Author Topic: EAF - GrafTech  (Read 13516 times)

bjakes00

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Re: EAF - GrafTech
« Reply #30 on: December 11, 2018, 02:52:45 PM »
Some additional colour from P66 recent results transcript:
1. They talk about needle coke being "a relatively small component in the overall mix for Phillips 66"
2. On plans to expand production:  "The coke business is within the Humber Refinery and the Lake Charles Refinery. So it shows up in the Refining portfolio, our Refining segment. In that segment we highlight the most important capital projects every year [...]. And so, the fact that we haven't highlighted a large capital project, it's probably a reasonable assumption that there's not one."
3.  "We do have industry-leading technology associated with needle coke production It is a different process. And so we are very unique in that regard."


kab60

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Re: EAF - GrafTech
« Reply #31 on: December 11, 2018, 10:49:26 PM »
Have theseguys fully matched their sales of GE with their purchases of Needle Coke? Couldn't see it in recent presentation. If not, is it a risk that some of these seemingly profitable contracts bite them in the butt because Needle Coke prices rise even more and thus they're locked into unprofitable contracts?

tripleoptician

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Re: EAF - GrafTech
« Reply #32 on: December 12, 2018, 06:55:51 AM »
Have theseguys fully matched their sales of GE with their purchases of Needle Coke? Couldn't see it in recent presentation. If not, is it a risk that some of these seemingly profitable contracts bite them in the butt because Needle Coke prices rise even more and thus they're locked into unprofitable contracts?

They produce their own needle coke via a wholly owned facility.
Thus is what makes them able to create fixed priced take or pay contracts on 2/3rd of their production. NO other GE producer has their own internal supply of needle coke.

Off memory I think they become unprofitable around the $2500 price for their graphite electrode. ThIs occurred in 2016 and led to bankruptcy given the debt load.

The extra 1/3rd of GE production is vunerable to external needle coke supply as it needs to bč exterbally sourced. 

Someone correct me if wrong as I read through the weekend but didnt take notes

kab60

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Re: EAF - GrafTech
« Reply #33 on: December 12, 2018, 07:05:26 AM »
Have theseguys fully matched their sales of GE with their purchases of Needle Coke? Couldn't see it in recent presentation. If not, is it a risk that some of these seemingly profitable contracts bite them in the butt because Needle Coke prices rise even more and thus they're locked into unprofitable contracts?

They produce their own needle coke via a wholly owned facility.
Thus is what makes them able to create fixed priced take or pay contracts on 2/3rd of their production. NO other GE producer has their own internal supply of needle coke.

Off memory I think they become unprofitable around the $2500 price for their graphite electrode. ThIs occurred in 2016 and led to bankruptcy given the debt load.

The extra 1/3rd of GE production is vunerable to external needle coke supply as it needs to bč exterbally sourced. 

Someone correct me if wrong as I read through the weekend but didnt take notes
Sorry if I was unclear - I know about their own production of Needle Coke, but as you said it only covers 2/3 of their needs according to their recent presentation. I was just wondering whether there's a big risk and Needle Coke prices spike a lot, thus making the 1/3 unprofitably - possibly by a large margin. Seems like it would take some extreme moves, but it wouldn't be the first time a company was screwed by fixed contracts with variable costs.

tripleoptician

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Re: EAF - GrafTech
« Reply #34 on: December 12, 2018, 07:18:14 AM »
Have theseguys fully matched their sales of GE with their purchases of Needle Coke? Couldn't see it in recent presentation. If not, is it a risk that some of these seemingly profitable contracts bite them in the butt because Needle Coke prices rise even more and thus they're locked into unprofitable contracts?

They produce their own needle coke via a wholly owned facility.
Thus is what makes them able to create fixed priced take or pay contracts on 2/3rd of their production. NO other GE producer has their own internal supply of needle coke.

Off memory I think they become unprofitable around the $2500 price for their graphite electrode. ThIs occurred in 2016 and led to bankruptcy given the debt load.

The extra 1/3rd of GE production is vunerable to external needle coke supply as it needs to bč exterbally sourced. 

Someone correct me if wrong as I read through the weekend but didnt take notes
Sorry if I was unclear - I know about their own production of Needle Coke, but as you said it only covers 2/3 of their needs according to their recent presentation. I was just wondering whether there's a big risk and Needle Coke prices spike a lot, thus making the 1/3 unprofitably - possibly by a large margin. Seems like it would take some extreme moves, but it wouldn't be the first time a company was screwed by fixed contracts with variable costs.

