@sukhlani1 wrote:
Graphite Electrode in a Special Situation
The Entire Graphite Electrode Industry is in a special situation like never seen before…
My Reasons for the same :
Strong Moat - Technology is not available publicly and new entry not easy. Last tech shift happened 25 years back.
Expansion by Exiting Players - Wont be easy as the supply of Needle coke (one of the key raw materials for Electrode is severely constrained). Needle coke is now getting used in Batteries which has caused a huge spurt in price almost up by 6 times. Current expansion plans : Graftech 35000 tonne increase and HEG going up from 85,000 to 100,000. Around 50K tonne increase over the next few years may not be enough
Total Current World Capacity is roughly 700,000 excluding China ( source : http://events.steelmintgroup.com/tag/graphite-electrode-price-chart)
Raw Material Supply Constraint to continue : As per Industry, it takes 2 to 3 years to respond to the demand on needle coke demand expansion.
China’s curb on Pollution causing a dramatic shift - China almost becoming a Net Importer from Exporter of GE. Export reduction of 120,000 tonne from China will lead to 10% reduction in overall supply (http://events.steelmintgroup.com/chinese-graphite-electrode-export-dry-2018/) . The Real impact of this will be felt in 2018
Pollution Impact - Steel can be produced through Electric Arc Furnace (EAF) or Blast Furnace(BF) where EAF is getting preference due to high pollution in BF . China has close 300,000 tonne of BF Steel Manufacturing plants already and is planning to open up 57 new EAF plants to add 120Mn Steel in 2017 and 137 Mn Steel in 2018 resulting in higher Steel prices of Steel across the world and also forcing others to produce more steel till China’s new EAF Steel capacity comes up. Also explaining drop of 200,000 Tonne of Graphite Export in 2018.
Graphite Use in Steel - 2-3 kg of Graphite per tonne of Steel so not a significant input cost for Steel
Any Alternatives of Graphite for EAF Manufactures - We need energy to make steel. You can take either for Chemical energy through exothermic reactions Or electric energy which needs GE. However it is not an easy task. However in the past GE was not a cost factor so no research has been done in this. But at this point in time there can be a lot of attention drawn towards these estimates and cost analysis. . In some plants in China and Russia plants are running without GE only on chemical energy by altering factors such as charge etc. Most EAF have gone towards hot metal to avoid GE and power consumption. This reduces GE consumption significantly. These are very early days still
Source : http://events.steelmintgroup.com/category/global-graphite-electrode-conference-2018/
Net Impact on GE prices : Prices have gone up by almost 6x and is currently at 15000 USD per tonne of Grpahite up from 2500 USD per tonne
What is factored in GE price already : GE are sold through annual contracts and the new contracts that reflects the price generally starts from January. Having said that some GE are sold through Spot prices so we expect the real impact should reflect from Q1-2018-19 Results
Is it a temporary or permananet Shift - Grafftech one of the key producers have contracted upto 60% of their capacity at 9500 USD for the next 5 years. They are able to do so since they are vertically integrated and produce Needle Code internally . GI and Heg may not be able to do such long comtracts so since they cannot favtor in Needle Coke Price commitment for so long. But still the story will be intact for several years and may not be a few quarter story
Are the profits real - Both GI and Heg have given strong dividends to reflect that profits are real and may not be only in paper. GI has spent almost 100 Crs in Dividends , still leaving 240 Cr of Net profit retained in the last quarter along
Targets for GI - Difficult to predict as it depends on two key factors : Price for Needle Coke and Price for GE. Both have gone up 5 to 6 times over last one year so any estimates will be futile . But we can predict looking at the price factors that GE should clock EPS of 45 - 50 by Q4 of current year and anywhere between 100 - 120 by the coming fiscal year on a conservative basis.
All Contradictory views welcome
Disclaimer : Invested since lower levels and these are personal views derived from various reports available publicly. Pls do your own research before investing
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