GrafTech Worldwide Ltd. (NYSE:EAF) Q2 2022 Earnings Convention Name August 5, 2022 10:00 AM ET
Michael Dillon – Vice President, Investor Relations
Marcel Kessler – Chief Government Officer and President
Jeremy Halford – Government Vice President and Chief Working Officer
Timothy Flanagan – Chief Monetary Officer, Vice President Finance and Treasurer
Convention Name Contributors
David Gagliano – BMO Capital Markets
Curt Woodworth – Credit score Suisse
Arun Viswanathan – RBC Capital Markets
Alexander Hacking – Citi Funding Analysis
Good morning, girls and gents, and welcome to the GrafTech Second Quarter 2022 Earnings Convention Name and Webcast. Presently, all strains are in a listen-only mode. Following the presentation, we’ll conduct a question-and-answer session. [Operator Instructions] This name is being recorded right this moment, Friday, August fifth, 2022.
I’d now like to show the convention over to Mike Dillon. Please go forward, sir.
Thanks. Good morning, and welcome to GrafTech Worldwide’s second quarter 2022 earnings name.
On with me right this moment are Marcel Kessler, Chief Government Officer; Jeremy Halford, Chief Working Officer; and Tim Flanagan, Chief Monetary Officer. Marcel will start with a couple of opening feedback, after which Jeremy will focus on security, gross sales and operational issues. Tim will overview our quarterly outcomes and different monetary particulars. Marcel will shut with feedback on our outlook. We’ll then open the decision to questions.
Turning to our subsequent slide. As a reminder, a few of the issues mentioned on this name could embrace forward-looking statements relating to, amongst different issues, efficiency, traits and methods. These statements are primarily based on present expectations and are topic to dangers and uncertainties. Elements that would trigger precise outcomes to vary materially from these indicated by forward-looking statements are proven right here.
We may even focus on sure non-GAAP monetary measures, and these slides embrace the related non-GAAP reconciliations. You discover these slides within the Investor Relations part of our web site at www.graftech.com. A replay of the decision may even be obtainable on our web site.
I am going to now flip the decision over to Marcel.
Thank You, Mike. Good morning, everybody. Thanks for becoming a member of our second quarter earnings name. Beginning on a private word, I’m excited to have joined GrafTech at this essential time, and I’m honored to have the chance to steer the corporate via its subsequent part of evolution.
I used to be drawn to GrafTech as a result of I see a set of distinctive belongings and capabilities that give me confidence in our means to ship shareholder worth over the long-term. I consider that we’re well-positioned to take part within the development of the graphite electrode market and have a promising basis to probably pursue different avenues of development sooner or later. Throughout my first few weeks at GrafTech, I’ve had the chance to get to know lots of our associates and I am very impressed by their degree of know-how, power and dedication.
Turning to the second quarter. We’re happy to have delivered ends in the interval regardless of the challenges introduced on by geopolitical battle and financial uncertainty. Our means to maintain key working and monetary metrics akin to prior 12 months ranges is a testomony to our operational execution and aggressive benefits. I want to thank the whole GrafTech staff for his or her arduous work.
I’ll now flip the decision over to Jeremy for an replace on security, gross sales and operational efficiency.
Thanks, Marcel and good morning, everybody. I am going to begin my feedback with a quick replace on well being and security excellence, which is a core worth at GrafTech as persons are our most essential asset.
We stay inspired that our total efficiency on this space continues to position us within the prime quartile of operators within the broader manufacturing trade. Nonetheless, our year-to-date reportable incident fee via the tip of the second quarter compares unfavorably to the previous two years, and we’re not glad with this outcome. Going ahead, we are going to proceed to emphasise that security have to be elementary to every thing we do and that key security initiatives have to be prioritized. We’ll stay steadfast in working towards our final objective of sending each worker residence safely each day.
Turning to slip 5. Let me present a couple of information factors on second quarter metal trade efficiency as context for our outcomes. International metal manufacturing, excluding China, declined 6% within the second quarter in comparison with the identical interval in 2021. Commensurate with that decrease manufacturing, world capability utilization charges additionally declined, however stay according to the trade common for the previous a number of years. We’re more and more seeing diverging metal trade traits in numerous geographic areas. This contains softness in metal markets comparable to Western Europe, reflecting, amongst different issues, the financial and provide chain impression of the battle between Ukraine and Russia. Conversely, the U.S. metal market has proven extra resilience as evidenced by utilization charges that stay elevated in comparison with the worldwide trade.
