Looking overseas? How about German electrodes.
(SGG:NYSE ADS) expects to post a double-digit percentage increase in net income this year compared with 1996's net income of $129.6 million, or $5.79 a share, said Robert Koehler, chairman and chief executive, in an interview with
A key reason for the big earnings gain: pricing power on the company's graphite electrodes. Wiesbaden, Germany-based SGL sells the graphite electrodes for electric furnaces used at some steel mills. The electrodes are pushed down into the furnaces filled with scrap metal, melting it in the first step of making new steel.
SGL and rival
control about 59% of the Western world's market for the electrodes, and a total of just seven companies own 92% of that market. With little excess capacity, the market's supply and demand remain basically in balance. All of this gives the electrode makers pricing power, an increasingly rare commodity in a world replete with vicious price competition.
Unlike its customers -- steel makers that slash prices at the slightest push -- SGL has no intention of relinquishing the pricing power it has attained. Steel makers "can put as much pressure on us as they like," Koehler said. "You need two people in this, one who puts the pressure on and one who yields." And SGL will not yield, he says, adding that the steel industry did no favors for the electrode industry during its tough times in the 1980s.
The pricing power allows SGL to retain the savings it gets from cost-cutting, which Koehler says will continue.
SGL is benefiting from growth of steel made in electric furnaces. (The traditional method of making steel involves smelting iron ore, coke and limestone.) SGL estimates that this method of making steel will account for 45% of the Western world's production by 2000, up from about 37% now. Yet at the same time, electric-arc steel makers are using the electrodes more efficiently, making them last longer, so overall growth in demand will be about 2% a year, Koehler said.
While SGL is strong in Europe and the U.S., it needs to grow in Asia. It already has plans for a joint venture to build a plant in China with a company there. But Koehler wants SGL to have the controlling stake and management control. "If it doesn't happen more or less under our conditions, we'll walk away," he says.
Meanwhile, SGL is using the strong earnings of its graphite electrode business to boost its specialty graphite and engineered products businesses. The company's products in this area includes high-purity graphite used in making semiconductors. Another product is oxidized carbon fiber for aircraft brakes. The brakes are mostly made from steel now. Steel wears out quicker than the carbon fiber. However, Koehler admitted that it will take some time for the carbon fiber to overtake steel because it costs more.
Koehler notes that these specialty industries contain many small companies in need of capital to grow, making them perfect acquisition candidates. With acquisitions and internal growth, he said, the specialty business should make up half of the company's sales by 2000, up from about 33% now.
SGL's key competitor in graphite electrodes, UCAR, also is a big competitor on this side of the business. But SGL had a head start by about two years in investing in these businesses because UCAR was paying off debt from a leveraged buyout.
By Erle Norton