TOP CONTRIBUTORS

Karl Wichorek

Cabot Corporation is the world's largest seller of carbon black, an ultra fine particle used primarily in the production of tire rubber, by revenue. The company also generates 10% of its revenues by selling aerogel, a low density insulation material, and other nano-sized particles such as fumed metal oxides, which are nano-sized particles used in the production of adhesives, sealants, coatings, greases, inks and toners.^[1]

Rising oil prices are a major issue for Cabot. Oil and natural gas account for at least 30% of Cabot's cost of sales in FY 2007.^[2][3] Rising oil prices in 2008 have also led Americans to drive less and to buy fewer cars. This has had a direct impact on the demand for car tires in Cabot's U.S. market. In fact, the company shut down one of its carbon black plants in West Virginia in March, 2008 due to decreasing demand for carbon black in the United States. ^[4] To offset falling demand in the US and Europe, Cabot announced that it would expand its carbon black plant operations in China, where the costs of production are relatively low and where they expect demand for carbon black to increase.^[5] Cabot attributes all of their 2.87% increase in revenues in 2007 to its growing presence in emerging markets like China,^[6] and the company expects its growth from 2008-2011 to be driven mainly by its efforts to expand its carbon black operations in China. ^[7]

Company Overview

Business Operations

While over three-quarters of Cabot's revenues come from its carbon black business, the fumed silica business in Cabot's metal oxides segment is an important component of Cabot's revenues.^[8]

Cabot Corporation is divided into segments by both operating region and business segment. The company operates in 18 countries and five regions: North America, South America, Europe, Asia Pacific, and China. In addition, Cabot has four primary business segments:

1. Carbon Black (77% of revenue) - Carbon black is a fine, black powder. Cabot’s carbon black is sold for use in tires, building materials, toners, inkjet cartridges, and other various products. The primary product in this segment is rubber black, which is used primarily in tires. Carbon black is Cabot’s primary source of revenue.
2. Metal Oxides (10% of revenue) - This segment includes fumed metal oxides (which are used in spark plugs, printing inks, and even cake mixes), and aerogel, which is primarily used as an insulating material.
3. Supermetals (9% of revenue) - Cabot’s supermetals business segment primarily produces tantalum, a metal used for making capacitors, semi-conductors, and jet engine blades.
4. Specialty Fluids (2% of revenue) - The main product in the specialty fluids segment is cesium formate, which is a fluid used in the drilling of oil wells.

Cabot’s business strategy is to use the cash earned by their older and core product lines (carbon black, fumed metal oxides, and supermetals products) to develop their newer products (specialty fluids, aerogel, and inkjet colorants). ^[9]

Financial Performance and Business Metrics

Cabot had total revenues of $2.6 billion in FY 2007, a 2.87% increase from FY 2006 revenues of $2.5 billion. Cabot attributes their increase in revenue to the presence of their carbon black business in developing and emerging regions, particularly China.^[10] Cabot’s revenues have increased consistently each year since FY 2003.^[11]

Cabot has had steadily increasing revenues since 2003; however, their net income has been sporadic, increasing some years and decreasing others.^[12]

Revenues from Cabot's operations in China only accounted for 10 percent of Cabot's revenues in FY 2007, but the sales growth in this region during 2008-2011 will be an important factor in Cabot's future operations.^[13]

Cabot’s earnings per share fell from $1.79 in FY 2004 to negative $.84 in FY 2005. The decline in earnings was caused by rapidly rising energy prices that increased the costs of Cabot’s carbon black business, and an asset impairment charge in Cabot’s supermetals segment.^[14] During FY 2005 Cabot decided to perform impairment analyses because of the negative outlook of their supermetals segment.^[15] Cabot’s analyses led them to record asset impairment charges totaling $211 million in FY 2005, which was a significant factor behind their negative net income of $48 million.^[16] In the second quarter of FY 2008, the cost of oil and natural gas had a negative impact of USD 20 million on Cabot's net income, which was the largest single quarter impact in the company's history.^[17]

Key Trends and Forces

An increase in the price of oil will increase Cabot's cost of sales and simultaneously decrease the demand for carbon black.

