Author Topic: EAF - GrafTech  (Read 21511 times)

Spekulatius

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Re: EAF - GrafTech
« Reply #110 on: October 05, 2019, 06:25:14 AM »
  • Another key point of the bull thesis is that the Chinese lack the know how for building UHP graphite electrodes. However, management indicated some months ago that 2-3 players there had managed to build some UHP graphite electrodes, even if not yet production ready. Nevertheless, should we see this as an indication that the chinese will eventually get there? If so, it would only be a matter of time before graphite electrode supply increases.


I am no expert in this field, but based on my general knowledge of material science and the Chinese abilities to reverse engineer, I donít think it will be too hard for Chinese companies to create their own UHP needle coke supply. The general process is known, equipment to do this can be purchased, so itís matter to learn some tricks of the trade that are proprietary. It will happen, itís just a matter of time.
To be a realist, one has to believe in miracles.


Fitz

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Re: EAF - GrafTech
« Reply #111 on: October 06, 2019, 05:42:03 PM »
  • A key argument of the bull thesis is that there is not enough petroleum needle coke. Now, a lot of capacity was shut down some years ago (partly the reason of the recent under supply). That capacity may take some time to rebuild cannot be denied, but the fact that much more capacity existed in the past, however, must mean that enough input existed, and possibly is still available today to expand capacity again. I am talking about decant oil. If decant oil is not a constraint, does that mean that it is only a matter of time before petroleum needle cake supply increases?
  • Another key point of the bull thesis is that the Chinese lack the know how for building UHP graphite electrodes. However, management indicated some months ago that 2-3 players there had managed to build some UHP graphite electrodes, even if not yet production ready. Nevertheless, should we see this as an indication that the chinese will eventually get there? If so, it would only be a matter of time before graphite electrode supply increases.

If petcoke and graphite electrode supply increases, then Graftech may become a poor business to own - just as it was before. Whats more, for a stockholder it is not about capacity actually increasing - so long as the market can confidently see that happening in the future, why would anyone invest in the company?
My point is that this may literally be a cigar butt.

We may look at the contracts and think that there is margin of safety there. But, even if the company makes so much money in contracts in the next 3Y-5Y, how much will actually trickle down into common stockholders pockets? Management targets a 50%-60% return of FCF to shareholders, ie dividends and buybacks, but buybacks may prove worthless if shares tank in the future. Therefore, will dividends received before the market can see the business turning ugly cover much of the investment?

Appreciate any comments.


- I'm not aware of needle coke supply shutting down, UHP Graphite rod production was taken off line. The squeeze on needle coke supply has been the increase in demand in the lithium ion batteries used in EV's.

- The main thesis for this trade wouldn't ride on needle coke supply at 70% is made in house and already locked up in 3-5 year contracts. The spot price of needle coke gives you the margin on 30% of revenus and if it persists at elevated levels this will allow for future contracts to be signed at much higher prices. These rosy assumptions aren't built into the buy today but would just be nice kickers!

- As for China entering the UHP or Needle Coke production market, I'm sure they are working very hard right now to produce needle coke or an alternate domestically and would be supersede if they were unsuccessful, but would also be surprised if it came online in a couple years. They are the largest manufacture of Lithium batteries and with all the uncertainty in the global trade market it would be crazy if they weren't working on an in house alternative.

- Capital allocation, I see a majority of the capital returned to be in dividends, at least I hope this is the case. Not because I wouldn't like to see a lot of buy backs today but there just isn't enough float to make this happen. The two people who own most of the stock are BBU and Pabrai both are pretty smart investors and I doubt will be selling back at low prices. This will leave them paying down debt at a higher clip than originally projected or more special and large dividends, and buying back whatever small amounts they can in the public market. If prices rise I hope there is enough independence in management / board to not blindly take in BBU's stock, but after seeing TOO debacle its something to look out for.

Look forward to hearing your thoughts.

