU Directive No.

2010/75/EU on industrial emissions (“IED Directive”) entered into force on January 6, 2011.

It provides for regulation on the prevention and control of pollution from industrial activities and includes rules aiming to reduce emissions into air, water, and land and to prevent the generation of waste.

Starting January 2013, the EU member states had to comply with emissions limits for certain industries.

Moreover, the IED Directive amended the former EU Directive 2008/1/EC on integrated pollution prevention and control (“IPPC Directive”) by defining best available techniques as binding industry standards.

The Best Available Techniques Reference (BREF Notes) document applied to the carbon black industry was developed and implemented in August 2007 and it is subject its revision beginning at the end of 2020 or in 2021 by the European Commission.

Germany, for example, implemented the IED Directive by amendments to certain German statutes (among other things, the Federal Emissions Control Act ( Bundes-Immissionsschutzgesetz ), the Federal Water Act ( Wasserhaushaltsgesetz ) and the Act on Recycling ( Kreislaufwirtschaftsgesetz ).

With respect to new emissions thresholds and new binding industry standards, permits need to comply with these standards and will, in general, not be grandfathered.

Besides the IED Directive and its implementation, European jurisdictions in which we operate may provide for further regulations regarding emission reduction and safety technology standards that apply to our facilities (for example, the German Emissions Control Act).

Therefore, under such regulations we would have to modernize our facilities regularly to meet the required standards.

In the United States, we are subject to emissions limitations under the federal Clean Air Act (“CAA”) and a consent decree entered into with the U.S.

In the European Union, we are subject to the EU Directive No.

2010/75/EU on industrial emissions (“IED Directive”), which regulates pollution from industrial activities and includes rules aiming to reduce emissions into air, water, and land and to prevent the generation of waste.

In addition to the IED Directive and its implementation, European jurisdictions in which we operate may provide for further regulations regarding emission reduction and safety technology standards that apply to our facilities (for example, the German Emissions Control Act).

In the U.S., we are subject to emissions limitations under the federal Clean Air Act (“CAA”) and a consent decree entered into with the U.S.

Environmental Protection Agency (“EPA”) as described in more detail below under “ —Environmental Proceedings”, as well as analogous state and local laws, which regulate the emission of air pollutants from our facilities and impose significant monitoring, record keeping and reporting requirements.

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In certain cases, we may need to incur capital and operating expenditures for specific equipment or technologies to control emissions.

facilities are required to obtain federal “Title V” permits, which are required for stationary sources classified as “major” on the basis of their emissions.

Obtaining permits and approvals required for the construction, modification and operation of our facilities, or the appeal of such permits and approvals once they are issued, has the potential to delay the development of our projects.

We have incurred, and expect to continue to incur, substantial administrative and capital expenditures to maintain compliance with CAA requirements that have been promulgated or may be promulgated or revised in the future.

We have incurred, and expect to continue to incur, substantial administrative and capital expenditures to maintain compliance with CAA requirements.

Pursuant to the CAA, the EPA has developed industry-specific National Emission Standards for Hazardous Air Pollutants (“NESHAPs”) for stationary sources classified as “major” on the basis of their hazardous air pollutant emissions.

facilities are subject to NESHAPs applicable to carbon black facilities, as well as NESHAPs applicable to industrial boilers.

The NESHAPs establish emissions reduction requirements and require use of control technology requirements that meet a minimum standard and which may entail a combination of technology, processes, and techniques.

These requirements are imposed through our Title V permits, and require specific monitoring, recordkeeping and reporting requirements.

See “ —Environmental Proceedings ” for information regarding our compliance with the CAA.

In China, a reduction of NOx emission limits for a boiler from 300 parts per million (“ppm”) to 200 ppm and dust from 30 micro gram per cubic meter (“mg/m 3 ”) to 20 mg/m 3 was required following a change in China's Air Pollution Prevention law in October 2017.

