Investor's Business Daily, June 7th, 2007
Goodbye fiberglass. Hello carbon fiber.
At least, that's the case when it comes to wind power systems.
Fiberglass once was the material of choice for wind blades on turbines. But since carbon fiber is lighter and stronger, wind power turbine makers are using it to make turbine blades longer, stronger and more efficient. That way, more power can be generated per dollar invested.
The worldwide wind power industry is growing about 12% to 15% a year, not bad for an alternative power source. But since carbon fiber is needed to make more and larger turbine blades, demand for carbon fiber for the wind industry is growing even faster.
How much faster? Analyst Stuart Bush of RBC Capital Markets estimates it's growing about 45% a year.
Enter Zoltek ZOLT, rather happily. The St. Louis, Mo.-based firm is the market leader in the kind of carbon fiber used to make turbine blades for wind power systems.
That kind of fiber is industrial grade. And it's two to three times cheaper than the carbon fiber used in the aerospace industry.
Aerospace
Makers of aerospace-grade carbon fiber are too busy filling big orders from Boeing BA and Airbus to bother with the cheaper grade of carbon fiber, analysts say. But not Zoltek, which specializes in such carbon fiber.
"It's the wind market that's really driving demand for this cheaper version of carbon fiber," Bush said. "Right now, the wind industry makes up 60% to 70% of Zoltek's carbon fiber sales."
In late May, Zoltek said it landed an expanded carbon fiber contract with the world's largest producer of wind turbine generators. The deal with Denmark-based Vestas Wind Systems is valued at more than $300 million over the first five years -- about triple the value of its current contract.
Vestas plans to open new blade-making plants in the U.S., Spain and China. To follow the global footprint, Zoltek intends to expand carbon fiber capacity to 10,800 metric tons by early 2008, up from 2,800 in 2005.
Between 1997 and 2006, wind power capacity grew 10-fold worldwide, according to the World Wind Energy Association. In 2006 alone, capacity grew 25% over 2005.
Europe leads the world in wind power generation due in large part to its high electricity costs. But wind power is growing fast in the U.S. and other parts of the world. A tax credit in the U.S. offsets some of the costs of wind-generated electricity.
Analyst Michael Carboy of Signal Hill Capital Group likes to take the wind out of skeptics who question the future of wind power. He says renewal energy in all its forms -- wind, solar, biofuel, geothermal, for example -- will likely become part of the utility industry's portfolio of clean, alternative supply sources.
"Can we please stop this silliness that something is wrong with wind power," he said. "The rate of growth for electricity in this country has doubled over its multidecade historical average. We need the power."
Higher demand for cheap carbon fiber will likely inspire new suppliers to enter the field, analysts say.
"It's basically a commodity product," Bush said. "But right now Zoltek has an advantage. It can negotiate favorable terms on contracts because it is the only large supplier with a consistent quality of product."
It wasn't always so. As recently as last year, production glitches hampered output. "They've had execution issues not only adding capacity on time but with yields out of some of their plants," Bush said.
But in the last couple of quarters management has improved operations, Bush says.
After several years of losses, Zoltek reported a profit of 17 cents a share last fiscal year, which ended in September.
In the second fiscal quarter ending March 31, the firm earned 19 cents a share vs. 11 cents last year. Sales grew 40% over last year's same quarter to $36.7 million.
Analysts polled by Thomson Financial estimate the firm will earn 77 cents a share this fiscal year. That compares with 17 cents last year. For fiscal 2008, they expect earnings will go up 94% to $1.49 a share.
"There's still a large execution risk, but we think that concern has alleviated somewhat," Bush said. And with the new contract with Vestas, Zoltek will no longer be building capacity as much for a speculative spot market. "They are building for a secure contract," he said.
Other Customers
While wind is at Zoltek's back, other kinds of carbon-fiber customers -- now relatively small ones -- are gaining force in the background. Foremost among them are deep-sea oil drillers and auto makers.
Analyst Carboy expects orders for deep-water rigs to surface in a "meaningful way" in the latter part of fiscal 2008.
It'll take longer -- about five years -- for carmakers to ramp up, he says. "Automakers need to learn how to change their production processes to accommodate carbon fiber."
He sees business from wind power turbines growing more than 20% a year for several years.