The increasing cost of oil and energy in the second quarter of FY 2008 had a negative impact of USD 20 million on Cabot's net income, which was the largest single quarter impact oil has had on Cabot's net income ever. Cabot’s factories require oil to produce many of their carbon black products. In addition, the US Department of Energy expects the global demand for oil and petroleum to increase by 1.2 million barrels per day in countries like China, India, and the Middle East.^[18] The Department of Energy expects demand to be greatest in China, where Cabot earns 10.2% of its revenues.^[19] According to the Department of Energy, the global production of crude oil is also expected to decrease in non-OPEC countries, while the production of crude oil in OPEC countries is uncertain.^[20] Both of these factors significantly affect the price of oil. If the price of oil rises there will be less demand in the automotive industry and therefore less demand for carbon black to be used in the production of car tires. Cabot’s production costs will also rise with a rise in the price of oil, which will negatively affect Cabot’s net income. Since Q3 of FY 2008, Cabot has not actively hedged against the rising cost of oil.

Increases in the price of oil will decrease demand for cars and car tires, which make up over 38% of Cabot's revenues.^[21]

Oil prices have risen sharply in the last four years, from $32/barrel in 2003 to $66 in 2007.^[22] Consequently, the cost of gasoline has increased from $1.49/gallon in January, 2003 to $3.16/gallon in January, 2008.^[23] This has dramatically increased the cost of owning a car, which has discouraged many potential buyers from buying new cars, and existing car owners to drive less frequently. Naturally, this has decreased the demand for car tires, the makers of whom constitute 38% of Cabot's revenues. Sales to the Goodyear Tire Company alone represented 12% of Cabot's total revenues in FY 2007. Further increases in the price of oil will encourage current car drivers to decrease their driving and discourage potential car buyers from buying new cars. Both of these effects will reduce the demand for car tires and subsequently reduce the demand for Cabot's rubber black.

Fluctuations in foreign currency exchange will affect Cabot's revenues.

Over 72.6% of Cabot’s revenues are generated by overseas operations and fluctuations in foreign currency exchange rates will affect Cabot’s revenues.^[24] If the US dollar continues to depreciate, then the foreign revenues from Cabot’s overseas operations will increase. Inflation is expected to rise to 4% in 2008, before falling back to 2% in 2009.^[25] A rise in inflation will increase spending on foreign goods, and if the US continues to import more than it exports, as it did in 2007, the dollar will continue to depreciate in 2008.^[26] Because Cabot depends primarily on revenues from foreign operations, depreciation in the US dollar will increase Cabot’s revenues.

CBT looks to China for future growth

In March, 2008 Cabot announced the shutdown of one of its rubber black plants in West Virginia because there was not enough demand for rubber black in the US. In response to falling demand in the US, Cabot will expand its carbon black operations in China during 2008. The company expects most of its growth over the next several years (2008-2011) to come from its Chinese expansion. As a result, Chinese demand for Carbon Black, will play a much more important role in the company's near term growth.

Competition and Market Share

Competitors

Cabot competes for market share in each of its four business segments, and in each of its operating regions. Cabot’s main competitors in the carbon black industry are:

• Degussa - Degussa was acquired by Evonik Industries in 2007 and is Cabot's main competitor in the carbon black industry. Through its subsidiary, Degussa Engineered Carbons, Degussa has carbon black operations in the United States. Evonik Industries plans to increase the efficiency of its Specialty Technology business segment through its acquisition of Degussa.^[27]
• Columbian Chemicals - After being acquired by a private equity firm in March, 2006, Columbian Chemicals is now a part of DC Chemicals. Columbian Chemicals operates 13 plants in 10 countries, and in 2007 the company started to expand its plant operations in South America and Europe. Columbian Chemicals also plans to expand its plant operations in China during 2008.^[28]
• Birla - Birla is Cabot's primary competitor in Asia. Birla owns four carbon black companies including Thai Carbon Black, which plans to expand its plant operations in China in 2008.^[29] Thai Carbon Black will be competing directly against Cabot for market share of the carbon black industry in China during 2008.
• Sid Richardson - Sid Richardson only operates out of North America and has carbon black plants in three states.^[30] The company is Cabot's smallest main competitor.

