FORGING AHEAD ON THE BACK OF JUDICIOUS PLANNING
2018 was a turbulent year for your Company characterised by shifting market dynamicsa continued deceleration of the Chinese economy and government actions that had adecidedly tangible impact on our businesses.
We began 2018 by continuing to ride a wave of momentum that began in mid-2017 asglobal aluminium production and demand for our calcination and distillation productssteadily increased leading to corresponding improvements in selling prices and margins.The global economy also continued to strengthen especially in the US where importtariffs and rising prices for aluminium and steel motivated US manufacturers to restartmothballed facilities and increase capacity utilisations.
By the end of March however markets started showing early signs of weakness -particularly as an anticipated rebound in the Chinese economy and infrastructuredevelopment failed to materialise. As the year progressed additional unexpected headwindsemerged in the form of a slowdown of Europe's auto manufacturing sector - a major marketfor our Advanced Materials business - and a temporary ban on the imports of pet coke intoIndia.
At the same time the spread between our raw material costs and prices for our finishedproducts began to shrink reversing a trend that was a principle factor in our strongearnings and EBITDA in 2017. However it is important to note that as prices forcommodities and products decrease it does not have a domino effect on our costs since weare typically selling inventory that had been committed or purchased earlier whencommodity prices were higher. This can result in a time-lag of one to two quarters foradjustment.
Despite these challenges headwinds and unexpected issues in 2018 our combinedbusinesses generated '21471 million of Adjusted EBITDA compared to a Company-record of'22727 million of Adjusted EBITDA in 2017. Looking ahead the fundamentals of each of ourbusinesses remain strong and I believe we are poised to maintain our market-leadingpositions thanks to prudent investments to grow and modernise our Advanced MaterialsCarbon and Cement operations.
In the Carbon sector - which contributes more than 75% of our Adjusted EBITDA - webroke ground on a new vertical-shaft calciner in the Special Economic Zone nearVisakhapatnam (Vizag) in Andhra Pradesh India. Once commissioned in the third quarter of2019 our new calciner will have a production capacity of 370000 tonnes per year - addingto our current global capacity of 2.1 MT. This will leverage technology that will allow usto produce high-density calcined petroleum coke (CPC) from lower-cost feedstock whileconsuming less energy than our other calciners.
While the new shaft calciner will position your Company to meet the growing CPC demandin Asia and the Middle East we are also focusing on the ruling by the Honourable SupremeCourt in July to ban the import of green petroleum coke (GPC) and CPC as part of thegovernment's effort to reduce air pollution. This did have an adverse impact on ouroperations in India.
In October 2018 the Honourable Supreme Court relaxed the restriction on theimportation of GPC by Indian calciners permitting the industry to import 1.4 MT per yearin aggregate as feedstock in the production of CPC.
At the same time the Honourable Supreme Court passed an order to allow aluminiumsmelters to import 500000 MT of CPC annually; however the prohibition on CPC importsby the calcining industry for the purposes of producing blended CPC remained intact. Ourinability to import CPC into India for blending at our Vizag plant has resulted in atemporary reduction of CPC production at our US plants.
Nonetheless we continue to pursue discussions with the Indian authorities regardingour GPC allocation and our ability to import CPC. In terms of the new shaft calciner theproject is on schedule to be commissioned during Q3 2019. Once operational we believe thesupply of raw materials for the shaft calciner will come from the current 1.4 MT importallocation since the Ministry of Commerce has stated that the industry's allotmentalready contemplates future expansions.
As a result your Company will focus on rationalising raw materials between our twoIndian plants and supplementing our raw material needs by utilising proprietarytechnologies to calcine lower-quality GPC available within India to produce anode-gradeCPC.
We believe these actions combined with state-of-the-art pollution control equipmentthat will remove more than 98% of the shaft calciner's sulphur dioxide emissions as wellas the plant's ability to generate approximately 15 MW of clean electricity from wasteheat will keep the facility's feasibility intact.
In Europe we began building a new hydrogenated hydrocarbon resins (HHCR) productionfacility in June 2018. Once commissioned in the third quarter of 2019 the plant willproduce up to 30000 tonnes of "water-white" resins per year including ournewly introduced product NOVARES pure. This will enable customers to meet evolvingregulatory requirements and the growing demand for cleaner and safer raw materials inconsumer products such as food packaging and sanitary products. Beyond the technicaladvantages of hydrogenated resins NOVARES pure will be produced in Germany which meansthat European customers will have a local source for water-white resins significantlyshortening their supply chain. Currently European manufacturers rely heavily on importedvolumes of hydrogenated resins mostly from China.
It was announced last April that as part of a realignment of our Carbon and formerChemicals sectors the HHCR facility would serve as the centrepiece of our AdvancedMaterials business going forward. This reflects an increasing focus on transformingby-products of our coal tar and petrochemical feedstock distillation activities to produceraw materials that support high-growth products of the future. The shift to AdvancedMaterials also allows us to place greater emphasis on premium products such as CARBORESand PETRORES which are used in specialty applications such as lithium-ionbatteries and energy storage.
