Since its founding in 1934, SEC Carbon has consistently led the way in developing and producing top-quality graphite products. Today, as a vital contributor to carbon neutrality efforts, the company offers a range of innovative products that play a pivotal role in reducing CO2 emissions and advancing sustainability.
Japan is at a very exciting time for manufacturing. On one hand, we have had major supply chain disruptions in the last three years, caused by the COVID-19 pandemic as well as tension from the China-US decoupling situation. As a result, we are seeing many multinational groups try to diversify their supply chains with a focus on reliability. This is where Japan can enter; a country known for decades of high reliability, trustworthiness, and short lead times when it comes to production. Now, with a depreciated JPY, we believe there’s never been a more opportune moment for Japanese manufacturers to meet the pressing needs of this macroeconomic environment. Do you agree with this premise, and what, in your opinion, are the strengths of Japanese manufacturers that set them apart from regional competitors?
Regarding the decoupling situation between the US and China, I perceive a shift in the tide. The supply chain is now more diversified, no longer solely centralized in China. Despite this, Japanese companies have not yet witnessed tangible effects. As a result, we are cautiously observing the situation. Moreover, the political conflict between Ukraine and Russia has had a notable impact on our business, as global demand has shifted away from Russian cathode blocks, leading to increased orders for our products.
While the depreciation of the JPY has significantly bolstered our export prospects, there have been some challenges as well. Notably, the rising costs of imported raw materials have offset some of the positive effects, resulting in an overall increase in the production expenses for our products.
There was a special agreement inked between the US and Japan in March 2023 which aims to get a tax credit of USD 7,500 to Japanese makers who can supply materials to the EV battery sector. When giants like Panasonic and Tesla collaborate they significantly benefit from these kinds of tax credits but we also know there are so ‘trickle-down’ benefits for smaller material and parts suppliers. We are curious about companies such as yours that are tier-2 or tier-3 suppliers further down the supply chain. What trickle-down effects do these tax credits will bring? Do you expect new opportunities to emerge from this new agreement?
Currently, our company's dealings with non-ferrous materials and US companies are relatively limited. Therefore, the new US-Japan agreement is not expected to offer us any direct advantages. Nevertheless, this assessment is based on our present situation, and we have ambitious plans to broaden our horizons. Considering the evolving business landscape, the enactment of the Inflation Reduction Act (IRA) in 2022, and the increasing focus on electric vehicles (EVs), we now view the US market as highly appealing for expansion. With these developments, we aim to penetrate and establish a presence in the US market.
You spoke there about how the US is in an opportune moment, however, domestically there is huge pressure coming from the population change. Japan is the oldest society in the world, with a declining birth rate to make matters worse. One in three people is expected to be over the age of 65 by 2035, with a fertility rate per couple being only 1.3 kids. How are you combating these challenges when it comes to the recruitment of new staff or in terms of new markets beyond Japan?
SEC Carbon is a company with approximately 300 employees, and the majority of our workforce, around 200 individuals, operates from our Kyoto, Fukuchiyama factory. Overcoming the constant challenge of filling these 200 positions has been achieved through a focused effort on local recruitment. Through close collaboration with the local community and partnerships with nearby educational institutions, we have streamlined the process of hiring new employees from the area. This approach has not only bolstered our brand recognition but also garnered significant local support.
Our Amagasaki office serves as the central hub for essential management functions, including finance, recruitment, public relations, and sales. In contrast to exclusively hiring new graduates, SEC Carbon has recently adopted a more inclusive hiring policy, actively seeking mid-career professionals to expand our potential talent pool. By flexibly responding to new graduates and mid-career recruitment, we have successfully managed the hiring process throughout our company's history.
To create a more diverse and inclusive workforce, particularly at our Fukuchiyama factory where the employee demographic is predominantly male, we are committed to recruiting women and non-Japanese workers, broadening the pool of potential employees.
Furthermore, embracing innovation, we are actively incorporating automation, mechanization, and AI technologies to not only address manpower shortages but also enhance production efficiency.
Your electrodes are used as a principal component to manufacture steel and electric arc furnaces (EAF). Now we know that one trend in the industry is the enlarging of furnaces, and they are getting larger for durability and efficiency reasons. For electrode makers, there are a number of technical challenges to make electrodes larger. We know that new materials, new surface treatments, and new techniques have been applied or experimented with to come up with the most optimal solution. Your company is very successful in this respect because you are a market leader in larger diameter electrodes. Can you give us some insight into how you’ve been able to develop these and some of the key technologies you possess?
The trend of manufacturing larger Electric Arc Furnaces (EAFs) emerged approximately 20-30 years ago, and we have since adapted by enlarging our electrodes to align with industry standards. Utilizing cutting-edge technology, we have successfully developed over 30-inch diameter electrodes, while a global shift towards 30-inch class diameter electrodes is becoming increasingly prevalent for large-scale EAFs. Though several foreign companies may also be pursuing this size, as pioneers in the field, we are determined to maintain our position at the forefront of innovation. To achieve this, we are actively exploring opportunities to invest in additional facilities, which will enable more efficient production of these large-scale electrodes.
As the size of EAFs and electrodes increases, operational electricity stability becomes a crucial consideration. To address this, our research and development efforts are centered on identifying optimal designs tailored to meet the diverse needs of various electric furnaces. Our goal is to pair electric furnaces with the most suitable electrodes to ensure a stable and safe electricity supply during operations. This commitment to precision and a customer-centric approach sets us apart from regional competitors, reinforcing our position in industry.
