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I expect GrafTech (NYSE:EAF) to generate a 17% IRR over the next 5 years with a clear and decisive way to protect its cash flows. Investors who can stomach volatility will be rewarded.
Business
EAF is located in Brooklyn Heights, Ohio, and is the only graphite electrode producer with vertically integrated needle coke production. Graphite electrode rods are used for EAF “electronic arc furnace” production of steel. Electric arc furnaces are cheaper to build than traditional blast furnaces, which make steel from iron ore and are fueled by coking coal. Graphite rods are a mission critical component of the EAF process but only contribute 1-5% of the overall cost.
The electrodes are part of the furnace lid and are assembled into columns. Electricity is then passed through the electrodes, forming an arc of intense heat that melts the scrap steel. These highly technical rods oftentimes take 5-6 months to make and require both graphite and needle coke as its main inputs.
After fully integrating Seadrift in 2010, EAF has become the second largest petroleum needle coke producer globally. This integration has led to EAF controlling 20%+ of the ex-China petroleum needle coke market, and undercutting competitors by $2,700/tonne on needle coke production. More recently, they've rid themselves of two underperforming facilities, bringing facility count down to four globally diverse locations. These four plants produce more electrode rods than the previous six. This result stems from technological efficiencies, increased safety standards, and successful debottlenecking initiatives. They currently produce 202,000MT of graphite electrodes per year with capacity to bring on more capacity after the warm idling of the