Well the price of needle coke has spiked dramatically but those costs of production have been passed on via increased spot prices in GE productioń.

If there is no other producer that internally sources needle coke than higher prices of needle coke from Phillips would increase the cost of production for everyone.

It doesnt appear steel producers using EAF have an option to not have a GE for their production and therefore higher needle coke prices just get passed to the consumer of GE. This cost seems low to the overall cost of steel production.

The known unknowns are what happens with China. All discussion from the company is ex-China as no one can estimate their production abilities or ability to compete in the high quality GE market.
It also looks like China is trending toward increasing the percentage of EAF steel production vs Blast secondary to the environmental factors.

Assuming this continues to occur, perhaps a significant portion of internally sourced needle coke in China needs to be kept in China for GE production.

I read an article for india where their gov't was forcing GE producers to create fixed prices of GE's for the steel companies despite being externally sourced needle coke. Now that can be a recipe for disaster.
« Last Edit: December 12, 2018, 07:27:06 AM by tripleoptician »

peterHK

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Re: EAF - GrafTech
« Reply #35 on: December 12, 2018, 07:23:44 AM »
Have theseguys fully matched their sales of GE with their purchases of Needle Coke? Couldn't see it in recent presentation. If not, is it a risk that some of these seemingly profitable contracts bite them in the butt because Needle Coke prices rise even more and thus they're locked into unprofitable contracts?

They produce their own needle coke via a wholly owned facility.
Thus is what makes them able to create fixed priced take or pay contracts on 2/3rd of their production. NO other GE producer has their own internal supply of needle coke.

Off memory I think they become unprofitable around the $2500 price for their graphite electrode. ThIs occurred in 2016 and led to bankruptcy given the debt load.

The extra 1/3rd of GE production is vunerable to external needle coke supply as it needs to bč exterbally sourced. 

Someone correct me if wrong as I read through the weekend but didnt take notes
Sorry if I was unclear - I know about their own production of Needle Coke, but as you said it only covers 2/3 of their needs according to their recent presentation. I was just wondering whether there's a big risk and Needle Coke prices spike a lot, thus making the 1/3 unprofitably - possibly by a large margin. Seems like it would take some extreme moves, but it wouldn't be the first time a company was screwed by fixed contracts with variable costs.

No because GE prices are largely based on coke plus a margin (usually), so there is a floor in the market based on coke prices. One of the reasons GE prices are so high is that coke prices are so high, so one has to watch them both to get a sense of the business.

valueinvestor

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Re: EAF - GrafTech
« Reply #36 on: December 12, 2018, 07:54:52 AM »
Have theseguys fully matched their sales of GE with their purchases of Needle Coke? Couldn't see it in recent presentation. If not, is it a risk that some of these seemingly profitable contracts bite them in the butt because Needle Coke prices rise even more and thus they're locked into unprofitable contracts?

They produce their own needle coke via a wholly owned facility.
Thus is what makes them able to create fixed priced take or pay contracts on 2/3rd of their production. NO other GE producer has their own internal supply of needle coke.

Off memory I think they become unprofitable around the $2500 price for their graphite electrode. ThIs occurred in 2016 and led to bankruptcy given the debt load.

The extra 1/3rd of GE production is vunerable to external needle coke supply as it needs to bč exterbally sourced. 

Someone correct me if wrong as I read through the weekend but didnt take notes
Sorry if I was unclear - I know about their own production of Needle Coke, but as you said it only covers 2/3 of their needs according to their recent presentation. I was just wondering whether there's a big risk and Needle Coke prices spike a lot, thus making the 1/3 unprofitably - possibly by a large margin. Seems like it would take some extreme moves, but it wouldn't be the first time a company was screwed by fixed contracts with variable costs.

No because GE prices are largely based on coke plus a margin (usually), so there is a floor in the market based on coke prices. One of the reasons GE prices are so high is that coke prices are so high, so one has to watch them both to get a sense of the business.