In its other industries, Cabot competes against hundreds of various local and global producers.^[35]

Market Share

Cabot has a 25% global market share in the carbon black industry, which is the largest global market share in the carbon black industry. Cabot also has the second largest market share in the fumed silica industry.

While Cabot has a slight advantage in market share in the carbon black industry, it faces close competition from two of the other major carbon black producers.^[36]

Cabot has a strong second position in fumed silica market share, but Cabot is far from challenging Degussa for the most market share in the fumed silica industry.^[37]

References

1. ↑ Fumed Silicas Overview.
2. ↑ Jefferies and Company, Inc. “Cabot Corporation.” February 28, 2007.
3. ↑ Cabot Corporation 10-K 2007. Section 1 - Business. pg 4.
4. ↑ “Cabot Closes W.Va. Carbon Black Plant.” Associated Press. April 8, 2008.
5. ↑ Cabot Corporation 10-K 2007. Section 1 - Business. pg 4.
6. ↑ Cabot Corporation 10-K 2007. Section 2 - Quantitative and Qualitative Disclosures About Market Risk. pg 42.
7. ↑ Cabot Corporation 10-K 2007. Section 1 - Business. pg 4.
8. ↑ Cabot Corporation 10-K 2007. Section 2 - Financial Statements and Supplementary Data. pg 104.
9. ↑ Cabot Corporation 10-K 2007. Section 1 - Business. pg 3.
10. ↑ Cabot Corporation 10-K 2007. Section 2 - Quantitative and Qualitative Disclosures About Market Risk. pg 42.
11. ↑ Cabot Corporation 10-K 2007. Section 2 - Quantitative and Qualitative Disclosures About Market Risk. pg 41.
12. ↑ Cabot Corporation 10-K 2007. Section 2 - Quantitative and Qualitative Disclosures About Market Risk. pg 41.
13. ↑ Cabot Corporation 10-K 2007. Section 2 - Financial Statements and Supplementary Data. pg 105.
14. ↑ Cabot Corporation 10-K 2007. Section 1 - Business. pg 1.
15. ↑ Cabot Corporation 10-K 2007. Section 1 - Business. pg 1.
16. ↑ Cabot Corporation 10-K 2007. Section 1 - Business. pg 1.
17. ↑ Cabot Corp. F2Q08 Earnings Call Transcript. Seeking Alpha.
18. ↑ “Short-Term Energy Outlook.” Energy Information Administration. June 10, 2008.
19. ↑ “Short-Term Energy Outlook.” Energy Information Administration. June 10, 2008.
20. ↑ “Short-Term Energy Outlook.” Energy Information Administration. June 10, 2008.
21. ↑ Cabot Corporation 10-K 2007. Section 1 - Business pg 4.
22. ↑ Historical Crude Oil Prices. Capital Professional Services.
23. ↑ Retail Gasoline Prices. US Energy Information Administration.
24. ↑ Cabot Corporation 10-K 2007. Section 2 - Financial Statements and Supplementary Data. pg 105.
25. ↑ Barkley, Tom. “IMF: Fed Should Leave Rates Steady.” The Wall Street Journal. June 20, 2008.
26. ↑ The World Factbook: United States. June 19, 2008.
27. ↑ Evonik Degussa Interim Report 2007. Business Overview.
28. ↑ DC Chemicals Annual Report 2007. Business Overview. pg 12.
29. ↑ "Thai Carbon Black: Company Overview."
30. ↑ "Sid Richardson and Company: Corporate History."
31. ↑ Cabot Corporation 10-K 2007. Section 2 - Financial Statements and Supplementary Data. pg 104.
32. ↑ DC Chemicals Annual Report 2007.
33. ↑ Birla Annual Report 2007. Financial Highlights. pg. 8
34. ↑ "Sid Richardson Key Financials." 2007.
35. ↑ Cabot Corporation 10-K 2007. Section 1 - Business. pg 11.
36. ↑ Jefferies and Company, Inc. “Cabot Corporation.” February 28, 2007.
37. ↑ Jefferies and Company, Inc. “Cabot Corporation.” February 28, 2007.