Turning to our second quarter efficiency, beginning on slide six. Our second quarter manufacturing quantity elevated 1% year-over-year to 44,000 metric tons as our crops proceed to function at excessive ranges of capability utilization. We offered 42,000 metric tons of graphite electrodes within the quarter, representing a slight decline each year-over-year and sequentially, reflecting the amount impression of the Ukraine/Russia battle.
Our second quarter electrode shipments have been comprised of 24,000 metric tons offered below our LTAs at a weighted common realized worth of $9,600 per metric ton and 18,000 metric tons of non-LTA gross sales at a weighted common realized worth of $6,000 per metric ton. This non-LTA pricing represented a 46% enhance over the second quarter of 2021 and was according to the primary quarter of 2022, per the expectations we offered on our first quarter earnings name. As we proceed via the rest of the 12 months, we count on our weighted common non-LTA pricing for the second half to be akin to the pricing realized within the first half of 2022.
Web gross sales within the second quarter have been $364 million, representing a rise of 10% in comparison with the second quarter of 2021. This mirrored the upper non-LTA pricing, partially offset by a combination shift from LTA to non-LTA enterprise, in addition to the decline in total gross sales quantity.
FX additionally had a barely unfavorable impression on our year-over-year and sequential web gross sales efficiency in the course of the second quarter. This primarily displays the strengthening U.S. greenback versus the euro and Japanese yen, as a portion of our gross sales are denominated in these and different foreign currency. Nonetheless, the FX prime line headwind is greater than offset on the underside line by a profit to COGS associated to euro denominated spending in our European operations.
Let me now flip it over to Tim to cowl the remainder of our monetary particulars.
Thanks Jeremy and good morning to everyone on the decision.
Web revenue totaled $115 million within the second quarter or $0.44 of earnings per share on each a GAAP and adjusted foundation. Second quarter adjusted EBITDA was $158 million, a lower of 1% in comparison with the second quarter of 2021, as greater year-over-year prices offset the rise in web gross sales. Adjusted EBITDA margin was 44% within the second quarter.
Let me take a minute to broaden briefly on our prices. With practically all different industries, we proceed to be impacted by world inflationary pressures, which is especially acute in Europe, pushed by greater power costs. Particular to our enterprise, the impacts are most important for sure key uncooked supplies, power and freight.
For the second quarter, we skilled a year-over-year enhance of roughly 21% and acknowledge COGS per metric ton, excluding depreciation and amortization. This represented a 7% sequential enhance in comparison with the primary quarter of 2022. We count on sequential price inflation to persist at an analogous fee within the third quarter. That being mentioned, we proceed to focus prudently on managing our working and discretionary spending, as we navigate the present inflationary surroundings.
Turning to money circulation. Within the second quarter, we generated $60 million of money from operations and $48 million of adjusted free money circulation. Each measures decreased in comparison with the second quarter of 2021, reflecting greater working capital. This greater working capital was pushed by a rise in stock, reflecting each the associated fee impression I simply spoke to, in addition to greater portions as manufacturing quantity outpaced gross sales within the first half of 2022.
Stock builds occurred in the course of the second quarter prematurely of deliberate third quarter outages at our European electrode amenities and our Seadrift needle coke manufacturing facility. Additionally in anticipation of upcoming outages of sure oil refineries that offer decant oil. Moreover, early within the second quarter in response to market disruptions associated to the battle in Ukraine, on-hand portions for sure uncooked supplies which are important to our manufacturing course of have been elevated above our typical security inventory ranges.
These actions have been taken proactively to allow us to fulfill the electrode provide wants of our clients regardless of the present uncertainties within the world provide chain. As we transfer past the outage home windows within the third quarter and as our visibility within the provide chain continues to extend, we anticipate starting to unwind the stock construct as we proceed via the again half of 2022.
Turning to slip eight. We additional strengthened our stability sheet with a $40 million discount in our time period mortgage in the course of the second quarter, leading to a complete debt paydown of $110 million on a year-to-date foundation. Our debt-to-adjusted EBITDA ratio was 1.4 occasions as of June 30 in comparison with 1.6 occasions on the finish of 2021.
In the course of the second quarter, we executed an modification to our revolving credit score facility, which elevated our borrowing capability by $80 million for a brand new whole capability of $330 million. We ended the quarter with whole liquidity of roughly $382 million, consisting of $56 million of money and $326 million obtainable below the revolver.
Now on to slip 9. Sustaining a prudent and disciplined capital allocation technique stays a precedence. This features a continued give attention to decreasing debt to additional strengthen our stability sheet and assist our strategic flexibility whereas additionally returning capital to our stockholders and investing in our enterprise.
In the course of the second quarter, we repurchased $30 million of our widespread inventory, leading to a complete of $60 million repurchased via the primary half of 2022. We ended the quarter with $99 million remaining obtainable below our inventory repurchase program. As well as, we proceed to count on our 2022 capital expenditures to be within the vary of $70 million to $80 million.
