EAF - GrafTech

[Gregmal]

Bear market. People sell everything out of fear. Fundamentals no longer part of the equation.

 

Listening to many managers on TV, they all try to hide somewhere and almost all expect a bad economy in 2019. It now pays to be negative as they all have had a bad 2018 and their clients are not or will not be happy.

 

I don't own this stock but, I will be doing some research on it as it looks interesting.

 

Cardboard

 

Basically this.

 

All those turds who have been wrong for years, if not longer now get to gloat about being in the consensus but at the end of the day, you can't talk the economy into a recession, and barring one, there's a lot of companies out there that are very enticing right now. Sometimes the market goes stupid. Everyone thinks 2019 will be a lost year. If those predictions bear the same accuracy as one's we've heard from underperformers and analysts for the past decade, 2019 will turn out to be decent...Think with your brain, not your ears.

 

I'd also add that the Wall St crowd's obsession with the boogey man called "recession" is kinda stupid as well. Maybe companies that are operating at record profitability this year, earn 5% less next year... SO WHAT? What does Wall St say? Give em a 7x multiple.... Sheer stupidity.

[peterHK]

Bear market. People sell everything out of fear. Fundamentals no longer part of the equation.

 

Listening to many managers on TV, they all try to hide somewhere and almost all expect a bad economy in 2019. It now pays to be negative as they all have had a bad 2018 and their clients are not or will not be happy.

 

I don't own this stock but, I will be doing some research on it as it looks interesting.

 

Cardboard

 

Bringing it back to EAF, 2/3 of their revenue is contracted, and while some roll off this year there will be renewals.

 

The market thinks this business is WAY more cyclical than it actually is going to be over the next 4 years, and because of the small float, it can get pushed wildly around.

 

Basically this.

 

All those turds who have been wrong for years, if not longer now get to gloat about being in the consensus but at the end of the day, you can't talk the economy into a recession, and barring one, there's a lot of companies out there that are very enticing right now. Sometimes the market goes stupid. Everyone thinks 2019 will be a lost year. If those predictions bear the same accuracy as one's we've heard from underperformers and analysts for the past decade, 2019 will turn out to be decent...Think with your brain, not your ears.

 

I'd also add that the Wall St crowd's obsession with the boogey man called "recession" is kinda stupid as well. Maybe companies that are operating at record profitability this year, earn 5% less next year... SO WHAT? What does Wall St say? Give em a 7x multiple.... Sheer stupidity.

[valueinvestor]

???

Bear market. People sell everything out of fear. Fundamentals no longer part of the equation.

 

Listening to many managers on TV, they all try to hide somewhere and almost all expect a bad economy in 2019. It now pays to be negative as they all have had a bad 2018 and their clients are not or will not be happy.

 

I don't own this stock but, I will be doing some research on it as it looks interesting.

 

Cardboard

 

Basically this.

 

All those turds who have been wrong for years, if not longer now get to gloat about being in the consensus but at the end of the day, you can't talk the economy into a recession, and barring one, there's a lot of companies out there that are very enticing right now. Sometimes the market goes stupid. Everyone thinks 2019 will be a lost year. If those predictions bear the same accuracy as one's we've heard from underperformers and analysts for the past decade, 2019 will turn out to be decent...Think with your brain, not your ears.

 

I'd also add that the Wall St crowd's obsession with the boogey man called "recession" is kinda stupid as well. Maybe companies that are operating at record profitability this year, earn 5% less next year... SO WHAT? What does Wall St say? Give em a 7x multiple.... Sheer stupidity.

 

It's an incredible and lucrative phenomenon. I'm going to slowly rebuild my position, because although I have been in situations where it took two-to-three years of being underwater, before the market became optimistic, I'm not comfortable with the fact that it is a commodity company and the debt.

 

I still do not understand why it is hard to bring in additional needle coke and graphite electrodes supply, as I am just basing this on the words of Graftech and other reports, and not the source material.

 

However even with my ignorance, it looks stupid cheap, because even if there was enough demand or supply cuts that brought prices to down by 50%, they still make a 60% FCF margin. I wish Graftech includes in their presentation sometime in the future, how their company will look during a trough cycle, like how Fiat did.

 

It's trading at 6x net earnings after taxes, and even adding the debt to the market cap, it still trades at 9x net earnings after taxes without factoring growth or price increases as more than 2/3 of their contracts are based on prices that is 50% below the spot price. 

 

 

[peterHK]

As per Showa Denko's most recent call:

 

Q. It is said that spot prices of graphite electrodes

in Chinese market are going down. How are the

prices of graphite electrodes manufactured and

sold by your Sichuan subsidiary?

 

A. Prices of high power (HP) graphite electrodes for

ladle furnaces in China are stagnant. However, as

for ultra high power graphite electrodes which our

group company in China produces with high quality,

the situation is quite different. Prices of UHP

graphite electrodes with diameter of 24 inch or larger

in Chinese market remain high

 

From their Q2 call, they said that they think competitors are debottlenecking, but no new supply and IF there were it would take 3 years to build it (even in China).

[bjakes00]

How do you bring new petroleum needle coke onto the market (the key ingredient for the UHP-GE)? This is a small market with 4 players and Philips 66 has something like half (if not more) of the production. P66 and Graftech have 75% of production.

 

This stuff is produced in a complex refinery and a project to bring on more supply would be a significant cost and time outlay. I don't see how P66 would be incentivised to bring on more capacity given how profitable their current capacity is without significant off take agreements and a floor price. Otherwise they risk bringing on supply at a time when demand dries up.

 

There is also a route to produce UHP-GE via coal but I understand its only Showa Denko and maybe Tokai that can process this stuff:

https://www.m-chemical.co.jp/en/products/departments/mcc/coke/product/1201080_7940.html

EAF have an extremely advantaged position in the UHF-GE market.

[bjakes00]

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]

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]

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 bè exterbally sourced. 

 

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

[kab60]

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 bè 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]

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 bè 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 productioñ.

 

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.

[peterHK]

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 bè 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]

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 bè 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]

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]

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 bè 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]

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?

[valueinvestor]

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]

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]

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]

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?

 

 

 

 

[valueinvestor]

Thought this was interesting. I still think it does not apply to EAF, but we’ll see. I’m sure it’s 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]

Thought this was interesting. I still think it does not apply to EAF, but we’ll see. I’m sure it’s 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]

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]

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]

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.

 

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]

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.