Graphite electrode manufacturers witnessed another set of stellar results benefiting from the higher usage of EAF(electric arc furnaces) route for Steel manufacturing and limited supply (timelag in getting Greenfield capacity is 4-5 years). While this keeps the free cash flow visibility intact for the graphite manufacturers in the medium term,raw material constraints in terms of limited needle coke supply cap the volume growth.
As the raw material prices scale up, not surprisingly gross margin expansion cycle is stabilizing.
Sales realization per ton is now higher by 26 percent sequentially. It’s noteworthy here that needle coke prices have alag of six months from the time of contracts on account of processing time needed for manufacturing graphite electrodes. Due which a sharp increase in raw material cost recently would have a bearing on reported margins unless sales realization improvement to continue with a similar momentum.
On the volume front, the current market situation leads us to a dichotomy wherein, on the one hand, we have strong impetus from increasing EAF route of steel making supporting graphite electrode industry, while on the other hand there is a shortage of needle coke needed for graphite electrode. The very reason that there are no new green field projects been announced on needle coke front and at the same time there is a sharp increase in the number of EAF plants in China may be concealing few developments underneath which may include technological developments underway.
To resolve this mathematical impossibility,fresh investment for needle coke may follow at some point which may justify the time and technological risk of investing in needle coke facility. Or the competing mode of steel making, blast furnace, improvises in terms of environment salience and technology. Even if the later prospect emerges, it would take significant time and till that period the steady state of cash flowfor the graphite electrode players can remain intact.
The point we are drawing to investors’ attentionis that though there is still a compelling reason to add graphite players given the fundamental rationales, one should also keep in mind that cyclicality ofthe business is not totally absent. The industry remains exposed to numerous business-related risks –technological, environmental, end-market prospects,competing for technology and regulatory. Interestingly, due to regulatory reasons graphite industry players get significantly lower realizations from the domestic clients.