Aveek - Here are my notes. It may not answer all your questions but hopefully provide some more insights. Just FYI, all this information is purely by reading up relevant materials. I have not spoken to company management or any expert in the industry. I don’t do as much scuttle-butting as this VP forum is known for.
Where will the demand come from for the additional capacity of AIA?
• Demand would basically come from replacement of existing mining mills from forged media to high chrome media. Reason for replacement is benefits of using HCMI over forged media. Overall HCMI costs 20% more but it generates gross savings in the cost of mill internals to the extent of 50% on less wear of media, and higher productivity. It is estimated that about 2m MT of media can be converted into HCMI, which provides ample room for growth for AIA.
• New mines and added cement capacity
What is the replacement cycle of grinding media?
• Grinding media needs to be replaced every 30 days. Grinding media accounts for around 80% of the total replacement demand
• Other mill internals such as liners and diaphragms need to be replaced every 2-3 years
• Average wear rate of grinding media per ton of cement produced is around 100 grams.
• 300 MT of grinding media is required per million ton of fresh cement capacity
What is stopping manufacturers of forged mills venture into high chrome mills?
• No entry barriers. AIA’s competitive strength lies in the service that it provides, the durability and dependability of its products and relationship it has cultivated.
• Technical knowledge of metallurgy, grinding application and process technology is key and should not be under-estimated. Companies like Electrosteel, L&T and ACC have tried to enter into this industry but have failed.
• The lead-time to develop exact specifications of media depending on various variables can be anywhere from 6-18 months, but once the customer switches to AIA product they become sole or key supplier. Think of Mayur Uniquoters model here where they take a long time to get their product approved from OEMs but once they have foot into the door they become sole supplier for that specific model.
• AIA has slowly become a solution provider rather than product provider. You are right about the risk for the client to have sole supplier, but the very reason the client would like to work with significant players such as AIA or Magotteaux who are reliable and have a strong balance sheet. Look at a company called TDG in the US that is sole supplier of most of its product to airline companies. You may wonder why would an airline depend on a single supplier for its critical components but the customers don’t have a choice in many cases and/or the supplier has proprietary knowledge
Who are the competitors and the competitive advantage of AIA?
• Magotteaux – 350K MT, Anhui – 12K, Estanda – 8K, Christian Pfeiffer – 7K
• AIA has cost advantage over the other players providing them higher margins even with lower realizations. Able to supply the exact same product 20% cheaper. Raw material prices are not a significant risk because AIA has moved to fluctuating price contract whereby they pass the cost/benefit of the raw material to the customers.
• I’d think that AIA also has better technical knowledge over other players but that is debatable
Risks and Issues
• Currency risks due to huge FX exposure but AIA seems to be hedging the same.
• Power supply
Matters that need further digging
- Joint venture with Polyex minerals? Status on that? How does that backward integration help the company?
- More in-depth understanding of the what is stopping other forged media players to transit to high chrome media
- Why is Magotteaux not expanding capacity or trying to move to a competitive cost manufacturing base?
I agree that outsized return possibility is limited but I’ve a very low bar
Disc: Happy-go-lucky investor in AIA