CBT
#<UNK>, we have had, as part of our specialty carbons and formulations business, a business in specialty compounds in master batches for a long time, more than 30 years.
This business is strategic to downstream business where we draw on the strength of our specialty carbon particle technology to develop compounds that need the performance from specialty carbons.
You could call it a strategic formulation and channel play where we combine our upstream specialty carbons and the downstream formulation into plastic compounds to create value.
This has been part of our Company for a long time, and one where we see opportunities for growth, again given our strong backbone upstream in making specialty carbons and combining those in formulations to downstream to sell.
That's the business and how it works.
And this investment is geared to continue to grow our position here.
In the markets we are in, we are the leader.
We've got real strength in Europe and real strength in China, in particular.
So, so not something new here.
You're right about that.
Both the European and North American markets are more established in terms of the vapor emissions.
And it appears that those will continue to ratchet, although we'll have to see given the apparent about-face on all of these topics from the Trump administration.
But let's see how that plays out.
We certainly are in this market today and our product development efforts are geared to benefit from this.
But I think it's important, our focused efforts are in markets where this regulation is really being established and where there's, I think, a more legitimate jump ball to win there.
We, in the negotiations with our customers, work hard to help our customers understand that this impact was a structural one, and one that really needed to be addressed in order to keep the business healthy and on a good track.
So, we spend a lot of time with our customers on that and help them understand that and, as a result, have been able to change the structure of those arrangements in terms of the index and the way that that formula works so that we feel it has a much better track to our actual purchase cost.
That's correct, yes.
You might remember, <UNK> that some time in the past year or so we had commented on the feedstock situation and how in Europe we felt it was a structural disconnect and therefore needed to be addressed in the customer discussion.
That's what I'm referring to, having addressed that.
Let me first, <UNK>, try to talk about the feedstock differentials in North America.
You might recall that those moved from favorable differentials to unfavorable differentials.
And that move was largely related to the opening of the arbitrage between Chinese coal tar and global fuel oil prices.
When that opened up, a lot of the Asian carbon black producers switched from pulling feedstock in the Gulf Coast to taking Chinese coal tar because that arbitrage was beneficial.
Now, that has all reversed and or view on that is that it's unlikely to open back up because that arb opened up because of Chinese stimulus and stimulus in steel which created more coking and more coal tar.
That certainly is not the case today.
But what happened is, then, as that arbitrage closed, then people who traditionally bought in the Gulf Coast moved back and the differential started to swing in the other direction.
And then there are always some things that can happen here in terms of specific suppliers.
And when they have outages or turnarounds, you can find things can move.
But I would say, as we look at it, those differentials have returned to the long-term historical norms.
That's how we see that one.
I don't think so, <UNK>, because we have been talking about this gradually normalizing here for a little while.
This is not a recent phenomenon.
So, I don't think you'd see anything material there.
But we feel that it's in the right place ---+ or, a very reasonable place right now.
And the factors that drove the movements we understand well and don't see those swinging in any large way.
Hopefully that they stay around that historical norm level.
That's our view.
Your second question was around the contracts, the tire negotiations in particular in North America.
I would say that the North American demand environment was pretty much flat in terms of production over this past year.
There were still lingering effects from passenger car anti-dumping duties from China, and then also more recently, the TBR, the duties against truck tires out of China.
All of that lead to a certain amount of channel stuffing and, therefore, depressing a bit the overall production environment in North America.
While sales may have been more healthy, production was more flat.
So, the environment was not as supportive in terms of growth as one might think about in terms of long-term fundamentals.
So, as a result, market pricing did move down a little bit.
We acknowledge that that was happening, but, on balance, felt that we ended up in a good place here in terms of restoring or regaining share back to previous levels, and at good prices.
Yes, sure.
Let me start with Reinforcement where, as we were working through the fall period and customer negotiations and had greater clarity about how those were going to shake out, and the volume growth associated with those, we did in fact produce more inventory so that we could ramp up and serve our customers, as committed.
That was a certain build in the period that will not recur in the next period.
So, that's a bit of the context there.
On Purification Solutions, at a high level I think you've captured it well and our view hasn't changed on this one.
In terms of the absolute impact from inventory build in 2017 we expect very limited absolute impact.
So, that is the case.
Now, there may be some movements quarter to quarter but over the full year, we're not expecting significant absolute impact from that.
But when comparing certain quarters there will be some favorability there.
And on a full year basis, I think we still expect that to be in the $10 million range of benefit.
I think in terms of China, certainly on the RM, the Reinforcement side, we probably did see a little bit of benefit from tire producers trying to aggressively export truck tires ahead of the North American duties.
But I think there are a couple of other factors playing out here, as well, in China.
One of them is that China has continued to pull certain stimulus levers to continue to grow the economy at the rate they are trying to grow it there.
So, that has trickled through.
And we've also seen some enforcement actions that I think are providing overall support for our businesses, regulatory and enforcement actions.
And I'd broadly characterize them as under an environmental umbrella.
One of them is that China has imposed strict regulations and seems to be enforcing the amount of weight that trucks are rated to carry.
China had been a chronic sort of abuser of that, in a sense, overloading trucks constantly.
And with that happening, it means to move the same amount of freight, you've got to have more trucks on the road.
So that's a positive factor for us.
And then I think the overall environmental enforcement level in China right now, I think is something that I see as different and positive, from our perspective, given the air quality problems in China.
I think finally we are seeing what are on the books pretty strict environmental emission standards but we're seeing them being enforced much more.
So, as that's happening, I think a couple of things are swinging a bit in our favor here.
One is the playing field is a little more level because, as the leader and a global player, we certainly comply with all of the standards and regulations.
But now that playing field leveling a little bit.
And I think some of our customers, having a preference for Cabot, given our stability and reliability in this area.
So, how China enforces these things is always a little bit opaque, but I'm definitely seeing a different story today than we have in the past, and it's a more favorable one.
So, I think those are the factors that are underpinning China.
Thank you all for joining us again, and thank you for your support of Cabot.
And I look forward to speaking with you next quarter.
