News from Notch Consulting, Inc.

India’s two leading carbon black producers have reported their most recent results.

Aditya Birla Nuvo, parent company of Hi-Tech Carbon, reported consolidated revenues of Rs. 3,661.6 crore for Q3 FY 2008 (quarter ended December 31, 2007), up 58% from the same quarter last fiscal year. The carbon black business had its best ever quarterly revenues of Rs. 245.3 crore, up 25% from 3Q FY2007. Net Income (PBIT) was Rs. 37.4 crore, up 18% compared to Q3 FY2007, though high input costs lowered operating margins. Carbon black export volumes more than doubled during the quarter based on expanded capacity. (Note: HTC added capacity at Chennai in July 2007).

The press release is here. Financials are here. Presentation is here.

The Presentation includes a significant piece of information about HTC’s proposed new plant at Patalganga. From Slide 4, Key Highlights: “Carbon black business, though received environmental clearance for greenfield expansion by 120 K MT in Western India, will decide after examining other sites.” The project is mentioned again on Slide 27, Value Businesses: “Evaluating greenfield expansion by 120 K MT in Western India along with other sites.”

So it appears that the Patalganga plant is under review. The Patalganga plant was initially announced at 60 KTPY and then was expanded to 120 KTPY. Last month there were rumors (unconfirmed) that HTC had scaled the project back to 60 KTPY, at least initially. It is possible that Birla and PCBL (see below) were involved in a bit of one-upmanship with the spate of expansion announcements that came out of India last year.

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Phillips Carbon Black Ltd. released results for Q3 FY 2008 (the quarter ended December 31, 2007). PCBL achieved its highest ever quarterly sales volume (64,918 tonnes), reflecting a 3% increase over Q3 FY2007. Export volumes declined about 2% to 15,227 tonnes compared to Q3 FY2007 due to stronger domestic demand. Gross sales during the quarter were Rs. 31,073 lakhs, up 1% from Q3 FY 2007. Operating margins (EBITDA) improved during the quarter to 14.00%, up from 10.98% in Q3 FY2007, driven by improve operational efficiency, better yield, and cost management.

Results are here. Management discussion here.

Highlights of the discussion:

• The expansion at Mundra is on schedule for startup during 4Q FY2009 (i.e., the first quarter of 2009). The Environmental Impact Assessment study has been completed, equipment orders placed, and the contract for civil construction has been awarded. The foundation stone ceremony (Bhumi Puja) was held on January 24, 2008.
• The expansion at Cochin is on schedule for startup 2Q FY2010 (i.e., the third quarter of 2009). The Environmental Impact Assessment is still underway.
• PCBL raised carbon black prices on January 1, 2008 to mitigate higher feedstock costs. Management expects that higher prices, coupled with higher production, improved operational efficiencies, and cost management, will maintain current EBITDA levels during Q4 FY2008.

An air of uncertainty hangs over the North American carbon black industry. There are persistent rumors that one of the US producers will close a plant or at least a unit, but thus far there’s been no specific news (aside from Cabot Waverly). But the biggest question is related to Birla Group: will they move forward with their proposed carbon black plant in Mexico?

News of the project surfaced last year in the press, primarily through the Economic Times (India). As originally envisioned, the plant would have an initial capacity of 60,000 tonnes, expandable to 200,000 tonnes. The plant would be located in Altamira, Tamaulipas and would be structured as a joint venture between Alexandria Carbon Black and Thai Carbon Black. The original start-up date was set for 2008.

So what is the current status of Birla Carbon Mexico? Based on some off-the-record conversations with Birla people and competitors, it would appear that this project is on-hold. Birla Group’s carbon black business is focusing its capital spending on its current slate of announced expansions in Egypt (two new units in 2009), India (new plant in Patalganga) and China (doubling capacity this year), while Mexico has been put on the back burner. If the plant goes forward, Birla would break ground in 2009, with start-up about 7 months later (so late 2009 or early 2010).

What happened? As Birla worked to put the project together, the plant’s economics were less favorable than originally thought due to a number of unforeseen complications.

• Steel costs remain quite high.
• Due to poor water quality at the site (which would negatively affect the cogen unit and the quality of the carbon black), the plant would need to include a water treatment plant on-site, which increases costs.
• Shipping carbon black out of the plant via container ships proved more expensive than assumed.
• Bringing feedstock into the plant would be more expensive than thought. The plant would use imported CBO from the US Gulf Coast, but even though the proposed site is very close to the Altamira port, the costs of receiving, storing and transporting (by pipeline) CBO were higher than Birla pays in other countries.
• Birla is not satisfied with the level of cooperation among Mexican authorities, particularly regarding tax incentives and permitting. By contrast, the permitting process is more fluid in Egypt, India and China, so the decision was made to focus on those operations.