In addition, Chinese government reduced SO 2 limits for the boiler from 200 ppm to 50 ppm effective from 2018.

Further reduction of NOx emissions from 200 to 100 ppm and dust from 20mg/m 3 to 10mg/m 3 became effective in 2019.

With effect from calendar year 2020 SO 2 emission limits for a dryer will be reduced from 200 ppm to 50 ppm.

In Korea, the Clean Air Conservation Act changed, leading to reduced air emission limits for carbon black manufacturing processes for SO 2 from 400 ppm to 200 ppm, and in the energy generation processes for SO 2 from 300 ppm to 200 ppm, for NOx from 200 ppm to 150 ppm and dust from 50ppm to 30 ppm and the energy processes NOx is to be reduced from 220 ppm to 180 ppm and dust from 35 ppm to 20 ppm on condition of 6% oxygen concentration.

These changes will become effective in calendar year 2020.

These regulation changes in China and South Korea in prior years have been complied with and those to come may require additional capital and operating expenditures for specific equipment or technologies to control emissions and we have projects underway to address the new requirements.

In China and South Korea, our operations have been subject to increasingly strict air quality regulations in recent years.

These regulation changes in China and South Korea in recent years have been complied with.

Those to come may require additional capital and operating expenditures for specific equipment or technologies to control emissions, and we have projects underway to address the new requirements.

Greenhouse Gas Regulation and Emissions Trading

Our facilities also emit significant volumes of CO 2 .

In the European Union, all our production facilities are subject to the European Emission Trading Scheme (“ETS”) for CO 2 emissions.

The ETS was set up in 2003 by the Directive 2003/87/EC in order to considerably reduce the output of greenhouse gas (“GHG”).

The directive has been implemented into German law as the Greenhouse Gas Emissions Trading Act ( Treibhausgas-Emissionshandelsgesetz ).

Industrial sites to which the ETS applies receive a certain number of allowances to emit GHGs and must surrender one allowance for each metric ton of GHG emitted.

For the trading period that commenced in 2013, the ETS has been revised such that the EU-wide quantity of emission allowances allocated each year have been significantly reduced as compared to the average annual total quantity of allowances issued in the EU between 2008 and 2012 and no free-of-charge allocation for any electricity producing entity exists anymore.

The ETS affects carbon black manufacturers in the European Union.

In the European Union, all of our production facilities are subject to the European Emission Trading Scheme (“ETS”) for CO 2 emissions.

Industrial sites to which the ETS applies receive a certain number of allowances to emit GHGs and must surrender one allowance for each metric ton of greenhouse gas (“GHG”) emitted.

Carbon black production is currently listed on the carbon leakage list, which allows receiving the significant share of needed emission allowances free of charge.

This list was reviewed by the European Commission and Carbon Black remained on the Carbon Leakage List for the ETS Phase IV (2021-2030).

See “ Item 1A.

Risk Factors—Legal and Regulatory Risks—Regulations requiring a reduction of greenhouse gas emissions could adversely affect our business,

financial condition, results of operations and cash flows.

” The preparation for the ETS Phase IV (2021-2030) started in 2017 by the European Commission, the European Council and the European Parliament in cooperation, Council and Parliament announced during 2018 the implementation timetable with regard to ETS Phase IV.

As part of International Carbon Black Association's (“ICBA”) joint activity towards ETS, OEC completed the emission data collection for the period 2014-2018 according to the relevant European Union regulations.

This data collection contributed to help developing an industrial benchmark of emission data.

These data will provide the basis for expected discussions and exchanges between environmental agencies across the EU to be expected to take place in the middle of 2020 to complete the emission allocation process for ETS Phase IV.

The design concept of the South Korean ETS is similar to the European ETS.

Currently, we purchase emission rights for an insignificant amount in South Korea to cover our excess requirements.

In the U.S., comprehensive climate change legislation has not yet been adopted.

