News from Notch Consulting, Inc.

May 3, 2009

Takeaways from Cabot’s 2QFY09 Conference Call

Filed under: Carbon Black, General, Silica — Notch @ 2:46 pm

Here are some key takeaways from Cabot’s conference call for the second quarter FY2009, which was held on Thursday, April 30. The call and the accompanying materials are available here.

General comments: Volumes remain weak due to weakness in the auto, tire, and construction sectors. As such, comparisons to prior years are less useful than sequential comparisons. The quarterly net loss of $56 million is attributable to lower volumes and weaker unit margins. Margin squeeze was caused by the fact that both contract and spot prices have declined substantially, but costs still reflect the flowthrough of higher cost inventory. Cabot expected this higher cost inventory to be sold off by this quarter, but that was prevented by lower volumes, particularly in South Asia. The selloff of higher cost inventory should be completed by 3Q FY2009. They are three-quarters through the process.

Chinese capacity: Cabot expects to start up its new 150 KT units at Tianjin by the end of calendar year 2009, probably in the fall timeframe. Cabot reiterated that these units will be the company’s most efficient and lowest cost plants, using its latest technology. The units incorporate an energy center. Reasons for optimism are that Chinese volumes have improved in recent months, and Cabot expects to improve its competitive position in China going forward. The new Chinese capacity is cost competitive enough that it will allow Cabot to export to the region to the extent that growth starts to come in other parts of Asia.

Margins: In response to a question about how the carbon black industry is holding up and strategizing under the difficult volume conditions, Bill Brady gave this response, “Pricing has moved down as oil and feedstock prices have moved down but I would say generally beyond that we’re finding pricing to be reasonable in these times. And I would say that if we took our prices today relative to the feedstock costs today, we would have margins that you would expect in these times.”

In response to the same question, Patrick Prevost said, “Perhaps another point is on the rubber blacks side and partially on the special blacks side we have still a proportion of our business — in the case of rubber blacks it’s about 50% and a somewhat lower number in special blacks — is under contracts with formulas which provide some assurance to margins in terms of these formulas being linked to feedstock.”

Global demand dynamics: In response to a question about regional versus global conditions, Patrick Prevost said, “In high demand periods when the whole system is fully loaded or close to it, I would say it’s potentially more of a regional picture. As you move into an environment like we have today where we actually restructured or are in the process of restructuring our capacity to the tune of about 16% downward, the game is played in my view more and more at the global level. And a case in point here is that we have actually today product moving from our Colombian operation to Asia and Europe. So what’s happening is that we are utilizing our assets on an optimized basis globally, and because of feedstock price differentials, Platts cost differentials, and much, much lower transportation costs, we’re able to leverage the system much more aggressively.”

Conditions in South Asia: In response to a question about why the South Asia (excluding China) sequential results were so much worse than all other regions, Bill Brady said, “I think the South Asia region probably had the biggest inventory destocking effect in the numbers you’re looking at. So they had the double problem of the lower demand and the considerable destocking.” Earlier in the call, Patrick Prevost also pointed out the heavy dependence on exports (50% or so) for the tire industries of countries such as Indonesia.

Utilization rates: Finally, without providing specific figures, Bill Brady characterized Cabot’s carbon black utilization rates by region as follows:
High utilization: China (for the current period, relative to other regions)
Medium utilization: South America and North America (“Not where we want them to be, by the way, but on a relative basis”)
Low utilization: Japan, Europe

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