Why Graphite India, HEG Expect A Much Better Second Quarter
Shares of the makers of graphite electrodes, a key input for steelmaking, have surged in the past year as demand recovered, reversing two years of declines. The companies expect consumption to improve in the ongoing quarter.
Prices of electrodes rose in the past year as the global economy recovered from the first round of lockdowns in early 2020. As a result, HEG Ltd. and Graphite India Ltd. have jumped about threefold in the last year.
The showing is reminiscent of their stellar rally three years ago when shares of the two companies skyrocketed after China cracked down on polluting steel units. That drove steel demand from rest of the world, propelling prices of graphite electrodes used in electric arc furnaces. This time, higher steel prices and a quicker-than-expected rebound in demand has aided the surge.
Q1 Cements Turnaround
Operating income rose for both Indian graphite electrode makers in the quarter ended June. For Graphite India, it surged 35% sequentially, while HEG saw an 18% growth. It was driven by higher prices, which was partly offset by slightly lower electrode volumes during the second wave and higher commodity costs.
Margins are expected to improve substantially in the ongoing quarter due to depletion of high-cost electrode and needle coke inventory, Manish Gulati, executive director at HEG, said in an interview to BloombergQuint. He guided for 10-15% sequentially higher electrode prices and capacity utilisation.
Electrode prices rose 10% for both ultra-high-power and high-power grades in April-June. And he expects another 10-15% rise in the second quarter ending September on rising steel production through electric arc furnaces.
Higher Output, Demand Aid Prices
Prices rose because of higher production in North America, South America, European Union and the Middle East where steel scrap is recycled in electric arc furnaces.
The global crude steel production excluding China surged 35.8% over a year earlier and 6.2% from the preceding quarter in the three months ended June, HEG’s management said in a conference call.
All major steel-producing countries registered a sequential growth except India, where output declined 4.4% because of the second wave.
Domestic demand for steel and electrodes, however, started rising from June as lockdowns were eased.
Demand for steel and electrodes is expected to rise in both domestic and international markets, KK Bangur, chairman at Graphite India, said in an analyst call after April-June earnings.
Global crude steel production between January and June surpassed crossed 1,000 million tonnes, up 14% over a year earlier, according to World Steel Association data. The output outside China jumped 18%, while it rose 11% in China.
What is encouraging is that the rest of the world steel production has outpaced growth in China, Ravi Jhunjhunwala, chairman, managing director and chief executive officer at HEG, said in an interview to BloombergQuint. This augurs well as the rest of the world produces nearly half the steel via electric arc furnaces, he said.
The China Factor
Since 2016, China has closed about 300 million tonnes of outdated and highly polluting steel production capacity but around 908 million tonnes remain, according to Graphite India’s presentation. Such units are being replaced by environment friendly electric arc furnaces.
China also abolished 13% value-added tax on certain steel exports to reduce steel production and exports. Lower exports from the nation bodes well for other EAF steel-producing nations.
The nation’s steel exports are expected to fall under the government policy to cut or maintain crude steel output at 2020 levels as part of Beijing's goal to achieve carbon neutrality by 2060.
Other Factors Supporting Steel Output
Growth in EAF steel production globally is expected to drive demand for electrodes in the near term.
India’s increased spending on infrastructure and the revival of key sectors such as construction, mining, capital goods and automobiles will have a positive impact on steel production and electrodes demand.
Withdrawal of customs duty in India on scrap imports should benefit EAF steel manufacturers.
Graphite India and HEG are not widely tracked by analysts.
Four analysts have a ‘buy’ rating on HEG, and average of their 12-month price targets suggests a potential upside of nearly 28%, according to Bloomberg data.
Five out of six analysts covering Graphite India have a ‘buy’ call, and their price targets imply an average upside of nearly 30%.
Watch the interview with HEG's Manish Gulati