Rising Needle Coke Prices May Not Dampen HEG, Graphite India’s Stellar Run
Indian graphite electrode makers HEG Ltd. and Graphite India Ltd. have had a stellar run in the last one year, driven by China’s crackdown on pollution. But one limiting factor has emerged: prices of needle coke. That, however, may not be an immediate concern though.
The cost of needle coke, the key raw material for graphite electrodes, rose to its highest in five years at $1,440 a tonne in the quarter ended June, according to Jefferies. It estimates the price to more than double to $3,500 by March 2019.
The rise was not factored in the June-quarter earnings as it comes with a lag, HEG said in its earnings presentation, adding that the full impact of the cost pressures will be felt in second half of the year through March. It expects the prices to jump 100-150 percent by the fourth quarter, with demand from electric vehicles causing the shortage. Needle coke is used in lithium ion batteries, besides making graphite electrodes for electric arc furnaces that turn scrap into steel.
Tarang Bhanushali, assistant vice president-research at IIFL Wealth, doesn’t expect an immediate impact. Margins of graphite makers are expected to remain at elevated levels even if they don’t improve, at least in the second quarter ending September, according to him. Some softening in the second half of the financial year may emerge as needle coke price rise starts reflecting in the financials, he said.
Shares of HEG and Graphite India have jumped 85 percent and 49 percent, respectively, this year. That follows a record surge of 1,456 percent and 872 percent in 2017, driven by a cut in supplies of needle coke by China to curb pollution. A byproduct of petroleum or coal tar, needle coke is highly polluting.
China’s crackdown on polluting mills reduced steel exports by 15 percent in the first half of calendar 2018, HEG and Graphite India said in their presentations. That increased the production and capacity utilisation of electric arc furnaces in other steel producing nations, boosting demand for graphite electrodes.
As a result, revenues and profitability for the two graphite electrode makers jumped multifold over the past year through the quarter ended June. Margins surged as higher capacity utilisation improved realisations.
What’s expected to further aid financials is that the legacy contracts have ended. While HEG said most of the pacts pegged to older prices expired in the quarter ended March, Graphite India’s legacy contracts tapered off in the three months to June. This will improve realisations as new ones will be pegged to higher prices as the companies have started quarterly contracts, according to HEG’s management.
Jefferies raised its realisation estimate for Graphite India for the ongoing financial year to $14,000 a tonne from $12,500, indicating that the spot market realisations are around $15,000-20,000 a tonne.
HEG and Graphite India are, however, close to exhausting capacity as demand surges. Both operate at a utilisation rate in excess of 80 percent. And only it’s expected to increase.
HEG, which increased prices to electrodes in July, said it plans to increase its capacity from 80,000 million tonnes to 1,00,000 MT in 18-24 months. Graphite India, however, is not keen to add production capacity.
Citing shortage of needle coke as a limiting factor, ICICI Securities in a report said any increase in availability of the raw material will further boost capacity utilisation.
The companies are also looking secure supplies. Graphite India signed needle coke contracts until December, which ensures smooth production, according to Jefferies. Phillips 66, one of the large producers of needle coke, is debottlenecking to improve utilisation, which should help in the short term, according to HEG.