Because the trade strikes in direction of extra EAF-based metal manufacturing, we are going to proceed to put money into our top quality, low price world working belongings to fulfill the rising demand that the shift will create over the long-term. We’ll stay prudent in managing our CapEx spend, prioritizing these tasks with the best return on funding.
Now, let me flip it again to Marcel for his perspective on the outlook.
Thanks, Tim. As is the case for many manufacturing-based sectors at this cut-off date, the working surroundings for the metal trade stays unstable. International metal costs have retreated from current highs and world metal manufacturing, excluding China, declined 6%, each within the second quarter and year-to-date in comparison with the identical interval in 2021. As Jeremy indicated, we proceed to see diverging metal trade traits in numerous geographical areas, we’re softening in sure markets comparable to Western Europe, whereas different markets comparable to the USA has been extra resilient.
For GrafTech, the near-term outlook is turning into tougher with greater uncooked materials, power and logistics prices, in addition to the impression of the continued battle between Russia and Ukraine. On the identical time, the shift in combine from LTA to non-LTA enterprise continues.
To get forward of those near-term challenges, we proceed to strengthen our industrial capabilities, prudently handle working and capital expenditures, and we are going to proceed to give attention to decreasing our long-term debt. We may even proceed to put money into our product and repair capabilities to be optimally positioned to take part in the long term demand development for graphite electrodes.
We stay assured that the metal trade is accelerating efforts to decarbonize will result in additional development within the electrical arc furnace methodology of steelmaking, driving demand for graphite electrodes. To that time, bulletins of deliberate EAF capability additions by metal producers throughout the trade might end in annual incremental graphite electrode demand over 200 metric [ph] tons globally, excluding China, by 2030. As a frontrunner within the graphite electrode trade, this helps our constructive long-term outlook for our enterprise.
We additionally anticipate the demand for petroleum needle coke, a key uncooked materials used to speed up batteries for the rising [technical difficulty] petroleum needle coke as one other constructive long-term development for our enterprise as greater demand will end in continued fee of pricing for needle coke. Our vertical integration into petroleum needle coke manufacturing through our Seadrift’s facility is foundational for our means to reliably ship top quality graphite electrodes. With these sustainable aggressive benefits and the robust and dedicated staff, we’re assured in our means to ship shareholder worth over the long-term.
That concludes our ready remarks. We’ll now open the decision for questions.
Thanks, sir. Girls and gents, we are going to now start the question-and-answer session. [Operator Instructions]
Your first query comes from David Gagliano of BMO. Please go forward.
Hello. Thanks for taking my questions. I simply wished to ask a couple of operational kind of questions first, only a clarification on the near-term. Initially, on the pricing, I consider the commentary was comparable pricing within the spot market second half versus first half. I believe traditionally or current traditionally, the commentary was there’s a couple of six to nine-month lead time clearly spot, however there’s lead occasions related to it. And the commentary was expectations for costs to proceed to enhance within the second half. So — I consider — so now the remark being flat, is that as a result of more moderen contracts being — or volumes being signed or being signed at decrease costs. Are you able to simply give a bit of extra shade on the pricing dynamic that you simply’re seeing proper now within the spot market?
Yeah. Positive. Thanks Dave, and I recognize your query. Actually, numerous this comes right down to some macro components, simply provided that the world economic system has been fairly dynamic and there is a wide range of market forces that work in numerous areas. And most notably, what is going on on within the Ukraine/Russia state of affairs and the impression that is having on power costs, we’re seeing issues which are diverging regionally. And it is essential to acknowledge that the anticipated pricing that we’re speaking about here’s a world common.
As we mentioned within the remarks, we’re seeing some continued resilience in sure areas and softness in others. And primarily, what’s occurring is that this softness is manifesting itself in a wide range of alternative ways, together with bulletins by steelmakers, notably these in Europe that they are avoiding operations throughout sure peak energy occasions or they’re extending their deliberate summer season outages as a consequence of excessive energy prices. And so these lowered working charges are having the impression of accelerating electrode stock at sure clients, notably in Europe, and consequently decreasing demand within the short-term, finally making use of some downward strain on pricing in sure areas that’s past what we had anticipated earlier. So, this has actually restricted a few of the worth escalation that we have been beforehand anticipating.
It is also price noting that FX is taking part in a job right here. As you realize, we report in USD. And we have seen a fairly dramatic run-up within the worth relative to the euro and the Japanese yen. And so, provided that a few of our gross sales are contracted in euro and yen, worth will increase that we anticipated on these gross sales in native foreign money do not essentially report in — do not translate into reported worth will increase on a USD foundation. However having mentioned that, I believe it is essential to notice that it is a short-term impression.
