An employee wears protective clothing as he removes slag from molten spheroidal graphite (SG) iron in the foundry at Specialised Castings Ltd. in Denny, U.K. (Photographer: Paul Thomas/Bloomberg)

Party Far From Over as Graphite Maker's Gains Exceed Bitcoin

(Bloomberg) -- A staggering rally in the shares of Indian graphite electrode producer HEG Ltd. shows no sign of losing steam as global shortages persist amid increasing demand from European steelmakers.

A cut in electrode production capacity in the past few years and a dearth of needle coke, the raw material used to make them, have reduced supplies, while a slump in Chinese steel exports has encouraged world mills to boost output from electric arc furnaces, which use electrodes to process scrap into metal.

Capacity additions are unlikely in the next two to three years at a time when demand for steel from electric arc furnaces is reviving because the world is becoming more aware of the impact of pollution from blast furnace technology, according to India Ratings & Research, the local arm of Fitch Ratings.

Party Far From Over as Graphite Maker's Gains Exceed Bitcoin

HEG climbed a massive 1,412 percent in Mumbai to 2,784.45 rupees ($44) in the past year, while Indian peer Graphite India Ltd. jumped 709 percent to 788.90 rupees. The gain in HEG far exceeded the 1,109 percent increase in Bitcoin over the same period. The benchmark S&P BSE Sensex Index was up just 29 percent.

Increased use of capacity and higher contract prices are expected to benefit both companies in the second half of the financial year ending in March, ICICI Securities Ltd. said in a report early January. The broker has targets of 1,000 rupees for Graphite India in the next 15-18 months, and 3,200 rupees for HEG.

Supplier Market

Rising steel production from electric arc furnaces, especially in China, bodes well for global demand for graphite electrodes, the broker said, adding mills use about 1.8 to 2 kilograms of electrodes to make one ton of steel.

“What used to be at one point of time a buyers’ market has now turned into a suppliers’ market,” Vivek Jain, associate director at India Ratings & Research, said by phone from New Delhi. “We haven’t heard of any new capacity additions either on the needle coke side or the graphite electrode side. Given that the deficit will only widen and not reduce, the kind of prices you are seeing right now are likely to sustain.”

Global mills have benefited from China’s efforts to shrink bloated capacity and cut pollution. The country’s steel exports fell 31 percent in 2017 to the smallest in four years, customs data show. The drive for cleaner skies has also cut Chinese supplies of electrodes, contributing to the global shortage.

World peers of the Indian electrode makers have also posted healthy gains in the past 12 months. Tokai Carbon Co. jumped 356 percent in Japan, while Showa Denko KK tripled.

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