Zoltek Companies (ZOLT)

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Jin Bin Liu

Thomas Shyr

Zoltek (NYSE:ZOLT) manufactures and sells commercial-grade carbon fiber and oxidized acrylic fiber. The company’s carbon fiber is used primarily to build the blades on wind turbines. Its oxidized acrylic fiber, termed “technical” fiber by Zoltek, is used primarily to build aircraft brake pads. Zoltek is a relatively small company in the carbon fiber industry, compared to industry giants like Cytec Industries (CYT) and Hexcel (HXL); in 2009 its total revenues were $138 million, and its net loss was $4.2 million.

Traditionally Zoltek supplied most of its products to the aircraft industry. To diversify its product line away from the aircraft market, where it is a small player, Zoltek has expanded into niche markets like wind energy, which has been a driver behind Zoltek's sales increases. As of 2009, Zoltek is a long-term turbine blade provider for the top two pure-play producers of wind turbines in the world, Vestas and Gamesa.^[1]

Financials

Zoltek's fiscal year ends on September 30 of every year. For 2009, its total sales decreased by 25.2% to $138.8 million.^[2] This decline in revenues is due to lower sales volume, driven by the weak economic climate worldwide in 2009. The largest impact was the decline in carbon fiber sales, which accounted for $40.7 of the total $46.9 million decline in 2009.^[2]

Business Segments

Zoltek manufactures two main products:

Panex: carbon fiber

Zoltek’s carbon fibers have many applications. Chief among them is being used as the building material for the blades on wind turbines. Carbon fiber is rapidly replacing glass fiber as the material of choice in production of wind turbine blades. Carbon fiber is lighter and provides more stiffness.^[3] Zoltek’s biggest customer in 2007 was the world’s largest wind turbine producer, Vestas Wind Systems.^[4]

Pyron: technical fiber

Zoltek’s technical fiber is oxidized acrylic fiber that is made out of polyacrylonitrile; the company is the largest producer of polyacrylonitrile fibers in the world.^[5] Zoltek’s technical fiber is useful for heat and flame resistance applications. The company’s technical fiber is used primarily for aircraft brake pads. In 2007, Zoltek controlled 85% of the market share for aircraft brake pads.^[6]

Trends and Forces

Zoltek’s Pyron division depends on aerospace demand

The aerospace industry is becoming increasingly dependent on carbon fiber composites, which are lighter, stronger, and cheaper than conventional metals.^[7] When the aerospace demand cycle is in its upswing, the biggest companies in the carbon fiber industry shift their supplies toward this increase in demand. Zoltek benefits by supplying to the commercial aircraft brake pad market, which will have shortages as the bigger companies take on higher-cost applications, specifically larger aircraft parts. As long as aircraft orders from the aerospace industry continues to surpass 1,000 per year, Zoltek will be able to profit from shortages in the commercial market.^[8] In 2007, Zoltek had 85% of the market share for aircraft brake pads, the primary application for its Pyron fibers.^[9]

Zoltek invests heavily in the wind energy industry

The global wind industry installed close to 20,000 MW of wind energy in 2007, and global investment in renewable sources of energy is expected to continue to rise. In the US alone, 5,244 MW were installed in 2007, more than double the amount installed in the previous yearl this accounted for about 30% of the entire new power-production capacity in the U.S. that year.^[10] Furthermore, the wind industry is expected to grow to 240 GW of total installed capacity by 2012.^[11]

The material of choice for the production of wind turbine blades is carbon fiber. Zoltek plans to benefit from the growth of the wind energy industry by supplying it’s Panex fibers for this application. In 2007, Zoltek signed multiyear contracts with three large wind turbine producers, including the two largest producers in the world. In May of 2007, Zoltek agreed to supply $300 million of carbon fibers to Vestas over five years.^[12] In August of 2007, the company agreed to supply $142 million of carbon fibers to Gamesa, the world’s second largest producer of wind turbines.^[12] In June of 2007, Zoltek also agreed to supply $30 million of carbon fibers to German-based DeWind Incorporated over three years. ^[12]