Over the medium time period and long-term, we stay very bullish on our core markets. And we consider that the worth proposition of the EAF course of to assist decarbonize. The steelmaking trade is simple, and that is being borne out within the numerous new EAF tasks which were introduced globally for the approaching years. As Marcel famous, we’re monitoring over 150 new EAF tasks within the time interval via 2030, that may generate 200,000 tons of incremental electrode demand throughout that timeframe. And these new furnaces are going to require the most recent and best in electrode know-how, and we consider that our worth proposition to assist these excessive effectivity EAFs via our product know-how, our — and our means to vow stability of provide via our vertical integration via Seadrift is basically going to be shifting numerous these market dynamics in our favor.
Okay. That is useful. Thanks for that reply. And simply to follow-up on the commentary, clearly, it sounds cautious within the near-term. Traditionally, GrafTech has been a frontrunner at factors by way of meaningfully decreasing volumes in a weaker demand surroundings. Contemplating the state of affairs now, are you able to communicate extra particularly to second half — or third quarter and second half quantity expectations? How low will GrafTech take its volumes within the second half of this 12 months?
Thanks Dave. Recognize it. Yeah. As we discuss concerning the second half of the 12 months, definitely I believe if we take a look at our contracted gross sales. We offered the steering for the total 12 months on the LTA quantity. And clearly, we now have to ship in opposition to these volumes, and the order ebook is in any other case fairly full within the again half of the 12 months on the non-LTA facet as effectively.
I suppose, the query at all times turns into, and we have talked or alluded to in a few of our commentary concerning the efforts to interchange the impacted tons due to the battle within the Ukraine, these have to return out in a worthwhile method. So, as we take a look at the tip of the 12 months and definitely, the escalating prices in Europe, we’re taking a look at these on an order-by-order foundation to be sure that they’re worthwhile. However so long as we proceed to promote tons as worthwhile, we’ll ship as many tons as we will within the again half of the 12 months. And we’ll — from an operational standpoint, we’ll proceed to match our manufacturing to that gross sales demand, proper? And be sure that we now have enough graphite electrode inventories on-hand on the finish of the 12 months as we head into the primary quarter of subsequent 12 months as effectively.
Okay. So, once you put all that collectively, what’s cheap? If I look again the final — no matter again to 2018, 3Q is, particularly, volumes have been beneath. Clearly, there’s some difficult occasions there, however volumes went right down to 32,000 tons in 2020, 39,000 final 12 months. Is it cheap to be inside these two zones for 3Q, 32,000 to 39,000, someplace in that band?
No, I’d suppose we’d count on definitely as we glance to the again half of the 12 months to be extra according to the place we have been, not happening to the extent that you simply quoted in 2018 or what we noticed even final 12 months.
Okay. That is useful. Thanks. After which only one final one for me. Simply on the long term, we’re getting nearer, clearly, 4 months, 5 months away from the tip of the — from the significant wind down. And a market would not sound nice. What is the up to date ideas on extending the LTAs? And is there truly any negotiations occurring alongside these strains for 2023, 2024 and past.
Thanks for that query, Dave. It is Marcel right here. So, possibly, to begin with, it is essential to level out that GrafTech has been offering graphite electrodes for a really very long time earlier than coming into into any LTAs. So, I believe, we’re totally ready to deal with this transformation.
Now, we proceed to consider that there’s a function that multi-year agreements will play in our portfolio. And they could be a win-win for our clients and for us, offering our clients with a hedging mechanism and surety of provide whereas locking in a portion of our money circulation. So, I believe, as we transfer ahead right here, we are going to look to supply our clients a wide range of contract phrases tailor-made to their wants.
Particularly to your query, so we now have had discussions with some clients already, and we would count on to have some new multi-year agreements in place by the tip of this 12 months and into subsequent 12 months. Now, generally, we’d count on these new agreements to be primarily based on the present market situations on the time that they’re that they are entered into, though we could contemplate a wide range of pricing constructions that swimsuit the wants of each us and our clients.
Nonetheless, it is very important word that whereas we are going to proceed to supply multi-year agreements as an essential a part of our commercialization technique and worth proposition, we don’t anticipate that they’ll make up nearly all of our portfolio shifting ahead.
Okay. That’s useful. Thanks very a lot.
Your subsequent query comes from Curt Woodworth of Credit score Suisse. Please go forward.
Yeah. Thanks. Good morning.