-Fitz

elliott

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Re: EAF - GrafTech
« Reply #112 on: October 09, 2019, 02:13:36 AM »
Fitz, you are right about the petroleum needle coke capacity. The capacity decrease I was talking about was of graphite electrodes - I mixed the two. Still, it remains to be seen for how long petroleum needle coke capacity will remain as it is, and not increase over demand as it usually happens with commodities. Decant oil is certainly not a constraint.

As for your comment that persisting elevated prices might give the opportunity for Graftech to sign contracts at higher prices, I have some doubts. For one, coke prices seems to be dropping off their recent highs, and I think no one is really surprised. Further, I am not sure about the timing so maybe I am wrong here, but Graftech has managed to sign contracts at an average price short of USD 10,000 / MT when petroleum needle coke spot prices ranged between 15-30,000 per MT. What prices will they get if coke price drops to, say, 10,000 / MT?
EDIT: Actually, most of the capacity that management "sells" in the form of contracts, 3Y-5Y out, is already contracted, so any new contract should only have a very minimal impact anyways. It will be interesting to see what the situation is like 3 years from now, though, when some of these contracts expire and must be renewed.
« Last Edit: October 09, 2019, 07:07:46 AM by elliott »

elliott

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Re: EAF - GrafTech
« Reply #113 on: October 09, 2019, 02:32:21 AM »
Another thing I also think about is...
How much FCF will Graftech generate when the chinese start producing and selling UHP graphite electrodes? Half of what it does today? Less? Not to mention that in such a reality, FCF would probably swing from the positive to the negative, unpredictably as is the case with other commodities.

The reason I ask myself that question is becasue Graftech is currently doing ca USD 700M in FCF. Lets say it keeps generating that amount through 2023, so that by the end of 2023 Graftech has made USB 3.5B in FCF. Its current EV is still higher than that though, ca USD 5.5B, and I am not sure that in 2024, if the chinese are actually producing UHP graphite electrodes and the necessary coke, the company will be worth USD 2B or more.
So, is Graftech really that cheap?

Saluki

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Re: EAF - GrafTech
« Reply #114 on: October 09, 2019, 07:50:05 AM »
if the chinese are actually producing UHP graphite electrodes and the necessary coke,

The second part is a very big if.  You can only get needle coke when you start by scraping the crud out of a petroleum refinery coker and work it from sponge coke to the good stuff.  But only certain refineries use the crude that you need to start with.  My understanding is that you can't make it from a refinery that processes that venezuelan junk. Since it's a by product, to make more, you would need more refineries that work with light crude. To do that, you would need to find more oil.
EAF and PSX own 70% of the needle coke production capacity in the world. So if you want to make more graphite rods, you can buy the coke from EAF, but if you want more needle coke, where will you get the stuff to make it with?  If you want a house made out redwood trees, you can't just tell people to plant them in georgia because the ones from oregon are getting too expensive.
If it's important, do it every day. If it's not important, don't do it at all.  -Dan Gable

elliott

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Re: EAF - GrafTech
« Reply #115 on: October 09, 2019, 08:04:50 AM »
Couldnt the chinese (or anyone else) buy the decant oil from the US?

According to Graftech, there is abundant decant oil.
Quote
While Seadrift has purchased a substantial majority of its raw material inventory from a limited number of suppliers in recent years, we believe that there is a large supply of suitable decant oil in the United States available from a variety of sources.

Also, note that I am not considering if the chinese will be competitive 2 years from now, but in say 5 years. The economy there is planned, or at least semi planned. Even if the economics dont look good, they will spend as much money as is necessary in order to be able to manufacture their own needle coke - at least if they believe its a strategic concern or something of the sort.
Even Graftech management acknowledged that the chinese will make it at some point - I am pretty sure they said this in one of the last two conference calls, in the Q&A sessions. Dont ask me if they said it will happen in 3 years or 20, I think they didnt mention, but somehow was clear they were not thinking in 20 years. Anyway, I think this was also discussed in the Value investors club writeup. You may check there for more info, Saluki.
« Last Edit: October 09, 2019, 08:10:57 AM by elliott »