Three graphite electrodes glow red hot in an electric arc furnace at the electric steel-making shop in Volzhsky, Russia, (Photographer: Andrey Rudakov/Bloomberg)

Is The Party Slowing Down For Indian Graphite Makers?

Rising raw material costs and falling product prices may weigh on graphite electrode makers HEG Ltd. and Graphite India Ltd. over the next few quarters.

Both HEG and Graphite India have corrected close to 30 percent from their all-time highs due to concerns over weak margin. The needle coke maker Phillips 66, Steelmint website reported, increased the price of needle coke—a key raw material used to make graphite electrodes—by 24 percent.

Graphite electrode prices in China have been falling since November after the Chinese government ordered production cuts on steel mills to deal with the rising level of smog. As per Bloomberg, prices of graphite electrodes in China have dropped 35 percent since November 2018.

Prices of Indian graphite electrodes have been down 10-15 percent over the last quarter, said Macquarie analyst Sumangal Nevatia, adding that weak steel prices, Iran sanctions and destocking of electrodes are the key reasons for the drop in electrode prices.

While the third quarter results of both HEG and Graphite India may not reflect margin pressure accurately due to an inventory lag of four to five months, the fourth quarter of this fiscal and the first quarter of the next financial year may certainly see margin pressure, said Nevatia.

The rise in prices of needle coke will affect the margin of domestic companies, according to Bhalchandra Shinde, analyst at Anand Rathi.

While the margin is still expected to be on the higher side compared to last year, the Bloomberg consensus estimate shows a 500 basis point margin weakening for HEG in Q3 over the last quarter. In the second-quarter, while Graphite India saw contraction, HEG managed to expand margins on account existing inventory.