Higher Carbon Prices Darken the Horizon

Jan. 5, 2007

WQP: Please provide a brief update of the current state of the China carbon anti-dumping duties issue.

Derek Rowley: The tariffs have been set due to the petitioning of Calgon Carbon Corp. and Norit Americas, Inc. Both companies claimed that imported Chinese carbon was being dumped into the U.S. market at less than fair market value. The U.S. Department of Commerce has agreed with the petitioners, and preliminary tariff rates have been set and are now being collected on all imported carbons from China. These tariffs range from approximately 50% to greater than 200%, depending upon the source manufacturer of the carbon.

Again, these figures are preliminary. Final rate determinations will not be issued until April, but we believe that it is highly unlikely that there will be any significant changes to the tariff amounts when the final ruling is issued.

What is most unfortunate regarding this tariff is that the point-of-use (POU) and point-of-entry (POE) markets were not the intended markets targeted when this lawsuit was first petitioned. The primary motivation for filing the petition was non-competitive pricing in the municipal activated carbon markets. Regrettably, there was no differentiation between the markets, and the tariffs were simply placed on all carbon coming into the U.S. from China. The fact remains—all companies in our industry will be adversely affected by the new tariffs.

WQP: How is Pentair Water going to handle the added costs?

Rowley: Increases to manufacturing costs that are as significant as these tariffs force us to closely re-examine every aspect of our operation. We have been forced to look at changing many aspects of our supply chain, such as where we purchase activated carbon and how we can best change our manufacturing operations to minimize this cost impact on our business. In addition, we have created a new cross-functional team of engineers, and purchasing and manufacturing personnel to create a supply chain/value engineering team. Their mission is to optimize cost reduction opportunities while maintaining our strict quality and performance standards.

Pentair has always been committed to reducing cost through our lean manufacturing programs, but this has forced us to intensify these efforts in order to minimize the impact from the high cost increases we are experiencing. When cost increases are this significant, we are unfortunately unable to completely absorb them and are forced to pass a portion of these higher costs to our customers. Some product prices are increased much more significantly than others, but our hope is to minimize the magnitude of the increase so we can continue to offer a very high quality product at superior value to our customers.

WQP:What do you think will be the overall impact to other manufacturers and the industry at large?

Rowley: We feel that the carbon market will change greatly in the next 12 to 18 months as the market adjusts to the new tariffs. Pricing levels for all types of carbon are likely to change significantly as the market demand patterns shift for different types of carbon in the POU, POE and municipal segments. This could mean that prices may continue to rise depending on demand for other carbons that are not imported from China until other manufacturing locations in other areas of the globe increase production capabilities and become more competitively priced.

The same cost increases Pentair is experiencing will also be felt by any other company purchasing activated carbon, and we would expect them to be subjected to similar cost increases. The overall effect of increasing raw material costs will inflate the prices for all carbon products in the marketplace, which in turn will drive up the product costs for most activated carbon-containing water treatment units sold today.

For more information, contact Derek Rowley, product manager for Pentair Filtration, at 603.749.1610, or by e-mail at [email protected].

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