Buying SGL’s graphite electrodes to take the world’s top share — a contrarian bet (2017)

Can a contrarian bet be repeated?

What this decision implies lies in taking a business everyone called a sunset industry and locking up a global position in it at the worst of the cycle. Read after the fact, the reasoning holds together — that the cycle would turn, and that an overwhelming share would absorb the swings in the market. But what produced the record profit of 2018 was a policy change from outside: China’s ban on induction-furnace steel. The correctness of the read and a tailwind beyond anything assumed arrived together, and how much of the contrarian outcome can be credited to management is still a question that deserves caution.

The more fundamental question is how to convert one-off profits that rise and fall with a commodity cycle into durable earning power. President Morikawa’s talk of “distinctive businesses,” and the choice to direct the cash earned into the acquisition of Hitachi Chemical, was one answer to it. Can a winning ticket in a commodity market be rebuilt into a long-term pillar in semiconductor and electronic materials? Whether the graphite-electrode bet was truly a harvest depends on whether the transformed Resonac can become a company that earns steadily.