So, with respect to the third quarter, it looks as if volumetrically, you are guiding roughly flattish and pricing mainly the identical on non-LTA. So, from a price perspective, are you able to discuss via the way you see price development within the quarter? You talked about you are going to have an outage in your — an outage at Seadrift, so I assume then you’ll be able to have to purchase in additional third-party coke. After which you will have inflationary pressures on prime of that. After which, I’d are likely to assume that the service provider coke worth could be going up sequentially as effectively. So, are you able to stroll via a few of these shifting items simply to assist us get a bit of bit higher gauge on the third quarter? Thanks.
Yeah. No, thanks, Curt, for that. And I believe there’s about six questions or factors in there. However I’d strive to ensure I hit all of them. So, because it pertains to the outages, definitely, these are our deliberate actions. We take down our European operations yearly, and this coincides with numerous vacation intervals for our of us over in Europe and we do numerous upkeep and restore work throughout that point.
After which, additionally Seadrift, we do a biannual turnaround and main upkeep actions down at Seadrift. So, in our ready remarks, I commented on the stock construct that we had that was executed twofold. One, to ensure we had the graphite electrode stock to ship to our clients all through the third quarter and never have any disruption in provide definitely. However then additionally ensuring that we now have enough needle coke on-hand as we proceed to provide within the again half of the third quarter, if you’ll. So, numerous that’s already in our outcomes and in our money flows, if you’ll. After which we’ll proceed to work that down via the again half of the 12 months.
On the associated fee facet, yeah, definitely, inflationary forces have impacted us and can proceed to impression us. I believe we’re taking a look at sequential price enhance of roughly 7% according to the place we have been Q1 to Q2. And it is actually pushed on a few key areas. Initially, European energy worth, proper? General, power is a comparatively small piece of our total portfolio of prices and we’re largely mounted in Europe. For power, we’re at in all probability 80% mounted on the facility facet, 65% mounted on the fuel facet. However in the event you take a look at the volatility of the fuel market in Europe proper now, the Dutch TTF has swung from €110 a megawatt hour to the place it is sitting right this moment at $200 a megawatt hour during the last 4 months. So, even with having as a lot that we now have hedged, these wild swings are going to have an effect on our outcomes.
We talked about uncooked supplies. And definitely, if we take into consideration pitch, which is, once more, a key factor within the manufacturing of an electrode. The battle in Ukraine disrupted the European pitch market within the latter a part of Q1 and into Q2. And whereas we have stabilized that offer chain and locked within the provide that we’d like, that pitch pricing and the related logistics with it have definitely gone up. Decant oil that trades off of Brent and a selection over Brent, and people markets have continued to extend. So, regardless of our hedges, we’re nonetheless seeing some price inflation on the decant facet. I suppose, commenting that we won’t hedge 100% of your want, and we won’t hedge that unfold over Brent to what decant is traded at.
After which final level on price, logistics, proper? I believe, logistics pricing stays elevated or continues to raise for sure routes and specifically, that impacts us is North America to Europe and vice versa, and reliability of logistics stays at an all-time low. So — these are possibly a bit of little bit of shade on a few of the price headwinds that we’re going through, however we proceed to work to mitigate that one of the best we will.
And I believe your final remark or query was round third-party needle coke. And I believe on the needle coke facet, if we take a look at the import statistics that we regularly reference on these calls. And once more, I am going to simply remind they’re a month or so dated, and they’re only a reference level. However you are buying and selling at a variety of $2,600 to $2,900 a ton, which is up, name it, $300 a ton on the high-end. So, we proceed to see will increase in needle coke via the primary half of the 12 months as anticipated and anticipated. We could also be seeing a bit of little bit of plateauing right here within the near-term, however that is form of what we’re seeing from a needle coke perspective at this cut-off date.
Nice. Tremendous useful. After which, you made — your feedback on petroleum coke and form of the interaction and the lithium-ion battery. I imply, there’s numerous debate, I believe, across the final mixture of each the pure versus artificial graphite element within the anode. After which even throughout the artificial piece, the mixture between petroleum coke or coal tar pitch coke. So, I simply need to see, do you will have a view on form of the composition and the evolution of that market? Would you will have any curiosity long-term by way of entering into the service provider EV market, we clearly noticed the deal that PSX introduced with NOVONIX.
Yeah. So, glad to touch upon that. As we take into consideration the lithium-ion battery house, it is clear that that is going to be an enormous driver of needle coke consumption as I believe — as I believe you are conscious. Whatever the battery chemistry, after we talked concerning the cathode, whether or not it’s lithium-ion phosphate or nickel manganese cobalt or no matter, in each case, the anode is graphite. And so inside that, as we see the EV adoption persevering with to extend, that is going to drive a rise within the quantity of lithium-ion batteries which are offered.
