HEG And Graphite India: Is This Another Record Rally?

Graphite electrode prices have spiked as demand surged, aiding margins of HEG Ltd. and Graphite India Ltd., the domestic companies making the steelmaking raw material. Yet, there’s a sobering factor—rising input costs.Domestic prices have risen by Rs 20,000 per tonne—or 7% and 5.5%—sequentially for high-power and ultra-high-power electrodes for the January-March quarter, according to data from SteelMint. That’s the fourth straight quarterly hike and the second largest since April-June 2021.Electrodes, used in electric arc furnaces for melting and alloying processes, have risen on pent-up demand as steel consumption rose when global pandemic curbs eased. In 2017-18, a record rally was driven by China’s curbs on polluting units. This time again, China is cracking down in its quest for blue skies ahead of the Winter Olympics.Prices have risen 93% (high power) and 32% (ultra high power) over the quarter ended December 2020, according to SteelMint. .The rise was anticipated. In the second-quarter earnings call, Manish Gulati, executive director at HEG, had said the company expects electrode prices to strengthen in following quarters.High capacity utilisation by the global steel industry is driving demand and prices of graphite electrodes, GrafTech International Ltd., one of the biggest makers of steelmaking raw material, said in its commentary for the quarter ended September.David Rintoul, president and chief executive officer at GrafTech, sees “significantly” higher prices in 2022. .Needle Coke DampenerWhile prices of graphite electrodes are surging, key raw material needle coke is also turning costlier. And demand is rising because of its use in lithium-ion batteries of electric vehicles.GrafTech, also a producer of needle coke, expects prices to be in the range of $1,700-2,300 a tonne over the next 12-24 months, up from its earlier projection of $1,300-1,800 a tonne.The cost of needle coke and other inputs including coal tar pitch, besides freight, have been rising sequentially. So raw material inflation pressure will persist in the ongoing and upcoming quarters.Still, GrafTech expects input costs to rise only 1.5% to 2% over the previous quarter. What that means realisation for makers of graphite electrodes as price spike will be higher than the increase in costs.That’s expected to aid margins, which started improving from the January-March quarter of 2021..Jefferies, however, still advises caution.The research firm, after the second-quarter earnings, maintained its bullish stance on the Indian graphite electrode industry due to China’s decarbonisation plans.Yet, in its November report, Jefferies slashed FY22-FY24 operating income target by 10% for HEG and cut FY22-24 earnings per share estimate for Graphite India by 9%. It has a less enthusiastic outlook for the industry as opposed to guidance by producers..ICICI Securities, however, said with a decline in steel production and exports from China, there may be a gradual increase in electric arc furnace steel production in other countries. That will aid realisations and margins of Indian producers of graphite electrodes.Shares of HEG surged 88% and Graphite India surged 65% in the last one year. Analysts predict more upside.All four analysts tracking HEG have a 'buy' call with the average of 12-month target suggesting an upside of nearly 63.7%, according to Bloomberg data. All six analysts covering Graphite India recommend 'buy', with an upside potential of 30.1%.

HEG And Graphite India: Is This Another Record Rally?

Graphite electrode makers bracing for sweeter times.

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