Shares of companies engaged in graphite electrode business such as Graphite India Ltd. and HEG Ltd. fell from their all time highs as the prices of graphite electrodes, used in steel production, continue to decline. The stocks gained more than 400 percent so far this year as graphite electrode prices hit a record in August on a global supply crunch (Share price of Graphite India is 204.95 in August 1, 2017 and 642.10 on Nov 14, 2017; while share price of HEG is 493.55 on August 1, 2017 and 2077.95 on November 14, 2017).
Graphite electrodes are used in electric arc furnace based steel mills and is a consumable item for the steel industry. The graphite electrode industry is highly consolidated with the top five major global players accounting for almost 75 percent of the high end UHP electrode capacity. Majority of this capacity however, is currently located in high cost regions like US, Europe and Japan. The manufacturing process, for the high end UHP electrodes is technology intensive and is a significant barrier for the entry of new players.
Manufacturing of Graphite electrodes takes in to account the consumption of various raw materials, such as petroleum coke, pitch binder, power, and needle coke etc. The rise in raw materials has led to increase production costs, which in turn has increased the price of electrodes. China accounted for the largest market share for global graphite electrodes market, owing to the high steel production. But China has cut graphite electrode capacity by around 50 percent amid government mandated closures to curb emissions. This has led to an increase in the steel output in other EAF steel producing countries. Capacity of electrodes has also been shut in Europe and America.
So the companies such as Graphite India are benefited from various reasons such as reduced supply of both steel and electrodes, Increase of steel demand in India due to government’s investment in the infrastructure sectors, and limited needle coke availability restricting the eventual electrode supplies. The tightness on the supply side coupled with healthy demand has shifted in the favor of suppliers.
But now the position seems changing. China’s benchmark graphite electrodes prices fell 6 percent to $10, 603 a metric ton on Wednesday, according to Bloomberg data. It is down over so far 30 percent in November. Still the outlook for the industry/company remains positive. ). But the profitability can be limited by factors such as margin pressure caused by raw material volatility, and restart of Chinese electrode capacities etc. So the big question is “Is the boom period for the Graphite Electrode Makers is over?” It seems yes, as of now.