And the opposite factor that we’re seeing is a continued development within the megawatt hours of the batteries which are going into these EVs. And so, after we put all of that collectively, actually what it is telling us is that between now and 2030, we count on a couple of 23% compound annual development fee within the quantity of artificial graphite and consequently needle coke, that is being consumed in that market.
So, it is going to be a significant driver of the underlying economics within the needle coke world. Whether or not or not we finally select to take part in that house is one thing that we’re exploring presently — in form of extra to return on that. However to your level, Curt, the — that is clearly a driver of needle coke and needle coke’s consumption. And we expect that, that’s going to proceed to be supportive of our worth proposition as we go ahead, and our rivals must more and more depend on — pardon me — rely completely on third-party sources of that needle coke whereas we can provide our clients — our electrode clients surety of provide given the — given our vertical integration.
Nice. Thanks very a lot. That’s all I’ve.
Your subsequent query comes from Arun Viswanathan of RBC Capital Markets. Please go forward.
Nice. Thanks for taking my query. Yeah. Simply choosing up that final line of questioning and I suppose form of concerning one thing you mentioned earlier so far as utilization charges. So, what’s the capability that GrafTech has to probably dial again its personal utilization charges? The place are you guys working, I suppose, throughout your completely different amenities, throughout your system? And simply curious, in the event you’ve made some acutely aware choices to scale back charges in Europe? After which, additionally simply given the discount in metal utilization charges that you simply referenced, after which in that case, would you have the ability to redirect a few of that needle coke quantity probably into the EV market and probably begin that course of. I am positive you are early on in that exploration, however simply need to get your ideas on that. Thanks.
Okay. Yeah. So nice query, and thanks, Arun. So, beginning with a dialogue about utilization charges in our factories in Europe, the place our factories generally, as we have mentioned traditionally, we have about 200,000 tons of capability that we might moderately count on to have working at 90% of capability. And so that might say roughly 45,000 tons in 1 / 4. There’s a bit of little bit of seasonality to that. However provided that we’ll take issues down for a few weeks within the third quarter. So that might inform you that we’re persevering with to run our factories fairly arduous proper now with a view to be certain that we shield our clients. As we go ahead, we’re repeatedly monitoring the underlying economics of working these factories and evaluating these economics to our means to command worth on the promoting facet. And we’ll make prudent choices as this progresses, and we’re promoting incremental tons.
And so — happily, if we return in time a bit of bit, we have actually dialed up numerous our give attention to ESG initiatives and specifically, the environmental facet of issues. And so, we do have some issues that we have been doing to enhance the power effectivity of our amenities across the globe, however I am speaking particularly about Europe proper now. And a few of these investments that we have been making primarily for environmental functions, now command or now generate a fairly substantial financial return given the value of fuel and the place it is going.
And so, as we take into consideration how we run our factories and the way we prioritize our enterprise, we count on that as we glance into the medium time period, we are going to begin seeing some profit from investments that have been initially made extra for environmental causes, will now be producing fairly robust monetary outcomes for us as effectively.
Coming again round then to the — your query about our means to provide extra needle coke in Seadrift and our means to probably get into the lithium-ion battery world, we — I believe we have mentioned earlier than that form of the headline capability at Seadrift is about 140,000 metric tons. And provided that our inner consumption is meaningfully greater than that we do purchase third-party coke from a wide range of locations. And in order that does give us some strategic flexibility if we have been to resolve to get into that house to make use of a few of our inner capability to check that market, whereas persevering with to make the most of third-party sources for a few of our inner utilization as we supply that ahead.
So, I hope I touched on all factors of your query, however glad to go deeper someplace if you would like.
Nice. No, that was very useful. After which, I suppose, I additionally wished to clearly get your ideas on the markets in electrodes and needle coke as effectively. So, you famous that there is been some pullback in metal utilization charges inflicting some stock construct on the electrode facet and a few impression on pricing. How lengthy do you suppose that may final? I imply, do you suppose we’re form of within the early phases of that, simply given what is going on on with demand and the macro facet. And I suppose, has it impacted needle coke as effectively? Might you simply touch upon the place costs are in needle coke within the spot market? And in the event you see that additionally form of within the early phases of that stock construct.
Nicely, I’ll — it is Marcel right here, Arun. Possibly one remark and I’ll go again to Jeremy for the specifics on the needle coke, I believe. Simply reinforcing our earlier feedback, proper, we’re presently in an working surroundings that does stay very unstable. And whereas we stay optimistic concerning the long-term fundamentals of our enterprise, there’s near-term uncertainty within the broader market, is the rationale why we are going to chorus from offering extra specifics on our 2022 outlook presently.