After determining that emissions of carbon dioxide, methane, and certain other gases endanger public health and the environment in December 2009, the EPA has regulated GHG emissions under various provisions of the Clean Air Act.

The EPA adopted rules that require reporting of GHG emissions by owners and operators of facilities in certain source categories or that exceed certain GHG emissions thresholds, and our facilities are subject to this rule.

Further, EPA issued the GHG “Tailoring Rule” in May 2010, to address GHG permitting requirements pursuant to its determination that GHG emissions triggered permitting requirements for stationary sources starting in January 2011, and has since continued efforts to regulate GHG emissions.

Apart from the EPA’s efforts, Congress has from time to time considered legislation to reduce emissions of GHGs, but no legislation has been enacted to date.

In the United States, the EPA regulates GHG emissions under the Clean Air Act, and has adopted rules that require reporting of GHG emissions by owners and operators of facilities in certain source categories, which include our facilities.

At the state level, approximately one-half of the states have already taken legal measures to reduce emissions of GHGs, primarily through the planned development of GHG emission inventories and/or regional GHG cap-and-trade programs.

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The adoption of legislation or regulations that require reporting of GHGs, establish permitting thresholds based on GHG emissions or otherwise limit or impose compliance obligations for emissions of GHGs from our equipment and operations could require us to incur costs to obtain and comply with permits, reduce emissions of GHGs associated with our operations or purchase carbon offsets or allowances.

South African Carbon Offsets Law came into effect from June 1, 2019.

The carbon black process is listed on Table 3 of this bill and a process emission factor was determined for a ton of carbon black produced using furnace black technology.

The current amount of tax is determined to be 120 ZAR per ton of CO 2 emitted into the atmosphere.

Our facility in Port Elizabeth is subject to pay the tax for its emissions calculated from June 1, 2019 and on yearly basis thereafter.

Based on current production levels the total annual tax is expected to be not material and not to exceed $0.2 million per fiscal year.

There are also ongoing discussions and regulatory initiatives in other countries in which we have facilities, including Brazil, regarding GHG emission reduction programs, but those programs have not yet been defined.

There are also ongoing discussions and regulatory initiatives in other countries in which we have facilities, including Brazil, regarding GHG emission reduction programs.

Water Quality

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Most of our plants recycle a substantial amount of the water used in the manufacturing process, which is used as “quench water” in the cooling process.

Water discharge from most plants consists primarily of storm-water during and after heavy rain, as well as limited wastewater from ancillary operations such as boiler blowdown and equipment washing;

these discharges only take place under permitted conditions.

For those plants that discharge water, the treatment generally is a settling pond system.

Some facilities operate more advanced wastewater treatment systems, such as filtration and aeration systems incorporating chlorination or ozonation, depending on local requirements.

At the EU level, the European Directive No.

2000/60/EC, also known as the Water Framework Directive (“WTD”), aimed to achieve a good qualitative and quantitative status of all water bodies by 2015.

Its main goals include expanding the scope of water protection to all waters, including surface waters and groundwater, water management based on river basins, a “combined approach” of emission limit values and quality standards and streamlining legislation.

A lot of effort has been put into the preparation and drafting of the River Basin Management Plans by 2009.

The Plans should have identified all actions to be taken in the river basin district to deliver the objectives of the WFD.

An interim Commission’s Assessment with respect to the status of water conditions in the EU, and activities influencing it, is attesting best water qualities ever since.

However, the assessment shows that a more determined effort is needed to ensure achievement of WFD objectives in the enacted 6-year cycles ending in 2021 and 2027.

Moreover, the use of water for the manufacturing process may require permits or licenses as, for example, under the German Federal Water Act or German local laws.

Permits may also be required for the discharge of wastewater into the public sewer system.

Such permit or license may be revoked without compensation under certain circumstances.

In the United States, our facilities are subject to the federal Clean Water Act (“CWA”), and analogous state laws and regulations that impose restrictions on the discharge of pollutants into waters of the United States.