In evaluating Birla’s situation, it may be instructive to look at Bridgestone’s experience with its new Mexican plant, which is starting up this quarter. Bridgestone’s new Mexican plant is said to be an exact duplicate of its plant in Thailand. However, the Thai plant was built in 2003/2004 for a cost of $40 million, while the Mexican plant was built in 2007/2008 at a cost of $81 million.

On Wednesday, Cabot Corporation released its financial results for the first quarter of FY 2008. The company announced net income of $36 million for the quarter, including $7 million after-tax of income from certain items.

Cabot’s results during the quarter were unfavorably impacted by approximately $17 million arising from the time lag of the feedstock related pricing adjustments in the Company’s rubber blacks supply contracts and the immediate recognition of higher feedstock costs in North America, due to the use of LIFO accounting. The Company’s results during the quarter were positively impacted by approximately $14 million of tax benefits arising from favorable settlements of tax audits as well as various tax credits in China.

The results are here.

Cabot held a conference call on the results this afternoon. A webcast of the conference call is here. For the first time, Cabot has provided a deck of slides to accompany the presentation. See the above link under “Supporting Materials.”

This was the first earnings call for Cabot’s new President and CEO Patrick Prevost, and it was a relatively staid affair compared to some of the company’s recent quarters. There was no major news regarding the carbon black business. The slide detailing “Carbon Black Business PBT” provided some useful and illuminating information by breaking down the effect of Contract Lag and LIFO (last-in, first-out) inventories for feedstock purchasing on the Carbon Black Business PBT. The data is provided going back nine quarters, to Q1 2006. In Q1 2008, Contract Lag and LIFO together reduced Carbon Black PBT by $17 million, and over the last 3 quarters these factors have reduced PBT by $47 million as feedstock costs have continued to rise. (Contract lag refers to the time lag in the company’s ability to pass on feedstock cost increases to customers for carbon black sold under long term contract.)

Below is an rough guide to some of the topics discussed during the webcast specifically related to carbon black. Times refer to the Windows Media version of the webcast, which begins at 45:42.

52:20 to 56:50 — Overview of the carbon black business. Cabot started up the new Performance unit at Tianjin, and is on schedule for an expansion at Tianjin by year-end 2008. China carbon black volumes declined this quarter because Cabot stopped importing “seed volumes” from other plants in the region. On Inkjet Colorants, Cabot completed a debottleneck for its colorants production unit, but a planned expansion has been put on hold because volume sales into the High Speed market have been below expectations.

59:10 to 59:50 — Geographic breakdown of revenue by region. Cabot continues to shift its sales focus to Asia (particularly China) and South America, while reducing its presence in North America.

01:08:55 to 01:10:50 — More detail of China volumes. Why Cabot reduced import volumes.

01:23:10 to 01:26:50 — Discussion of Contract Lag and LIFO effects.

Talking about X number of tons used worldwide, it’s easy to forget where all this carbon black comes from. Here is an interesting essay on the author’s experiences working in a carbon black plant in the late 1970s. It gives new meaning to the phrase getting down to the nitty gritty.

A gallon of loose blacks weighed fractions of an ounce due to the entrapped air. So efficient was it as a coloring agent that a teaspoonfull was enough to completely color one’s skin a brilliant shiny, dark black. And because it was such a fine dust, it leaked out of just the tiniest of holes. We moved it around the plant in pneumatic conveyors: big pipes with big blowers that moved a mixture of loose black and air. Under pressure. Tiny hole in pipe? Little plume of loose black. You walk past, notice a black speck on your skin, wipe it with your hand, and suddenly your whole forearm is black. We had a lot of leaks. We were all black.

This week, US researchers announced that they had developed the darkest material on Earth, a substance that is more than 30 times darker than the carbon substance used by the US National Institute of Standards & Technology as the current benchmark of blackness. According to Reuters, the new substance, which absorbs 99.9% of light, is composed of carbon nanotubes standing on end. It has a total reflective index of 0.045%, compared to 5% to 10% for basic black paint.

Pulickel Ajayan, who led the research team at Rice University, said that the material gets its blackness from three factors:

It is composed of carbon nanotubes, tiny tubes of tightly rolled carbon that are 400 times smaller than the diameter of a strand of hair. The carbon helps absorb some of the light.

These tubes are standing on end, much like a patch of grass. This arrangement traps light in the tiny gaps between the “blades.”

The researchers have also made the surface of this carbon nanotube carpet irregular and rough to cut down on reflectivity.

Below is a photo of the new material. The nanotube material is in the center; at the left is the NIST’s reflectance standard; at the right is a piece of glassy carbon.

Photo: Shawn-Yu Lin, RPI via Reuters