Author Topic: EAF - GrafTech  (Read 49339 times)

valueinvestor

  • Sr. Member
  • ****
  • Posts: 327
Re: EAF - GrafTech
« Reply #40 on: December 17, 2018, 10:07:58 AM »
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?

Contractual audit-rights? MFN Clause? To say I'm not an expert is an understatement, but if you could elaborate more, I am more than happy to put in the time to see if it is a risk. Not sure how MFN Clauses applies really, but from what I'm interpreting, it prevented P66 at the time to provide needle-coke at better terms for other potential purchasers?


johnny

  • Hero Member
  • *****
  • Posts: 517
Re: EAF - GrafTech
« Reply #41 on: December 17, 2018, 01:16:50 PM »
Details aren't important. You understand the substance and, as you say, the audit rights were just to protect the pricing promises.

My point is more general: there's this very deep relationship between GrafTech and Phillips that predates GrafTech's absorption of their major competitor. We're being given a bull-case of decade plus secular growth in needle coke demand. And the two companies that make up 75% of its supply just blow-off the prospect of substantially increasing production as if only an idiot would ask about it.

This is, in-and-of-itself, only mildly eyebrow raising, I guess my real issue is that I haven't found any hard numbers to run the hypothetical of: "WE BUILD A NEW NEEDLE COKE FACILITY". I get that it's expensive, and that it's dirty, or whatever. But if somebody could make the clear case to me that the economics of building out new supply are actually Not Good, I think it'd help me abandon the conspiracy theory.

#needlegate

valueinvestor

  • Sr. Member
  • ****
  • Posts: 327
Re: EAF - GrafTech
« Reply #42 on: December 17, 2018, 02:11:03 PM »
Details aren't important. You understand the substance and, as you say, the audit rights were just to protect the pricing promises.

My point is more general: there's this very deep relationship between GrafTech and Phillips that predates GrafTech's absorption of their major competitor. We're being given a bull-case of decade plus secular growth in needle coke demand. And the two companies that make up 75% of its supply just blow-off the prospect of substantially increasing production as if only an idiot would ask about it.

This is, in-and-of-itself, only mildly eyebrow raising, I guess my real issue is that I haven't found any hard numbers to run the hypothetical of: "WE BUILD A NEW NEEDLE COKE FACILITY". I get that it's expensive, and that it's dirty, or whatever. But if somebody could make the clear case to me that the economics of building out new supply are actually Not Good, I think it'd help me abandon the conspiracy theory.

#needlegate

#needlegate - funny  :)

I have no idea on the economics of building out new supply, which is why my position may only be 15% of my portfolio maximum. However the graphite electrode manufacturers with considerable resources (forgot the names, but I'll see if I can get the information again) who announce they will be building out new manufacturing facilities, say it will take at least 2-5 years to get construction started (guess due to the regulatory hurdles and permits required), from what I read.


bjakes00

  • Newbie
  • *
  • Posts: 47
Re: EAF - GrafTech
« Reply #43 on: December 18, 2018, 01:12:20 PM »
You talking about Tokai or Showa Denko?

Would be epic if an industry expert could chime in on the technical and economic complexities of building out a delayed coker for needle coke production but that may be hoping for too much.

For those that are technically inclined (there are further citations at the bottom if you want to go down the rabbit hole): https://patents.google.com/patent/US3704224

This is the refinery where P66 has a delayed coker for the production of needle coke: https://www.phillips66.com/refining/lake-charles-refinery
I think they could expand this / debottleneck potentially but I have no idea how much time/capital that would require. I highly doubt they would build a new refinery just because needle coke prices are high - one would think that many stars would have to align before a new refinery build is on the table.

Gazprom is building a Delayed Coking Unit that is expected to be completed by 2020 (and started in 2017):
https://www.gazprom-neft.com/press-center/news/1120294/

Interestingly, it says that the petroleum coke is used in the Aluminium industry for smelting and makes no mention of Needle Coke. Seems like the needle coke tech is a tightly held secret but unclear if that's right?



« Last Edit: December 18, 2018, 01:30:18 PM by bjakes00 »

valueinvestor

  • Sr. Member
  • ****
  • Posts: 327
Re: EAF - GrafTech
« Reply #44 on: December 25, 2018, 02:37:27 PM »
Thought this was interesting. I still think it does not apply to EAF, but well see. Im sure its stull a show me story and it will definitely show in a couple of quarters.

https://www.cnbc.com/2018/12/22/reuters-america-china-carbon-industry-to-face-severe-overcapacity-association.html

peterHK

  • Full Member
  • ***
  • Posts: 239
Re: EAF - GrafTech
« Reply #45 on: December 26, 2018, 06:41:24 PM »
Thought this was interesting. I still think it does not apply to EAF, but well see. Im sure its stull a show me story and it will definitely show in a couple of quarters.

https://www.cnbc.com/2018/12/22/reuters-america-china-carbon-industry-to-face-severe-overcapacity-association.html

High grade GE needs needle coke:

"However, despite the capacity expansion, China will still face tight supply of high-quality carbon products such as needle-coke, which is used to make lithium-ion batteries."