However Jeremy, is there something you need to add extra particularly on the query for needle cock pricing?
Yeah. So, I believe, what we have seen — I believe, Tim referenced that we have seen a couple of $300 run-up in third-party needle coke costs primarily based on the import export statistics that we monitor. So, regardless of the softening of the market in sure areas of the world, we expect that needle coke pricing is elevated in comparison with the place it has traditionally been. However we expect that as we take a look at the varied components which are going to have an effect on it, we expect that there is a minimum of assist for the present ranges and sure room to develop even from the place they’re at proper now. And so, primarily, what — the way in which I’d characterize it’s that any demand slowdown that we’re seeing on the graphite electrode facet is being greater than made up for on the lithium-ion battery facet. And so, our anticipation is that we’ll proceed to see power within the needle coke costs.
Nice. Thanks. After which, I suppose, the final query I had was simply on — within the needle coke market. Have you ever seen different electrode producers utilizing pitch needle coke to make extremely excessive efficiency electrodes? Simply curious if there’s any observations you have had possibly probably with capability in China or elsewhere? Has there been any innovation to make UHPs from pitch needle coke? And is that additionally inflicting further provide available in the market?
Yeah. So, one other nice query. I recognize that. The — as we take a look at our rivals and what they’re doing, clearly, we’re not inside their manufacturing facility. So, we do not know for positive what they’re doing with pitch primarily based needle coke. What — we ourselves have checked out this previously as excited about pitch primarily based needle coke and have concluded that it was not appropriate for us and our purposes, primarily given some chemistry points inside it and what it could do to our processing occasions that might drive a major quantity of inefficiency in our manufacturing course of to have the ability to make a UHP electrode utilizing our course of. It might definitely be executed, however we do not suppose that it may very well be executed in as environment friendly a way as we’re in a position to accomplish with petroleum primarily based needle coke.
Good. Thanks lots. I’ll flip it over.
Your subsequent query comes from Alex Hacking of Citi Analysis. Please go forward.
Yeah. Hello. Good morning. I’ve two or three follow-up questions, if that is okay. So, on the — I suppose, the associated fee facet, the manufacturing facet, are there significant price differentials opening up between your manufacturing amenities in Europe and Monterrey. And is there some extent the place it type of is smart to shift your working footprint a bit of bit, transfer volumes extra in direction of North America, even contemplate reopening St. Mary’s, or the associated fee differential will not be that nice.
Yeah. So, thanks, Alex. I recognize that query. And I am going to take the primary half after which let Jeremy deal with the working portfolio. Definitely, there are price differentials between all of our websites, proper, by way of the areas we function. North American power costs are considerably decrease than what we see in Europe proper now. And even on a historic foundation, North American pure fuel is less expensive than European pure fuel, and you’ve got labor differentials as effectively.
On the finish of the day, in the event you take a look at all of these, there’s not a large disparity by way of our price construction on common. However definitely, I’d say proper now, the European energy pricing does pose distinctive problem to these operations.
Jeremy, I do not know if you wish to discuss form of the general community.
Yeah. Yeah. So, Alex, as you’d in all probability have anticipated given this distinction that is opened up that Tim was speaking about and a few of the variations in metal utilization charges in North America versus Europe, we now have considerably all of our lean and steady enchancment staff. We now have all of these sources centered on debottlenecking in every single place we will in North America, and Monterrey, clearly being a key driver of that. So, you are completely proper that to the extent that we will proceed to open up incremental capability in Monterrey. That is the place we now have our sources centered on doing proper now.
As we — in response to your query on St. Mary’s, as you realize, we have elevated the quantity of exercise within the St. Mary’s facility with the set up of the brand new machining line that enhances the graphitization actions that have been already happening there. And I’d level out that I am truly fairly happy with the St. Mary’s staff and their efficiency on commissioning and ramping up that gear, they usually’ve demonstrated the flexibility to run that gear on the design grade.
And so, as we go ahead, St. Mary’s it’s a location with plentiful entry to moderately priced power, and that is an element that we have to contemplate as we take into consideration this. However in the mean time, it stays only one extra arrow in our strategic quiver if I might put it that approach. Nothing to announce by way of something past that, however clearly one thing that we proceed to bear in mind as we discover what we’ll do with the manufacturing footprint.
Okay. Thanks. After which, I simply wished to follow-up in your reply to Dave’s query earlier on the LTA. So, I believe, what you mentioned was you might be in dialogue on LTAs with sure clients going to be lots decrease quantity going ahead. Would these LTAs be comparable multi-year mounted worth construction because the outdated ones have been? And I imply, I suppose, by way of pricing, I am unsure what you’ll be able to say in all probability not a lot. However I suppose, from my perspective, I am unsure how enticing it could be to be fixing present spot costs for a number of years, given the volatility on the associated fee facet. So, I suppose, any extra shade on the LTA course of. Thanks.