Any such discharge of pollutants must be in accordance with the terms of the permit issued by EPA or the analogous state agency.

In addition, the CWA and implementing state laws and regulations require individual permits or coverage under general permits for discharges of storm water runoff from certain types of facilities.

Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with discharge permits or other requirements of the CWA and analogous state laws and regulations.

These permits generally have a term of five years.

facilities are subject to CWA permitting requirements, and must obtain and comply with National Pollutant Discharge Elimination System permits, which establish standards for, and require monitoring of, our discharges.

We are subject to categorical pretreatment standards for the Carbon Black Manufacturing Point Source category, which, among other requirements, prohibits discharges of process wastewater pollutants to navigable water.

Contamination

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Additionally, third parties may be able to file claims for personal injury and property damage allegedly caused by the release of hazardous substances or other pollutants into the environment.

In particular, the German Federal Act on Soil Protection ( Bundes-Bodenschutzgesetz ) requires the prevention of soil contamination by taking adequate precautions.

In case of discovery of any contamination or past pollution ( Altlasten ) the owner, the current controlling person of the property, the polluter, its universal successor ( Gesamtrechtsnachfolger ) or the previous owner (if such owner transferred title to the real property after March 1, 1999 and knew or should have known of the contamination or past pollution) may be held responsible for remediation measures.

Responsibility may be placed on either or several of the persons even in the absence of any fault or negligence.

The competent authorities may also take remediation measures themselves and require the responsible party to bear the costs of such remediation.

If several parties are responsible, they are jointly or severally liable and each party has the legal claim to reimbursement against the other parties.

Such reimbursement may be contractually modified or waived among the parties.

In case of contamination of ground or surface water, the responsibility for remediation measures results from the Federal Act on Soil Protection in conjunction with the Federal Water Act and local water protection laws.

In particular, the German Federal Act on Soil Protection requires the prevention of soil contamination by taking adequate precautions.

In the United States, our facilities are subject to the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), the Resource Conservation and Recovery Act (“RCRA”) and similar state laws.

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Under CERCLA, we may be subject to liability without regard to fault or the lawfulness of the disposal or other activity.

Our operations involve the storage, handling, transportation and disposal of hazardous substances within the meaning of CERCLA.

As a result, we may be jointly and severally liable under CERCLA for all or part of the costs required to clean up sites at which hazardous substances have been released into the environment.

Under CERCLA and similar state laws, we could be required to remove previously disposed substances and wastes, remediate contaminated property and groundwater, conduct natural resource damage assessments and pay compensation and penalties.

RCRA is the principal federal statute regulating the generation, treatment, storage and disposal of hazardous and other wastes.

RCRA and state hazardous waste regulations impose detailed operating, inspection, training and response standards and requirements for permitting, closure, remediation, financial responsibility, record keeping and reporting.

Our sites have areas currently and formerly used as landfills for wastes generated by our operations.

These landfills may be subject to regulation under RCRA, and certain of our facilities have been investigated and remediated under RCRA.

Our sites have areas currently and formerly used as landfills that are subject to regulation under RCRA, and certain of our facilities have been investigated and remediated under RCRA.

These laws and regulations may also expose us to liability for acts that were in compliance with applicable laws at the time we performed those acts.

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In some jurisdictions in which we operate we are subject to provisions regarding waste management and the handling and storage of hazardous substances.

Those provisions may require documentation on the disposal of waste or compliance with certain safety standards (for example, as set forth in Council Directive 96/82/EC on the control of major-accident hazards involving dangerous substances, known as Seveso II Directive).

The directive was implemented into German law by the 12th Ordinance under the German Emissions Control Act.

We generate hazardous waste in the form of spent solvents at our plant labs.

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Energy Surcharge

The German Renewable Energies Act grants above-market payments to the producers of energy generated from renewable sources.