Any chance you can clarify more? For some reason, my interpretation is that the take-or-pay agreements say the price of their graphite electrodes is "coke price + some margin," as opposed to an actual price, therefore factors in any possible extreme movements in needle coke. It's not unheard of but I never saw a client sign a contract where the margin is well in excess of 20%. Unless the price they receive from their Seadrift production is significantly lower than the third-party vendors.

bjakes00

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Re: EAF - GrafTech
« Reply #37 on: December 12, 2018, 07:57:23 AM »
Showa Denko released a medium term plan today reiterating the tightness in the market and saying prices for next half are agreed and above the previous half prices. The BoAML note is informative if you can access.

They again said there is no point in expanding UHP capacity (even though it would take a few years to do so) as no needle coke producers are bringing on any supply - they all realise how cyclical the industry is and are acting rationally (for now).

Expect EAF to report that 75% of volumes are contracted (post sea drift debottlenecking) at a higher than previous average price.

peterHK

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Re: EAF - GrafTech
« Reply #38 on: December 12, 2018, 12:08:54 PM »
Have theseguys fully matched their sales of GE with their purchases of Needle Coke? Couldn't see it in recent presentation. If not, is it a risk that some of these seemingly profitable contracts bite them in the butt because Needle Coke prices rise even more and thus they're locked into unprofitable contracts?

They produce their own needle coke via a wholly owned facility.
Thus is what makes them able to create fixed priced take or pay contracts on 2/3rd of their production. NO other GE producer has their own internal supply of needle coke.

Off memory I think they become unprofitable around the $2500 price for their graphite electrode. ThIs occurred in 2016 and led to bankruptcy given the debt load.

The extra 1/3rd of GE production is vunerable to external needle coke supply as it needs to bč exterbally sourced. 

Someone correct me if wrong as I read through the weekend but didnt take notes
Sorry if I was unclear - I know about their own production of Needle Coke, but as you said it only covers 2/3 of their needs according to their recent presentation. I was just wondering whether there's a big risk and Needle Coke prices spike a lot, thus making the 1/3 unprofitably - possibly by a large margin. Seems like it would take some extreme moves, but it wouldn't be the first time a company was screwed by fixed contracts with variable costs.

No because GE prices are largely based on coke plus a margin (usually), so there is a floor in the market based on coke prices. One of the reasons GE prices are so high is that coke prices are so high, so one has to watch them both to get a sense of the business.

Any chance you can clarify more? For some reason, my interpretation is that the take-or-pay agreements say the price of their graphite electrodes is "coke price + some margin," as opposed to an actual price, therefore factors in any possible extreme movements in needle coke. It's not unheard of but I never saw a client sign a contract where the margin is well in excess of 20%. Unless the price they receive from their Seadrift production is significantly lower than the third-party vendors.

1) The MARKET price of electrodes is driven by needle coke as a cost of production.

2) The CONTRACT prices are based on a negotiated rate, lower than spot to account for the lack of optionality for the customer and value for the producer. 

3) They produce their needle coke, and have hedged the cost of needle coke production through hedging oil production, so they know their cost.

The profit to EAF is the difference between the negotiated rate, and the cost to produce the needle coke. Because they have both locked in, they know their margins and there can be no risk of increases in coke prices etc. for the duration of the contract.

Going forward, the way you make a contract is to 1) see what rate you can get from the customer, which depends on the current spot prices, 2) hedge your oil needs so your cost is known, 3) profit is the rate you get from the customer less the cost to produce (which is known).

Thus, contract profitability is driven by the spot price.

However, GE spot prices are driven by both supply and demand, but also by needle coke prices, so higher needle coke prices support higher GE spot prices, which in turn supports higher contract prices. Thus, the two move together, so you can think of them like a spread.


johnny

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Re: EAF - GrafTech
« Reply #39 on: December 15, 2018, 02:29:37 PM »
Has anybody given any thought to antitrust risk here? You have two players controlling ~75% of the needle coke market, needle coke price has been a ten-bagger in the past year, and both players keep blowing off questions about building new supply.

Before the acquisition of Seadrift, GrafTech actually had contractual audit-rights into Phillips' needle coke business to enforce an MFN clause. DOJ made them drop that, and any formal contracts between the two firms now get reviewed by DOJ. OK, cool.

Just concerned that there's a very obvious solution here where Phillips guarantees St Mary's supply in exchange for an assurance that Graftech won't expand production at Seadrift and possibly enter the coke market as a seller. I mean, I'm concerned that this solution is obvious and that the people negotiating the deal are going to get legally sloppy with it. Paranoid?