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March 21, 2018

Building Wealth in Float Glass

Float glass manufacturing is a wealth generating industry. Float glass was invented in the 1950s, and the industry has grown steadily since then. Float glass offers a promising opportunity for investors that are aware of a populous area with unmet glass demand and have available capital to utilize.

A large part of considering whether a glass factory investment is profitable is one's investment goal. If the investment goal is to maintain wealth, financial instruments like stocks and bonds are likely a better option since they are more liquid and easier to diversify. If the investment goal is wealth creation, building an enterprise is a necessity.

Manufacturing businesses are attractive because banks can easily evaluate the value of the enterprise (since it consists primarily of physical assets), and therefore the majority of the initial investment can be financed. Financing is almost always used for float glass facilities, as the costs range from approx. US $150-250 million. By financing the project, the Return On Investment (ROI) for investors is multiplied.

After the float glass facility is in operation an investor can either collect a regular dividend or sell their interest (or a portion of their interest) in the facility (at a large multiple of the initial investment). Maintaining a large interest in the company offers the advantage of assigning board members and facility managers; a founding member of a company has much more control than is otherwise possible.

Profit and risk

Investing in manufacturing can be profitable, but it comes with risks. One cautionary tale is the countless ethanol manufacturing facilities that sprang up when oil prices were over $100 per barrel. Now oil prices are stable at $50 per barrel and most of the ethanol facilities are out of business, causing losses for the initial investors.

Float glass is a slow-moving industry in terms of core technology. Float facilities operate continuously for 10 to 20 years, meaning the feedback loop for new technologies is generally long. This slow feedback loop makes the industry attractive for new entrants since there is little risk of a new technology in the industry having a major impact in any 10-year period.

The four major float glass expenses are fuel (usually natural gas), soda ash (the most expensive raw material), taxes, and loan payback. Natural gas prices are stabilizing globally as more pipelines are built, so it is less common to have a market advantage or disadvantage due to fuel costs. Soda ash is a global commodity used in glass, soap and paper manufacturing. Taxes are the expense that has the most variability. The US corporate tax rate is 39% while some developing countries like Bulgaria and Kyrgyzstan have a 10% tax rate (but a less advanced regulatory environment).

If local taxes are high, border taxes and tariffs on glass imports can give manufactures pricing power and the ability to maintain profitability. Loan payback will be an expense for most new entrants to float glass manufacturing. A favorable loan interest rate can be captured by securing the loan with a down payment, the production equipment, and government guarantees.

Growth

Float glass growth has been outpacing global Gross Domestic Product (GDP) growth, and that is expected to continue over the next few decades. Globally, the float glass market is growing at 5% per year. Areas that are under-developed can be expected to grow more rapidly to reach the glass demand of developed nations as they modernize. There is currently no product that can replace float glass. Plastics are more expensive and are damaged by Ultra Violet (UV) rays when used outdoors. Plastics are also less scratch resistant than glass and susceptible to damage from common cleaners.

Buildings are using more glass than ever, as it is common to have glass as the only exposed cladding on a building. In some countries, regulations over the past few decades have greatly benefited float glass manufacturing. Strict energy regulations have led to the use of double and triple pane windows. Triple pane windows use three times the amount of glass as a single pane window. As concern about climate change grows, float glass manufacturers will profit. An initial assessment of the feasibility of a float glass factory can be done by considering the following questions:

  • Is there a demand for glass in the area being considered? 
  • Is glass demand being met in the area? 
  • Is financing for a major project available?

Demand

Demand for float glass exists in every area of the world, but to justify the expense of a float plant there must be a large demand that is concentrated in a reasonable geographic area. Ideally, 50% of the plant production capacity is consumed within 200km of the plant.

Calculating demand is most easily done per capita. Developed areas like Japan, USA, and Europe consume 7 to 14kg of float glass annually per person. Less developed areas like the southern Pacific, Africa, South America and Central Asia consume 1.5 to 5kg annually per person.

For example, if a 200km radius area has a population of 80 million people and annual glass demand is 3kg per person then the area can support a 600 Metric Ton per Day (MTPD) float glass factory. Float plants generally operate profitably within 600km of their location unless other factors come into play, such as water transport (which extends the range) or border taxes (which shorten the range). In the previous example, if the area is landlocked and no other float factories are within 600km, then it is safe to assume the new factory can capture 90% of the market.

Finally, there is the concern of financing: As stated above, glass factories cost between $150 and $250 million. Typically, 70% to 80% of this cost is financed, so at a minimum, an investor group should have $30 million to invest in the project. Often in developing markets local governments either invest directly in float plants or give special incentives to attract investors for float projects.

After an initial assessment of the viability of a float glass factory, the next step is to do a more formal assessment. Companies such as Deloitte Touche, PricewaterhouseCoopers (PWC) and Stewart Engineers can conduct a thorough feasibility study that quantifies the feasibility of an area for float glass production. A feasibility study should include an analysis of the market, competition, civil engineering, process engineering and business financials. A feasibility study by a third party is useful for attracting investors and justifying bank loans.

A business plan should either precede or be completed in conjunction with the feasibility study. For example, a facility that produces only 6mm clear architectural glass will rarely be profitable, but a facility that produces multiple thicknesses, tinted glass, and CVD coatings can be profitable even in competitive markets. Companies with experience in the glass industry have an advantage when conducting a feasibility study because they leverage industry knowledge like glass prices, construction schedule, and equipment selection to give a more accurate and informed study.

Stewart Engineers is a company that has exactly that type of experience. When a country is growing, there are three key materials that are needed to fuel construction growth: steel, concrete, and glass. Glass manufacturing is experiencing stable growth and is expected to continue along that path. Investors that are looking for an enterprise that will grow their wealth should consider float glass.

An initial assessment can be done simply by the investor himself. The next step is to get a more formal assessment and business plan, and the final step is to secure project financing and select a general contractor to build the facility.

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Float glass manufacturing is a wealth generating industry. Float glass was invented in the 1950s, and the industry has grown steadily since then. Float glass offers a promising opportunity for investors that are aware of a populous area with unmet g... Read More→