Consistent with the change in reporting segments your Company spent much of 2018evaluating our existing product portfolio to ensure that we have the right product mix andthat our offerings support our increased focus on high-growth areas. As a result we areshutting down production lines in Germany that rely on outdated technology or whoseproducts are no longer competitive or fail to meet the needs of a changing market. Weexpect this restructuring to provide an annual cost savings of approximately $4 million.Moreover we continue to evaluate other parts of our business to see where we can improveefficiencies optimise logistics and maximise the use of our assets to eliminatenon-value- added expenditures.
As a result of prudent investments to grow and modernise our calcination anddistillation operations we believe that both our Carbon and Advanced Materials businessesare well positioned to meet the increased demand for raw materials that are essential forcleaner faster and lighter 21st-century applications. These initiatives willcontribute to the future earnings of your Company and enhance the medium- to long-termviability of our businesses.
Going forward we also expect that the aluminium industry will continue to be a majorcustomer for our products. As the world's leading coal tar pitch (CTP) producer andnumber-two calciner we provide two irreplaceable ingredients in the anodes that arerequired in the electrolytic process of producing this versatile metal.
Aluminum pricing weakened during the second half of 2018 despite unusually low LMEinventory levels. However we believe these price levels are not sustainable given theproduction costs of global smelters. Moreover demand for aluminium is expected grow as itcontinues to gain traction as the metal of choice in a growing number of applicationsthanks to its high-strength durable lightweight corrosion-resistant and recyclablenature.
Electric vehicles are an example of the potential growth in aluminium demand. Theytypically use 25-27% more aluminium than automobiles equipped with internal combustionengines. Also electric vehicles' share of the global automotive fleet is forecast toincrease from 4% in 2017 to 30% in 2030. This means smelters will need to increase theirproduction capacity to meet rising demand thereby requiring more CPC and CTP for anodesduring the next decade. It's also worth noting that as the number of electric vehiclesincreases so will the need for additional lithium-ion batteries that power theautomobiles. We expect this to benefit your Company as we are a leading supplier ofadvanced materials used in the coatings that extend the life of lithium-ion batteries andenable them to maintain a prolonged charge.
Our raw materials are also essential ingredients in the production of concrete andasphalt gypsum wallboard PVC piping paints and of course aluminium. Therefore ourproducts will play a significant role in the modernisation of developing countries.
Moreover in India - where our business was born - we are optimistic that Priya Cementwill provide a solid foundation for much of the infrastructure development and new housingthat is contemplated in the southern states of Andhra Pradesh Telangana Tamil NaduKarnataka and Kerala.
We expect growth in India's infrastructure and housing sectors to positively impactdemand for cement in the coming years. This growth coupled with limited expansion of thecement industry's production capacity should result in steady improvement of plantutilisation across India and a multi-year earnings growth cycle where cement gains pricingand operating leverage.
To help enhance the competitiveness of our cement operations we have installed a 7 MWpower plant at our Kurnool facility and are further installing a 4.1 MW power plant at ourNalgonda facility. Together they will generate 11.1 MW of clean electricity using thewaste gases produced in the manufacturing process. In addition we have upgraded a coolerat the Nalgonda plant to achieve greater energy efficiency and we are upgrading thecement-grinding facility at our Kurnool plant to improve its efficiency.
Alongside each of these activities RAIN Group maintains a steady focus on workplacesafety occupational health and environmental stewardship - and I am proud to report that2018 was the safest year in the history of your Company. The limestone mining operation atour Nalgonda cement facility is a prime example of our commitment to workplace safety.During National Safety Week 2018 the mine received first-place recognition from India'sDirectorate General of Mines Safety in the Drilling and Blasting and Safe Mine Workingscategories and second-place recognition in the Loading and Transportation and Lightingand Electrical Installation categories resulting in a first-place award for OverallPerformance.
While 2018 was a record year in terms of our safety performance we aspire to furtherimprove our safety standards. In fact we are working with DuPont Sustainable Solutions todevelop a behaviour-based safety culture as part of a Company-wide initiative called Questfor Zero - a two-year journey to become an incident-free organisation.
Of course being a global leader requires us to expand our focus beyond profit marginsto ensure that we are enhancing the quality of life of people in the communities where weoperate. Our Pragnya Priya Foundation operates three ambulatory care hospitals and threesecondary schools in rural Andhra Pradesh and Telangana helping drive positivesocio-economic changes in the remote areas of South India. In the US our operations andemployees have donated more than $1 million and contributed countless volunteer hours tohelp local charities schools and sports organisations. In Europe the RUTGERS Foundationprovides financial support for science-focused education and has reached more 10000students during the past 15 years.
As we enter 2019 - after a year of challenges and turbulence - we remain confident thatthe future holds more opportunities than risks for your Company. We look forward toreturning to more normalised earnings in our businesses in 2019 and we are eager tocomplete our new calcining and advanced materials facilities and realise theircontributions to our growth and bottom line. I want RAIN Group to be more than a Companythat you invest in - I want it to be a Company that you are proud to own.
Finally we look forward to continuing to manage our business and balance sheetaggressively investing in our business prudently cutting costs wherever possible andrealising the benefits of our Quest for Zero safety initiative in the years to come.
Jagan Mohan Reddy Nellore