The German Renewable Energies Act (“EEG”) grants above-market payments to the producers of energy generated from renewable sources.

To balance these payments, an energy surcharge is imposed on the consumers of energy.

Certain exemptions regarding that surcharge are provided in the EEG, in particular for energy intensive industries and self-consumption of self-produced energy.

The European Commission opened an in-depth investigation procedure in December 2013 to examine whether the reductions granted under the EEG comply with EU state aid rules.

Currently, the European Commission and the German government are working out an agreement regarding future benefits in that respect.

Accordingly, the German legislator is amending the national regulations and setting up a new regime regarding energy intensive industries.

It is expected that the exemption from the energy surcharge regarding electricity generated for the Company’s own consumption will be grandfathered.

It is expected that the exemption from the energy surcharge regarding electricity generated for the Company’s own consumption will continue to be grandfathered.

However, there is no assurance that we can maintain the exemption status permanently.

Environmental Proceedings

During 2008 and 2009, the EPA contacted all U.S.

carbon black producers as part of an industry-wide EPA initiative, requesting extensive and comprehensive information under Section 114 of the U.S.

Clean Air Act.

The EPA used that information to determine, for each facility, that either:

(i) the facility has been in compliance with the Clean Air Act;

(ii) violations have occurred and enforcement litigation may be undertaken;

or (iii) violations have occurred and a settlement of an enforcement case is appropriate.

In response to information requests received by the Company’s U.S.

facilities, the Company furnished information to the EPA on each of its U.S.

EPA subsequently sent notices under Section 113(a) of the Clean Air Act in 2010 alleging violations of Prevention of Significant Deterioration (“PSD”) and Title V permitting requirements under the Clean Air Act at the Company’s Belpre (Ohio) facility.

In October 2012, the Company received a corresponding notice and finding of violation (a “NOV”) alleging the failure to obtain PSD and Title V permits reflecting Best Available Control Technology (“BACT”) at several units of the Company’s Ivanhoe (Louisiana) facility, and in January 2013 the Company also received a NOV issued by the EPA for its facility in Borger (Texas) alleging the failure to obtain PSD and Title V permits reflecting BACT during the years 1996 to 2008.

A comparable NOV for the Company’s U.S.

facility in Orange (Texas) was issued by the EPA in February 2013;

and EPA issued an additional NOV in March 2016 alleging more recent non-PSD air emissions violations primarily at the dryers and the incinerator of the Orange facility.

In 2013, Orion began discussions with the EPA and the U.S.

Department of Justice about a potential settlement to resolve the NOVs received, which ultimately led to a consent decree executed between Orion Engineered Carbons LLC (for purpose of this section “Orion”) and the United States (on behalf of the EPA), as well as the Louisiana Department of Environmental Quality.

The consent decree (the “EPA CD”) became effective on June 7, 2018.

The consent decree resolves and settles the EPA’s claims of noncompliance set forth in the NOVs and in a respective complaint filed in court against Orion by the United States immediately prior to the filing of the consent decree.

All five U.S.

carbon black producers have settled with the U.S.

Under Orion’s EPA CD, Orion will install certain pollution control technology in order to further reduce emissions at its four U.S.

manufacturing facilities in Ivanhoe (Louisiana), Belpre (Ohio), Borger (Texas), and Orange (Texas) over approximately six years.

The EPA CD also requires the continuous monitoring of emissions reductions that Orion will need to comply with over a number of years.

Orion has commenced the installation works for its Ivanhoe facility, and expects to complete the installation in this facility over the next year.

Under the EPA CD, Orion can choose either its Belpre or Borger facilities as the next site for installation of pollution control equipment with comparable effectiveness.

We expect the capital expenditures for installation of pollution control equipment in the remaining Orion facilities to decrease due to economies of scale and synergies from prior installations.

