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Last Updated : Jul 05, 2018 02:10 PM IST | Source: Moneycontrol.com

Graphite electrodes supply-demand dynamics: Let’s do the math again

Graphite India is expected to continue to ride the strong cash flow cycle in the medium term

Anubhav Sahu @anubhavsays

Anubhav Sahu

Moenycontrol Research

A re-look at the graphite electrode industry suggests that Indian graphite companies are expected to remain key beneficiaries of favourable supply-demand dynamics. HEG’s annual report shed additional insights and add to our conviction on it and Graphite India. The latter is expected to continue to ride the strong cash flow cycle in the medium term.

Demand for graphite electrodes from China to soar

As per HEG’s annual report, China own requirement for graphite electrodes is expected to jump enormously. This is led by twin factors of closing units operating on inefficient steel-making technology (induction and blast furnace) having an adverse environmental impact and replacing it with units with electric arc furnace (EAF) technology.

Last year, China closed induction and blast furnace units having 155 million tonne (MT) and 115 MT capacities, respectively. At the same time, 105 new EAFs, with a capacity of 66 MT, have been installed or commenced construction in China in 2017.

Earlier this year, China’s Ministry of Industry and Information Technology (MIIT) announced new policy measures mandating steel capacity replacement in Beijing and near provinces would be in the ratio of 1.25:1. That means for every 1 MT of new steel manufacturing capacity through the EAF route, 1.25 MT of conventional capacity will have to be closed. At one end, though this puts a cap on growth in steel manufacturing capacities, it also increases the share of steel manufacturing through the EAF route.

The share of steel manufacturing capacity using EAF has already risen to 9 percent in 2017 from 6 percent earlier.  The Chinese government has set a target of achieving 20 percent steel production through the EAF route by 2020.

Steel production in China through the EAF route 
Capture1

Source: HEG

On account of this structural change, graphite electrode requirement is expected to increase 2,18,000 tonne per annum (tpa) by 2020.

Growth in steel manufactured via EAF
Capture2

Source: HEG, Platts

China’s steel exports cut; to boost incremental demand for EAF globally

Due to ongoing supply-side reforms, China steel exports have already declined. In Q1 CY18, steel exports fell to 60 MT (annualised) versus the earlier annual run- rate of around 100 MT. This cut down in supply is expected to increase steel manufacturing elsewhere through the preferred EAF route.

At present, about 45 percent of steel manufactured outside China comes through the EAF route. In 2017, steel manufactured outside China increased by 36 MT, of which 76 percent was manufactured through the EAF route. Even if we assume a 2 percent compounded annual growth rate in global steel production in 2020 and taking in to account lower exports from China, incremental steel production outside China would be around 135 MT. Assuming that only 75 percent of new capacity goes through the EAF route, we are talking about incremental demand of 1,80,000 tpa from 2020 onwards.

Where are we now?

A World Steel Association (WSA) report on global steel production pegs graphite electrode demand at about 850,000 tpa. Excluding China, this accrues to 716,000 tpa.

World steel production in 2017
Capture1

Source: WSA, Moneycontrol research kT: kilo tonne

Global current capacity, excluding China and Russia, is 725,000 tpa. In case of Russia, demand exceeded production by about 8,000 tonne in 2017 (source: www.steel-360.com), which means that at 85 percent capacity utilisation (considering needle coke constraint), global availability of graphite electrodes (excluding China and meeting Russia’s requirement) is in about 610,000 tpa. That means the delta between demand and supply is met by China.

Graphite electrode capacity, excluding Russia & China (tonne)
Capture3

Source: WSA, Moneycontrol Research

China’s export of graphite electrodes is expected to taper significantly. News flow suggest that Chinese 2017 exports at 208,000 tonne can decline to 80,000 tonne by 2020 due to sharp increase in domestic demand for graphite electrodes. Additionally, about 300,000 tonne of inefficient graphite electrode capacity in China has been shut causing further supply constraints. Only 40 percent of production in China is of high quality (UHP grade) and is utilised by global steel manufacturers.

Graphite electrode exports from China moderates
Capture4

Source: Trademap.org

New supply/ brownfield expansion to take time

The supply-demand dynamics for graphite electrodes are constrained by Chinese supply-side reforms and increase in steel manufacturing through the EAF route worldwide. New supplies are expected in the form of brownfield expansions like 20,000 tonne by HEG and 35,000 tonne by GrafTech International Holdings . Such projects might take 18-24 months to fructify. At the same time, greenfield projects might possibly take 4-5 years to commission and stabilise.

Threat to needle coke expansion remains

Needle coke prices rose by more than 45 percent year-on-year. Going forward, the same is expected to increase even more as newer contracts could exert pressure on business margins. As underlined by HEG, margins will rationalise to more sustainable levels. Also read: HEG cash flow visibility remains intact

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.

For more research articles, visit our Moneycontrol Research page
First Published on Jul 4, 2018 02:25 pm
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