The Miracle Metal Set To Rebound in 2014

[This article originally appeared in the Daily Resource Hunter on July 16, 2013]

Almost everywhere I go, almost every place I look, I’m seeing new uses for what I call the “miracle material.” Research budgets are skyrocketing. The top scientific minds of the world are flocking into a new field that barely existed five years ago.

In the past year, for example, I’ve visited U.S. National Laboratories, such as Sandia in New Mexico. I’ve visited restricted defense sites like the Naval Research Laboratory, near Washington, D.C. I’ve visited major industrial players like Boeing and… well, others that I toured, but under non-disclosure agreements that keep me from saying too much.

Here’s what I can tell you: I see all manner of new uses for this “miracle material.” These new apps are taking the old economy to new places. Companies are already making big money — and planning to make an even bigger mint-load — with new applications for advanced batteries, better electronics, improved optics and stronger and lighter construction materials.

Indeed, from the iPhone in your pocket to the airport where Boeing’s new 787 Dreamliner lands, it’s fair to say that this material has become the foundation for a new North American — and global — economic revolution. There’s a profitable way to play it, too.

I’m talking about carbon. In particular, I’ve been watching the evolution of carbon in the form of graphite, graphene, nanotubes and more — new “miracle materials” that have new uses each year. As longtime readers surely know, one of the most investable pure-play carbon ideas is GrafTech International (GTI). With current prices in the doldrums, it’s time to look at it again.

Small, but Mighty

GrafTech is headquartered in Parma, Ohio, where it started back in the 1880s supplying carbon arc street lamps to the city of Cleveland. Today, GrafTech has 19 manufacturing facilities globally and a sales presence in over 70 countries.

GrafTech has a modest market cap of $1 billion — tiny compared with the big oil, mining and service plays that we often deal with here. Yet GrafTech is mighty in its own sort of way. That is, GrafTech provides indispensible graphite products for customers across a range of industries, to include steel manufacturing, advanced energy and cutting-edge electronics.

In the past year and a half, GrafTech’s share price has drifted down. This was due to all manner of market negativity, ranging from the lingering effects of the 2008 market crash and Great Recession to the more recent “down” market for steel. Whatever the constellation of reasons for the share price decline, right now the company is a bargain — nearly 50% off from my initial write-up.

For all the disappointment of its share price retreat, market metrics fail to acknowledge that GrafTech is a leader in must-have carbon applications, as well as futuristic carbon-based ideas. In other words, GrafTech is doing well, and its shares are positioned to come back strong, riding the wave of an even slightly improved economy. I can foresee a double from here, in the next year.

Critical to Low-Cost, High-Quality Steel

Let’s start by reviewing GrafTech in terms of its bread and butter, which is selling into the steel industry. GrafTech graphite electrodes are critical to electric arc furnaces, which are the source of much of the highest-quality steel that gets poured into ingots.

Yes, the global steel industry is hurting because of the Chinese economic slowdown — to be precise, China is still growing, but at a slower pace. Lower steel prices mean that manufacturers have an incentive to close the least efficient operations.

But in the steel biz, the least efficient furnaces are NOT the carbon arc smelters. Indeed, electric arc equipment tends to be the most efficient at steelmaking. In other words, you run the electric arc furnaces and scale back on the other old plant and equipment. In fact, on average, graphite electrodes represent a mere 2% of production costs for arc furnaces.

Meanwhile, across the steel industry, there are no substitutes for what GrafTech sells, and there are only a few competitors. That is, steelmakers can buy graphite product from German and Japanese companies, but there are no outsiders coming up that can easily break into the electrode arena. It helps that GrafTech holds a large portfolio of over 700 patents on graphite products and related carbon applications.

Engineered Carbon

Aside from steel, GrafTech has a fast-growing business with engineered carbon solutions, such as graphite-based structural materials, fireproofing, coatings, batteries and innumerable other new energy applications.

Let’s take fireproofing as an example. GrafTech sells a product called “expandable graphite,” which other manufacturers can add to plastic, foam, putty, paint or other coatings. Expandable graphite doesn’t take up much volume initially. Yet when it warms up in a fire, this material expands to over eight times its volume and creates a “char” layer. That is, expandable graphite forms an insulating, nonburning barrier with a high heat rating.

Not to be ghoulish, but if the steel in the World Trade Center had been fireproofed with expandable graphite, the structural elements might not have weakened as quickly or as much due to fire. The Twin Towers might never have collapsed.

Or consider GrafTech’s line of flexible graphite materials. Think of a roll of wallpaper, except it’s made of graphite or reinforced laminated graphite. You can make all manner of gaskets, pipe coatings and other applications out of this material, and it’s as easy as unrolling the material and cutting it to fit a shape. Some versions of the product are strong enough, and of sufficient corrosion resistance, to be certified for use in nuclear power applications.

Or consider the carbon sheets that go into small, powerful batteries. The market for smaller, better batteries grows every day, from more and more iPhones and such, to the embryonic automotive sector that builds and sells “electric” cars — in whole or in part of the propulsion system. Globally, this is a sector that’s just on the cusp of rocket-like growth.

GrafTech’s product catalog is filled with a similar array of items that support all manner of futuristic applications. It’s just a question of the markets evolving and customers meeting up with GrafTech materials that can offer a solution.

In a recent meeting with one of the country’s leading carbon researchers, he told me that “each one of these [carbon-based] ideas could be a billion-dollar industry — or more — in its own right.” And GrafTech is on the ground floor of this coming business cornucopia.

Already Showing on the Bottom Line

At GrafTech, many of these new technological ideas have already taken root and show up on the bottom line. GrafTech’s engineered solutions business has grown strongly from $121 million in sales in 2009 to $223 million in 2012. Thus, new carbon apps are already helping GrafTech to balance out the cyclical nature of the steel industry, as well as creating organic sales growth in their own right.

I foresee better days ahead for GrafTech. The technology is impressive and hard for others to imitate, let alone surpass. GrafTech sales are strong. Profits can grow. The share price ought to rebound from current lows and outpace the rest of the market.

That’s all for now. Thanks for reading.

Byron W. King
for The Daily Reckoning

Ed. Note: Byron appears regularly in the Daily Resource Hunter email edition, and gives readers a leg-up on the world’s most exciting resource and energy plays. If you’re not getting the Daily Resource Hunter email edition, you’re missing out on some serious profit opportunities. Don’t wait. Sign up for FREE, right here.

Original article posted on Daily Resource Hunter

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Byron King

A Harvard-trained geologist and former aide to the United States Chief of Naval Operations, Byron King is our resident gold and mining expert, and we are proud to have him on board as the managing editor of Whiskey & Gunpowder.

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