Yeah. Thanks for that. And I am going to add to the feedback Marcel offered earlier. Definitely, yeah, we do count on it to be a decrease total share of our portfolio. And Marcel commented on the truth that we have operated with out LTAs previously, proper? And these are an excellent possibility for each us strategically, in addition to our clients as they’ve certainty of provide. And I believe during the last couple of years, we have seen sufficient provide disruptions that corporations are in search of a bit of bit extra of that certainty. However — we do not have a gun to our head essentially the place we really feel compelled that we now have to load 50% of our order ebook or 80% of our order ebook with mounted worth long-term agreements, proper? We could be strategic about it, enter into these partnerships with these clients that I believe there is a mutual worth perceived out of these long-term relationships. And that is the way in which we’re approaching it. And that is definitely the strategy within the clients that we’re having the discussions with presently, how they’re viewing it as effectively. So, we take a look at these as a mutual profit to each, however once more, do not feel compelled to lock in at any worth definitely.
I believe, as we glance going ahead, I believe there’s a wide range of pricing constructions that may very well be launched below these agreements, whereby they could not appear and feel like the unique Gen 1, if you wish to name them that, LTAs that have been signed 5 years in the past or so.
Okay. Thanks. Is smart. After which only one ultimate query, which was one thing that an investor requested me and it is form of an attention-grabbing query. I wasn’t fairly positive the reply. I imply, clearly, you are not making needle coke from pitch. However for these which are, is the coal worth present relative — some form of relative price assist for that needle coke — for the pitch needle coke, or it is not likely related as a result of it is a byproduct. Thanks.
Yeah. So, Alex, I’d be speculating if I attempted to reply that what’s in all probability higher if I do not. I apologize, however I do not know the reply to that, and I do not need to mislead you or any person else.
Yeah. No worries. I recognize the candor. All proper. Thanks lots for the query.
We now have a follow-up query from Curt Woodworth of Credit score Suisse. Please go forward.
Yeah. Thanks. One of many questions that I had is that my understanding is numerous these new electrical parks which are below building or starting stage, are going to make the most of. And I believe you form of spoke to this, the bigger dimension, extra greater tech merchandise, lots within the 32-inch diameter. So, I used to be simply questioning in the event you might form of communicate to your functionality within the 32-inch dimension. And if all the development is coming in this type of one specific product or the very massive dimension diameter, how — like how are you positioned for that? After which, are you able to communicate to how tight that market is right this moment? Thanks.
Yeah. Good. Thanks Curt. The — as we see numerous these excessive effectivity furnaces approaching, you are completely proper that lots of them are going with bigger and bigger graphite electrodes. The 32-inch market remains to be, the truth is — moderately began, the truth is, fairly small and principally centered simply on a few purposes right here within the U.S. As we undertaking out 5, six or seven years, we’ll see the 32-inch change into extra of a normal.
At the moment, what we’re seeing is that the 30-inch or 750-millimeter relying on which facet of the ocean you are on, is basically the usual for super-sized electrodes. We’re seeing numerous 750s, even 700s are what we’re seeing on numerous the brand new furnaces. And as we take into consideration these bigger electrodes, that is actually the place numerous our worth proposition comes into place, as we take into consideration the 700 and 750 that the market is basically demanding of us proper now. That is the place we like that house, as a result of that is the place we now have insulation from a few of the extra cost-oriented rivals and offers us a capability to promote our product on a worth proposition foundation the place these clients worth not simply our product know-how, however our technical service, in addition to the surety of provide that we give them in these sizes.
And so, you are precisely proper that as we’re seeing extra conversions of mills going from the built-in steelmaking routes to electrical arc furnace, the dimensions of the electrodes is continuous to develop. The 800s or 32-inch that you simply’re speaking about remains to be a comparatively small a part of that market, however we’ll develop as we progress via the stability of this decade, and we like our place on super-sized electrodes. Proper now, as we take into consideration the 700 and 750-millimeter electrodes, that is actually the place our major focus is, provided that, that is the guts of the market, and we’ll be able to spend extra time on the 800s or 32-inch as that turns into a much bigger a part of the market.
Nice. Thanks very a lot.
There aren’t any different questions from the telephone strains. I want to flip the convention again to Marcel Kessler for closing remarks.
Thanks, operator. I want to thank everybody on this name in your curiosity in GrafTech, and we look ahead to talking with you subsequent quarter. Have an incredible day.
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