With the start of new quarter from Jul’18, the contract prices of graphite electrode in Indian market are heard to register an increase of INR 75,000 – 80,000 (USD 1,000 – 1,100/MT) Q-o-Q basis. According to the market sources, the prevailing prices of 450mm HP grade GE are assessed at 975,000/MT (USD 14,171/MT) and that of 600mm UHP grade GE are heard at INR 995,000/MT (USD 14,465/MT).
This increase of GE prices in Indian market can be attributed to limited supply of key raw material, needle coke. The needle coke prices have risen by more than 45% y-o-y basis and its import prices in India are currently heard to be in the range of USD 3,000 – USD 3,200/MT. Going forward, the same is expected to increase even more as newer contracts could exert pressure on business margins.
However, Conco Philips, one of the largest producers of needle coke, is debottlenecking its capacity and increasing production by around 50,000-60,000 tonne. This is expected to come on stream in the second half of 2018 and should help alleviate raw material concerns in the short run. While this would help stabilise raw material prices, needle coke’s usage for production of lithium ion batteries, which accounts for 15% its total usage, would remain a critical factor to look for.
Increase in GE prices benefits its manufacturers
The prices of graphite electrode across the globe are on a roll especially since the latter half of 2017 against the backdrop of supply side reforms in China and the higher usage of electric arc furnaces (EAFs) for steel manufacturing.
This global price surge in graphite electrode has highly benefitted the global as well as Indian GE manufacturers such as HEG Limited and Graphite India. In the fourth quarter ended in Mar’18 of FY18, graphite electrode manufacturers witnessed one more quarter of pricing-led growth, with HEG far exceeding expectations in terms of sale realisations and margin expansion.
As per the HEG’s Q4 FY18 report, company’s sales have surged by 50% sequentially while the sales realisations have surged by 55% at USD 12,000/MT. However, the company’s capacity utilisation stood at 84% despite the high demand for GE, partially impacted by shortage of needle coke. For FY19, the company’s management expects a realisation of around USD 11,000/MT to be sustainable in the near term. As contract renewals for graphite electrodes pick up pace, the company expects almost all its sales in the first quarter of FY19 to come from its most recent price regime. Another GE manufacturer, Graphite India is also expected to continue to ride the strong cash flow cycle in the medium term.
Falling Chinese steel exports will push GE prices thus supporting GE manufacturers
Given that China has cut down on steel manufacturing and has shut down inefficient induction furnaces and blast furnaces, Chinese steel exports have continued to decline this year too. This cut down in Chinese steel exports is expected to increase steel manufacturing elsewhere through preferred EAF route leading to rise in GE demand globally and its prices subsequently.
At the same time, electric arc furnaces are replacing induction furnaces and blast furnaces in China. According to industry reports, steel production in China through EAFs is expected to increase from 42.04 MnT in 2016 to 75 MnT in 2020 and 100 MnT in 2025. This shift in China towards EAF will rise its GE demand in China thus restricting its graphite electrode exports.
The high barriers to entry, supply side reforms in China, higher usage of EAFs for steel manufacturing and the time lag of around 4 years in getting greenfield GE capacity, will support the cash flows of global as well as Indian graphite manufacturers in the medium term.
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