Aside from electrodes you also produce these SK-B Graphitized Cathode Blocks; your largest product in terms of revenue, generating 64% of your sales. SEC Carbon also produces fine powders, which are used for lithium-ion battery applications. Moving forward, which areas do you see the most growth potential with new applications on the market? Which industries are you looking to make inroads in?
Currently, our main source of dominant profit comes from the cathode blocks, especially in the Middle East, where the demand for our products is steadily growing.
While we experienced a minor downturn in the fine powder sector last year, the overall trend is positive with year-on-year growth. With the increasing prevalence of electric vehicles (EVs), we anticipate further opportunities to fortify this aspect of our business. To align with global trends, we have set our sights on targeting the domestic market in Japan, as well as China and the US for expansion in this sector.
On the other hand, the electrode business currently faces challenges. Nevertheless, we still consider remaining potential and are determined to rejuvenate and revitalize our sales efforts, particularly in the US market. In the past, we held a substantial market share in the US for this business, but it has since declined. By revitalizing this segment, we aim to strengthen our overseas operations and regain a prominent position in the US market.
SEC Carbon doesn’t just sell products, and you provide a number of services including after-sales, technical follow-up, and electrode optimization or cathode block optimization for smelting operations. How do you provide those services in the Middle East and North America? Are you currently looking for partners that could help you do better and improve your after-services?
The foundation of our overseas business is promoting together with major Japanese traders for exporting our products. However, we recognize the importance of providing excellent customer services to further enhance our global presence. To achieve this, we provide high-quality support by technical service members with advanced knowledge, in addition collaborating with local consultants who possess expertise in aluminum smelting. These consulting firms play a vital role in understanding and meeting the specific needs of our customers, thereby providing valuable services to local companies.
As part of our expansion strategy, we are now exploring opportunities to expand the range of services we offer to customers through these consulting firms. This initiative is aimed at bolstering our overseas operations in conjunction with our existing partnerships with trading firms.
While we are actively seeking new overseas partners with whom we can collaborate to broaden our market reach and achieve further growth.
Your company’s motto is “From Kyoto to the World.” Which markets are you particularly looking at for future expansion?
For our various products, the approach varies depending on specific factors. Let me first provide some context regarding the cathode blocks. The aluminum smelting industry demands substantial electricity, making it economically viable only in locations with low electricity costs. In Japan, we used to have aluminum smelting factories, but they ceased operations due to the high electricity prices. As a result, we have shifted our focus to target countries with low electricity costs, where aluminum smelting industries are currently developing.
Regarding electrodes, our primary focus lies in North America and Southeast Asia. While we previously held a significant market share in Southeast Asia, competing with Chinese products has become challenging due to their considerably lower price points. For specialized products like fine powders, our target markets include China and North America.
In the past, we’ve interviewed the president of Kyoei Steel who was very passionate about the mini-mill steel making method as a way to save resources, especially as the world’s population approaches 10 billion people. In the case of your technology, how do you believe we can transform our society to be more carbon-neutral and more energy efficient in manufacturing steel?
We are actively implementing measures to contribute to the reduction of CO2 emissions and achieve carbon neutrality by 2050. As you mentioned, the steelmaking industry currently relies heavily on blast furnaces, accounting for 70% of production. Major manufacturers operate blast furnaces, while electric furnaces account for 30% of global steel manufacturing. Electric furnaces use recycled steel scrap, CO2 emissions are reduced to one-fourth compared to traditional blast furnaces. Consequently, electric furnaces are considered an environmentally friendly option, aligning with the goal of a carbon-neutral future. We observe a global shift towards electric furnace adoption, presenting significant opportunities for our company to provide electrodes to support these furnaces.
Aluminum has emerged as an alternative to ferrous steel, particularly within the automotive industry due to its lightweight properties. This lightweight metal plays a crucial role in offsetting the weight of lithium-ion batteries, essential components of electric vehicles (EVs). Utilizing aluminum helps to reduce overall CO2 emissions, indirectly contributing to a carbon-neutral society, as our electrodes facilitate aluminum production.
At our factory, we prioritize resource and energy efficiency in our production processes. Regarding carbon neutrality by 2050, I am somewhat skeptical unless advancements are made in CO2 collection and storage technologies. Solely cutting emission sources may not be sufficient to achieve this ambitious goal.
An area of our unique R&D focus involves collaborating with a university venture to convert CO2 into carbon. This technology is based on molten salt electrolysis technology for aluminum, which we have been researching for some time. The carbon generated in this process can be utilized in fine powder applications. Currently at the laboratory prototype stage, our R&D efforts aim to commercialize this technology as soon as possible. It combines carbon capture utilization (CCU) and carbon capture storage (CCS) technologies to further enhance its potential. These technologies are of great significance across Japan, drawing attention from both public and private entities.
Looking ahead, we recognize that the extreme pursuit of carbon neutrality may impact our ability to use carbon as a material in our products, given its association with fossil fuel byproducts deemed harmful. This contributes significantly to CO2 emissions in the steel industry. In response, large companies are researching carbon replacement with hydrogen. However, the high temperatures required for steel manufacturing make this a complex and pending issue without a definitive solution.
As a president of a company that is looking to go global, in terms of the global stage, how would you like your firm to be seen?
Our goal is to maintain our position as the world's leading provider of cathode blocks. We are dedicated to pushing the boundaries of innovation and introducing special products that pave the way toward a carbon-neutral society.