We estimate the installations of monitoring and pollution control equipment at all four Orion plants in the U.S.

will require capital expenditures of approximately $190 million, subject to the results of further scope design and estimation efforts presently underway.

However, the actual total capital expenditures we might need to incur in order to fulfill the requirements of the EPA CD remain uncertain.

The EPA CD allows some flexibility for Orion to choose among different technology solutions for reducing emissions and the locations where these solutions are implemented.

The solutions Orion ultimately chooses to implement at its facilities other than Ivanhoe (Louisiana), may differ in scope and operation from those it currently anticipates (including those discussed in the next paragraph) and, for any and all of the its facilities, factors, such as timing, locations, target levels, changing cost estimates and local regulations, could cause actual capital expenditures to significantly exceed current expectations or affect Orion’s ability to meet the agreed target emission levels or target dates for installing required equipment as anticipated or at all.

Noncompliance with applicable emissions limits could lead to penalty payments to the EPA.

As part of Orion’s compliance plan under the EPA CD, in April 2018 Orion signed a contract with Haldor Topsoe group to install its SNOX TM emissions control technology to remove SO2, NOx and dust particles from tail gases at Orion’s Ivanhoe, Louisiana Carbon Black production plant.

The SNOX TM technology has not been used previously in the carbon black industry.

Orion’s Share Purchase Agreement with Evonik in connection with the Acquisition provides for a partial indemnity from Evonik against various exposures, including, but not limited to, capital investments, fines and costs arising in connection with Clean Air Act violations that occurred prior to July 29, 2011.

Except for certain less relevant allegations contained in the second NOV received for the Company’s facility in Orange (Texas) in March 2016, all of the other allegations made by the EPA with regard to all four of the Company’s U.S.

facilities - as discussed above - relate to alleged violations before July 29, 2011.

The indemnity provides for a recovery from Evonik of a share of the costs (including fines), expenses (including reasonable attorney’s fees, but excluding costs for maintenance and control in the ordinary course of business and any internal cost of monitoring the remedy), liabilities, damages and losses suffered and is subject to various contractual provisions including provisions set forth in the Share Purchase Agreement with Evonik, such as a de minimis clause, a basket, overall caps (which apply to all covered exposures and all covered environmental exposures, in the aggregate), damage mitigation and cooperation requirements, as well as a statute of limitations provision.

Due to the cost-sharing and cap provisions in Evonik’s indemnity, the Company expects that substantial costs it has already incurred and will incur in this EPA enforcement initiative and the EPA CD likely will exceed the scope of the indemnity in the tens of millions of US dollars.

In addition, Evonik signaled that it is not honoring Orion’s claims under the indemnity.

In June 2019, Orion initiated arbitration proceedings to enforce its rights against Evonik.

Evonik in turn has submitted certain counterclaims related to a tax indemnity and cost reimbursement against Orion, which counterclaims we do not believe to be material.

Although Orion believes that it is entitled to the indemnity and that its rights thereunder are enforceable, there is no assurance that the Company will be able to recover costs or expenditures incurred under the indemnity as it expects or at all.

See “Item 1A.

Risk-Factors-Risks Related to Indebtedness, Currency Exposure and Other Financial Matters-Our agreements with Evonik in connection

with the Acquisition require us to indemnify Evonik with respect to certain aspects of our business and require Evonik to indemnify us for certain retained liabilities.

We cannot offer assurance that we will be able to enforce claims under these indemnities as we expect.”

Chemical Regulations

Some jurisdictions we operate in have established regimes to regulate or control chemical products to ensure the safe manufacture, use and disposal of chemicals.

In the European Union, the Regulation on Registration, Evaluation, Authorization of Chemicals (“REACh”) was signed in December 2006, came into effect on June 1, 2007 and requires chemical manufacturers and importers in the European Union to register all chemicals manufactured in, or imported into the European Union in quantities of more than one ton annually.

Registration has to be made at the European Chemicals Agency (“ECHA”).