Zoltek foresees other carbon fiber applications in the near future

• Carbon fiber has the potential to make cars lightweight and fuel-efficient. Carbon fiber composites offer strength comparable to steel at 20% of the weight.^[13] It is estimated that a car produced entirely with carbon composites would weigh half as much as a traditional steel car. Rising oil and steel prices are extra incentives to begin switching to carbon composites.^[13] Zoltek is actively working with auto companies, including General Motors and BMW, to make such applications a reality.^[14]

• Carbon fiber has the potential to allow deep sea drilling at greater depths than before. At depths greater than 1,000 ft, steel structures become ineffective due to the high pressures.^[15] Carbon fiber composites allow harvesting of oil and gas at depths of 8,000 ft. Aker Kvaerner, the leading builder of umbilical systems used in deepwater, is replacing its steel cables with Zoltek's carbon composites.^[14] This could act as another potential source of future revenues.

Carbon Fiber is Extremely Expensive

Due to strong demand from the aerospace industry^[16], the price of carbon fiber is very high, up to 30 times that of steel.^[13] In early 2008, the price of steel was about $1000 per ton.^[13] While strong demand will drive prices up, it is also expected to drive increases in production, which will eventually bring prices back down. The output in 2010 is expected to be 53,000 tons.^[13]

Competition

The leading carbon fiber companies include:

• Cytec Industries (CYT) – Cytec’s Engineered Materials division produces carbon composites for aerospace applications.
• Hexcel (HXL) – Hexcel is the largest producer of carbon fiber in the US.^[17]
• Mitsubishi Rayon Co., Ltd. – Produces carbon fibers, intermediate materials, and fabricated composite products.
• SGL Technologies – Produces oxidized fiber, partially carbonized fiber, and heavy-tow carbon fiber.
• Toho Tenax Co., Ltd. – Mass-produces polyacrylonitrile based fibers.
• Toray Industries Inc (TRYIY) – One of Toray’s business segment is Carbon Fiber Composite Materials.

Toray, Mitsubishi Rayon and Teijin, Ltd. have 70% of the world's carbon fiber market share.^[18] Toray alone has 30% of the world's carbon fiber market share.^[19]

Zoltek has 85% of the commercial aircraft brake pad market.^[9]

References

1. ↑ ZOLT 10-K 2009 Item 1 Pg. 5
2. ↑ ^{2.0 2.1} ZOLT 10-K 2009 Item 7 Pg. 18
3. ↑ Zoltek Annual Report 2007: What’s Next After Wind Energy? P.4
4. ↑ Vestas: the World's Largest Wind Turbine Producer
5. ↑ Zoltek Products: Pyron
6. ↑ Zoltek Rewards True Believers
7. ↑ Fibre reinforced composites in aircraft construction
8. ↑ Aerospace: current signals could steer you wrong
9. ↑ ^{9.0 9.1} Zoltek Rewards True Believers
10. ↑ Global Wind Report 2007 P.6
11. ↑ Global Wind Report 2007 P.11
12. ↑ ^{12.0 12.1 12.2 12.3} Zoltek Annual Report 2007: Management’s Discussion & Analysis P.8
13. ↑ ^{13.0 13.1 13.2 13.3 13.4} Carbon fiber makers see broad use of it in cars
14. ↑ ^{14.0 14.1} Zoltek Annual Report 2007 P.3
15. ↑ Zoltek 8-K Dec 5, 2007 P.11
16. ↑ Why Bike Prices Are Shifting Higher
17. ↑ About Hexcel
18. ↑ Carbon fiber makers see broad use of it in cars
19. ↑ Carbon fiber makers see broad use of it in cars
20. ↑ Cytec Annual Report 2007: Management’s Discussion & Analysis P.18
21. ↑ Hexcel Annual Report 2007: Selected Financial Data P.12
22. ↑ Mitsubishi Rayon Annual Report: Business Performance Breakdown by Segment P.12
23. ↑ SGL Annual Report 2007: Business Unit Performance P.59
24. ↑ TOHO Tenax Annual Report: Review of Operations P.4
25. ↑ Financial Data: Business Segments