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

There’s More To Worry For Graphite Electrode Makers

After a stellar run that lasted over a year, shareholders of graphite electrode makers HEG Ltd. and Graphite India Ltd. have seen their wealth erode by more than 60 percent since October. And there is more to worry.

China is expected to add 40 percent capacity by 2019-20, according to a Citi note authored by analysts Alexander Hacking and Bella Peng. The supply will outpace estimated demand and lead to Chinese exports in the second half of the year, eventually putting pressure on the prices of steelmaking raw material, the report said.

Curbs on polluting units in China had caused a global supply crunch, increasing prices of graphite electrodes. That widened the margins of HEG and Graphite India, and their shares returned more than 1,000-fold gains. But the stocks started falling since October 2018 on expectations of additional supply.

There’s More To Worry For Graphite Electrode Makers

Citi estimates addition of 465 kilotonnes in 2019, 310 kilotonnes in 2020 and 185 kilotonnes in 2021. China’s graphite electrode market will likely turn into a surplus because of its plan to expand industry capacity, Peng wrote. The 40 percent increase in supply will cause a 40 percent drop in prices, she said.

Lower prices would impact HEG and Graphite India—the two companies export 70 percent and 37 percent of their production, respectively. Also import of cheaper Chinese electrodes into India could increase at a time HEG is looking to increase its capacity by 20,000 million tonnes to 1,00,000 MT by 2021.

India removed anti-dumping duty on graphite electrodes from China in September. The HEG management, while announcing its third-quarter earnings, had flagged that withdrawal of tariffs had increased imports from China.

Falling Margins

The margins of HEG and Graphite India are expected further contract because of lower prices and costlier needle coke, a key raw material used to make electrodes, according to Macquarie.

The prices of electrodes had fallen 10-15 percent over the previous quarter in the three months ended March, the brokerage said in a note in March. And it expects them to decline another 10-15 percent in the ongoing quarter. Lower steel spreads, Iran sanctions on Indian graphite electrodes, and reduction in inventory could further put pressure on the prices.

That comes when Phillips 66, U.S.-based needle coke supplier, increased prices of the raw material it supplies to China by 24 percent in the first half of 2019, according to SteelMint website.

Anand Rathi, in a note, said realisations of graphite electrode makers will be squeezed in the next one year. Macquarie expects the margin downtrend to continue for two to three quarters.