The registration process requires capital and resource commitments to compile and file comprehensive chemical dossiers regarding the use and attributes of each chemical substance manufactured or imported by us and requires us to perform chemical safety assessments.

Moreover, the use of certain “highly hazardous chemicals” must be authorized by ECHA.

Furthermore, REACh Regulation contains rules on bringing substances to the market that have been identified as substances of very high concern (“SVHC”).

If identified as SVHC, manufactured substances will be listed on the “candidate list” and potentially prioritized for or inclusion into Annex XIV to the REACh Regulation which may mean a full ban or requirement for authorization to be granted by the European Commission at its discretion.

Carbon black oils used as raw materials in the carbon black production are considered intermediates under REACh.

Use of intermediates is exempted from authorization under REACh.

Registration of certain chemicals with ECHA has been compulsory since June 1, 2008.

For pre-registered substances, three registration deadlines are applicable, depending on the tonnage of the substance.

Substances manufactured or imported into the EU exceeding 1,000 mt/y and specific SVHC in lower volumes had to be registered before December 1, 2010.

The second period regarding substances in quantities of 100 to 1,000 mt/y ended on May 31, 2013.

The last deadline for substances of more than 1 mt/y was May 31, 2018.

Further national provisions exist that apply to our business.

For example, under German law, the Chemicals Act ( Chemikaliengesetz ) and related ordinances impose particular obligations on producers, processors, and handlers of chemical agents.

We have to comply with safety obligations in this respect, particularly regarding the handling and storage of hazardous substances.

In the United States, we are subject to federal and state requirements relating to our business and products.

In particular, we are subject to the California Safe Water and Toxic Enforcement Act, known as Proposition 65.

Among other requirements, Proposition 65 imposes labeling and record keeping requirements.

Non-compliance may result in significant penalties or fines, and future amendments to Proposition 65 could result in increased labeling or other compliance obligations applicable to our products.

In South Korea the so called Chemical Control Act was enacted.

According to the act coal based feedstock oils such as CCT, CTD, SPO containing more than 0.001% quinoline are treated as hazardous chemicals requiring production sites to be duly licensed to use these coal based feedstock from 2019.

We may incur capital and operational expenses to meet the relevant requirements to become duly licensed.

In the European Union, the Regulation on Registration, Evaluation, Authorization of Chemicals (“REACh”) requires chemical manufacturers and importers in the European Union to register all chemicals manufactured in, or imported into the European Union in quantities of more than one ton annually.

Registration has to be made at the European Chemicals Agency (“ECHA”), and the use of certain “highly hazardous chemicals” must be authorized by ECHA.

Furthermore, REACh Regulation contains rules on bringing substances to the market that have been identified as substances of very high concern.

In the United States, we are subject to federal and state chemical regulations.

In particular, we are subject to the California Safe Water and Toxic Enforcement Act, which imposes labeling and record keeping requirements.

In South Korea, under the Chemical Control Act, coal-based feedstock oils such as crude coal tar (“CCT”), coal tar distillate (“CTD”) and soft pitch oil (“SPO”) containing more than 0.001% quinoline are treated as hazardous chemicals requiring production sites to be duly licensed.

We are a member of the International Carbon Black Association (the “ICBA”), which currently consists of representatives from carbon black manufacturers in Europe, North and South America, Asia and Africa.

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The International Agency for Research on Cancer (“IARC”) classifies carbon black as a Group 2B substance (known animal carcinogen, possible human carcinogen).

We have communicated IARC’s classification of carbon black to our customers and employees in

accordance with applicable regulatory requirements.

We have communicated IARC’s classification of carbon black to our customers and employees in accordance with applicable regulatory requirements.

The Permanent Senate Commission for the Investigation of Health Hazards of Chemical Compounds in the Work Area (the “MAK Commission”) of the German Research Foundation ( Deutsche Forschungsgemeinschaft ), which uses a different rating system, classifies carbon black as a suspect carcinogen (Category 3B).

