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HEG Chairman's Speech > Engineering - Heavy > Chairman's Speech from HEG - BSE: 509631, NSE: HEG
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HEG

BSE: 509631|NSE: HEG|ISIN: INE545A01016|SECTOR: Electrodes & Graphite
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Chairman's Speech (HEG) Year : Mar '18

Dear Shareholders

It has been the best year in our more than four-decade history. This holds special significance considering the previous two financial years in which we incurred losses. I consider myself lucky to have witnessed and played a role in this transformational year for our Company.

The rapid closure of inefficient steel and graphite electrode capacities in China and the replacement of steel capacities by EAF units have altered our business ecosystem.

Just a case in point - our contractual terms with key stakeholders, which remained largely unaltered over the last 40 years have completely changed - all in one year. While some may see this as a cyclical uptrend, I consider this change as a paradigm shift in our business space, where the demand will exceed supply over the foreseeable future.

Demand pull

The Ministry of Industry and Information Technology (MIIT), China announced a new policy effective January’18 to ensure zero growth of steel capacity in 2018.

This single policy promises large scale ramification.

Global steel demand is expected to grow by about 1.8% and remain at similar levels in China in 2018 over 2017. However the world demand, excluding China, would increase by 3.4%, which suggests that all the growth in steel production would come from outside of China.

As 45% of the steel made outside of China comes through the

EAF route, it suggests an increase in EAF production going forward. This, I consider as organic growth.

But there are other interesting aspects arising out of this single policy.

1) China’s domestic steel consumption is expected to remain flat. Due to reduction in inefficient steel capacity, we witnessed Chinese steel exports drop by more than 40% in the last year and a half, a trend which is expected to continue into the future. This provides an opportunity for idle capacity to come back on stream in the rest of the world, using the EAF route, thereby increasing the demand for graphite electrodes.

2) Some new rules as per this policy mandate capacity replacement in Beijing and six other nearby provinces which account for a very large steel production in China to keep the ratio at 1.25 against 1 level. This means that in order to have a new capacity of 1 mmt, you are required to close a capacity 1.25 mmt that produces steel through an environmentally unfriendly route. These rules encourage the replacement of old converters with new Electric Arc Furnaces.

China plans to produce approximately 20% of its total steel through the EAF route by 2020, which used to be around 6-7% till 2016 and is presently at about 8-10% in 2017. This means a near trebling of their own graphite electrodes requirement than what it used to be one year ago

Supply constrains

Most opinion makers are of the view that the law of equilibrium would catch up considering the sizeable opportunity at hand. Hence, supply, sooner than later, would catch up with demand.

But I hold a different view. Like I mentioned earlier, I don’t expect large additional volumes entering the graphite electrode market over the medium term as the Graphite electrode business is not an easy space to be in, for important reasons:

One, because the technology for manufacturing this product has been zealously guarded by a handful of players globally.

Two, it is a highly capital intensive business. It requires high investment to set up a unit and sizeable working capital requirement to run the facility.

Three, graphite electrodes are made out of needle coke, a crude oil derivative. This too is a technologically difficult product and its supply is controlled by very few companies across the globe. Hence, its availability has constrained any meaningful capacity expansion in our business. Moreover, needle coke has found a new application in lithium ion batteries, mainly in China, which are expected to be in high demand owing to the thrust on e-mobility across the globe. This further restricts any significant expansion in the production of graphite electrodes.

Four, any new Green field plant of electrodes would take anywhere between four to five years to build and stabilise production.

As a result, the graphite electrode sector has seen no large capacity increase over decades.

Interestingly, no new player has entered the graphite electrode sector. Consider this: HEG commenced production 41 years ago and since then there has been no new entrant in this field around the globe. This makes us the last entrant in this industry in the world.

Further, in these 41 years, only one new Greenfield plant was set up by a German company with a capacity of 30,000 TPA in Malaysia, who in turn closed couple of their European plants - in effect they simply rebalanced capacities from a high-cost location to a low-cost geography. This German company recently got acquired by an existing Graphite electrode company from Japan further consolidating the industry.

This suggests that even when demand appears robust over the foreseeable future, creating new large volume supply lines appears to be challenging. The bottom line therefore looks as if the demand will outstrip supply, at least for next few years.

Our performance

External tailwinds held promise for a superlative performance.

The outside world we create for ourselves is a reflection of what we hold within. We followed the same philosophy to bring about a paradigm shift in the mindset of our team, with an aim of converting promise into performance.

Our marketing team worked overtime to realign our business necessities, found new markets in different geographies, found new customers, strengthened the business with existing ones and stayed ahead of the curve as the situation unfolded.

On the other hand, our operations team laboured painstakingly to improve our shop floor efficiencies. We made innovative use of technology and automation tools to make our resources more efficient - enabling the team to achieve tougher benchmarks of performance than ever before. These initiatives resulted in improved operational efficiencies and higher man-machine productivity.

And we recorded the best performance ever in its existence. Our EBIDTA for 2017-18 was (1873%) higher than 2016-17 -which pretty much sums up our achievement.

What does HEG do?

When I meet well-wishers, I can almost envision the thought running in their mind - what will HEG do with the unprecedented volume of cash?

At the onset, we repaid our entire long term debt to emerge debt free as on March 31, 2018. This was important for us as we had borne the brunt of a relatively high leveraged position in the recent past.

In the current year, we are looking at expanding our graphite electrode capacity by 20,000 TPA at our existing location, subject to our being able to secure the supply of our raw material - needle coke, which is currently in short supply even to run our existing plant at optimum capacity. Ours is already the single largest plant under one roof anywhere in the world. When we decide to take this important step, this would further increase the difference between our plant capacity and that of some of the next-in-line large plants of the world. This would further strengthen our cost competitiveness and hence our competitive edge over others.

From a strategic perspective, we are also looking at possibilities of adding high-value revenue verticals that are synergic to our core business. Amongst many possibilities, we are working on some ideas, which we feel, hold considerable promise for the future.

I am sure these strategic initiatives, in policies and mind set, set into motion during the year, would continue to redefine our future course and yield rich dividends for several years down the line.

From this perspective, the year just gone by could perhaps be remembered in our history as one of the most defining moments in bringing about a directional change in our journey.

Acknowledgement

At last, but most importantly, I would like to acknowledge the efforts of every member of the HEG family, be it my colleagues on the Board or my colleagues at all levels in the Company, for their hard work and exemplary performance in making this year a highly successful and satisfying one, the best ever in the history of the Company! They have all been standing by my side like a rock in realising internal pride, external credibility and overall institutional glory.

Warm regards

Ravi Jhunjhunwala

A fellow shareholder

Source : Dion Global Solutions Limited
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