GE prices are usually based on needle coke plus a spread, thus tight needle coke supports tight GE.

heth247

  • Hero Member
  • *****
  • Posts: 615
Re: EAF - GrafTech
« Reply #46 on: December 30, 2018, 12:35:58 PM »
High grade GE needs needle coke:
"However, despite the capacity expansion, China will still face tight supply of high-quality carbon products such as needle-coke, which is used to make lithium-ion batteries."
GE prices are usually based on needle coke plus a spread, thus tight needle coke supports tight GE.

I thought it is the demand of GE that drives the price of needle coke up, not the other way around. I mean, the needle coke supply has always been there limited, how come the last down turn started?

Reading the latest 10Q, there is a section of "Global economic conditions and outlook" that gives good information of how the 2011-2016 downturn started and ended. I mean, needle coke price jumped in 2017 because GE demand is back due to EAF back on growth, which was the results of China cutting steel export, reducing BOF capacity, and scrape steel price coming down.

Going forward, I think the main driver/risk is still the demand for EAF for steel industry. Needle coke price alone (due to lithum battery) will not prop up the GE price, if the demand of EAF is going down due to an economic downturn. Maybe that is what the market is worrying about?

Here is another VIC writeup -
https://valueinvestorsclub.com/idea/GRAFTECH_INTERNATIONAL_LTD/2383790419

valueinvestor

  • Sr. Member
  • ****
  • Posts: 327
Re: EAF - GrafTech
« Reply #47 on: December 30, 2018, 01:25:29 PM »
High grade GE needs needle coke:
"However, despite the capacity expansion, China will still face tight supply of high-quality carbon products such as needle-coke, which is used to make lithium-ion batteries."
GE prices are usually based on needle coke plus a spread, thus tight needle coke supports tight GE.

I thought it is the demand of GE that drives the price of needle coke up, not the other way around. I mean, the needle coke supply has always been there limited, how come the last down turn started?

Reading the latest 10Q, there is a section of "Global economic conditions and outlook" that gives good information of how the 2011-2016 downturn started and ended. I mean, needle coke price jumped in 2017 because GE demand is back due to EAF back on growth, which was the results of China cutting steel export, reducing BOF capacity, and scrape steel price coming down.

Going forward, I think the main driver/risk is still the demand for EAF for steel industry. Needle coke price alone (due to lithum battery) will not prop up the GE price, if the demand of EAF is going down due to an economic downturn. Maybe that is what the market is worrying about?

Here is another VIC writeup -
https://valueinvestorsclub.com/idea/GRAFTECH_INTERNATIONAL_LTD/2383790419

The investment thesis does not exclude the possibility of EAF demand going down, but rather if EAF demand goes down, then it does not really affect Graftech. As they are one of the few that manufactures Ultra High-Quality Graphite Electrodes, one of fewer that produces their own supply of Needle Coke, and if prices crash by 50% their net profit margins are still 40% and ebitda margins at 65%.

For this thesis to not work out, prices would have to crash by almost 80%. However, even if the company is not affected, it does not mean the company's security would not inevitably go down in price. Hence, position sizing is key.

I really do wonder why Brookfield invested in the first place? Maybe the purchase price of Graftech limited their downside to almost zero? I do not see them foreseeing the massive increase in price at all such as China's restructuring... any chance anyone knows?

heth247

  • Hero Member
  • *****
  • Posts: 615
Re: EAF - GrafTech
« Reply #48 on: December 30, 2018, 04:54:57 PM »
The investment thesis does not exclude the possibility of EAF demand going down, but rather if EAF demand goes down, then it does not really affect Graftech. As they are one of the few that manufactures Ultra High-Quality Graphite Electrodes, one of fewer that produces their own supply of Needle Coke, and if prices crash by 50% their net profit margins are still 40% and ebitda margins at 65%.

For this thesis to not work out, prices would have to crash by almost 80%. However, even if the company is not affected, it does not mean the company's security would not inevitably go down in price. Hence, position sizing is key.

I don't disagree with that. I like the fact that they are 60% hedged, hopefully it will increase to 75% later. That will really make the margin of safety bigger.

Quote
I really do wonder why Brookfield invested in the first place? Maybe the purchase price of Graftech limited their downside to almost zero? I do not see them foreseeing the massive increase in price at all such as China's restructuring... any chance anyone knows?

Maybe buying the lowest-cost + the only vertically integrated producer at the bottom of the cycle was their idea?

valueinvestor

  • Sr. Member
  • ****
  • Posts: 327
Re: EAF - GrafTech
« Reply #49 on: December 31, 2018, 07:51:05 AM »
If my memory serves me right, I think they acquired seadrift, after they acquired Graftech. However I still think you're in the right direction, but there must of been an "aha" moment, such as they were purchasing it below replacement cost.