14 unchanged sentences

In Europe, Commission Regulation (EU) 2018/1881 as of December 3, 2018 amending the REACh regulation introduced new information requirements for substances with forms meeting the definition criteria of EU COM 2011/696/EU.

The notification of carbon black under the different notification schemes as well as meeting the new nano-related information requirements under REACh requires capital and resource commitments to compile and file dossiers.

The notification of carbon black under the different notification schemes as well as meeting the new nano-related information requirements under REACh requires

capital and resource commitments to compile and file dossiers.

Furthermore, more and more specific requirements for substances regarded as nanomaterials are emerging with Europe.

6 unchanged sentences

We cannot guarantee, however, that any future changes in the requirements or mode of enforcement of these laws and regulations will not have a material adverse effect on our business, financial condition, results of operations or cash flows.

As of December 31, 2019, we had 1,493 employees and approximately 362 contractors in our wholly-owned entities.

Labor Relations

Our employees in many countries are represented by employees labor unions in accordance with local law and practices, which could provide with participation and information rights to those representatives.

Membership of employees labor unions varies in accordance with the business area, local practice and country in which we operate.

We have entered into collective bargaining agreements with employees labor unions either directly or as members of employer organizations.

In particular, 73% of our employees are covered by such bargaining agreements.

Our employees are located in many countries and are represented by labor unions and works councils in accordance with local law and practices, which could provide participation and information rights to those representatives.

Membership of employee labor unions varies in accordance with the business area, local practice and country.

We have entered into collective bargaining agreements with employee labor unions either directly or as members of industry-wide unions or employer organizations.

In particular, approximately 73% of our employees are covered by such agreements.

These agreements typically govern, among other things, terms and conditions of employment and reflect the prevailing practices in each country.

We believe we have stable relations with our employees and voluntary turnover has been low in recent years.

We believe we have stable relations with our employees and voluntary turnover is low.

In 2017, 35 of the former employees in our closed facility in Ambès, France filed claims with the labor court of Bordeaux contesting the termination of their employment and seeking damages.

The court held several hearings on the claims in 2018 and 2019.

While we intend to continue to oppose these claims, our results of operations reflect accruals made by us to satisfy these claims should the former employees prevail.

Corporate information

Orion Engineered Carbons S.A.

is a Luxembourg joint stock corporation ( société anonyme or S.A.), incorporated on July 28, 2014 as a Luxembourg limited liability company ( société à responsabilité limitée ).

The Company's registered office is located at 6, Route de Trèves, L-2633 Senningerberg (Municipality of Niederanven), Grand Duchy of Luxembourg.

Our principal executive offices are located in Houston, Texas, U.S., and our telephone number is (281) 318-2959.

Our website address is www.orioncarbons.com.

The SEC maintains a website (www.sec.gov) that contains reports and other information regarding issuers that file electronically with the SEC.

The information contained on, or that can be accessed through these websites is not part of, and is not incorporated into, this report.

Historically, our business operated as a business line of Evonik.

Effective July 29, 2011, private investors indirectly acquired from Evonik the entities operating its carbon black business.

On July 30, 2014, the Company completed its initial public offering.

During 2017, Kinove Holdings sold all its remaining common shares.

Currently, we operate on a fully stand-alone basis with all our shares held by public investors except for 505,142 shares held by us in treasury.

Available information

We make available on or through our internet website at www.orioncarbons.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after electronically filing such material with the SEC at http://www.sec.gov.

This Annual Report on Form 10-K and our other SEC filings are also accessible through the SEC’s website at http://www.sec.gov.

All references to websites contained herein do not constitute incorporation by reference of information contained on such websites and such information should not be considered part of this document.

Of these claims 32 are pending in the courts and our results of operations reflect accruals made by us to satisfy our best estimate of these claims should the former employees prevail.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business