- GrafTech benefits from a global push to decarbonize steelmaking which is driving new capacity in electric arc steelmaking.
- Owning your own input commodity is a strategic advantage as others cannot guarantee production nor guarantee a profit on an order.
- The market is worried about recession which could result in some short-term pain to the industry.
- We own EAF at 11-16% FCF yield and presume no new long-term contracts are signed.
The following segment was excerpted from this fund letter .
GrafTech ( EAF )
GrafTech manufactures graphite electrodes in North America and Europe. The electrodes are necessary to produce electric arc furnace steel, a more environmental process than blast furnace production. EAF benefits from a global push to decarbonize steelmaking which is driving new capacity in electric arc steelmaking.
EAF can self-source their main input, pet-needle coke, through their Seadrift subsidiary. Pet-needle coke is increasingly going to be in short supply as it is an important input commodity for electric vehicle battery production. Owning your own input commodity is a strategic advantage as others cannot guarantee production nor guarantee a profit on an order.
EAF is in a unique position. Their product helps steelmakers emit less greenhouse gases which helps drive the topline. They can guarantee their product as they know 2/3 of their capacity can be covered by Seadrift.
The market is worried about recession which could result in some short-term pain to the industry. Another area of concern are long-term-agreements (LTA's) which are starting to roll off. Bears are concerned that as the business shifts to the spot market, the margins will decline. I will concede that historical margins are unlikely to be repeated but it seems likely new LTA's will be signed.
Recall our earlier discussion on scarcity. Their competitors DO NOT have control of their input costs…this advantage will become more pronounced as pet needle coke becomes scarcer as EV production ramps up. That should lead to higher top-line prices and healthy margins for EAF.
I conservatively think we own this business at 11-16% FCF yield and presume no new long-term contracts are signed. In time new LTA's will be signed and the business should achieve a more appropriate valuation.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
For further details see:
Black Bear Value Fund - GrafTech: Unique Strategic Advantage, 11-16% FCF Yield