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Recovery still far away in the global graphite electrode manufacturing industry

The graphite electrodes find application mainly in the steel manufacturing through Electric Arc Furnace (EAF) route. EAF steel is mainly produced in EAFs by melting steel scrap through the generation of heat with the help of electricity. Graphite electrode act as an electrical conductor in the furnace owing to its high electrical and thermal conductivity and higher-temperature strength, further, this is consumed in the process. Thus, the demand for graphite electrodes is solely dependent on the steel produced through EAF route.    

The global graphite electrode manufacturing industry is marked by high entry barriers in the form of technology. This is closely guarded and as a result, the global industry is marked by the presence of a few players and has not witnessed any new entrants in the past few decades. The top five players account for ~70% of the global graphite electrode manufacturing capacity.

The global graphite electrode industry’s size has remained very small with an annual production capacity of nearly 1.85 million tonnes in 2015. This was on account of very low consumption rate of graphite electrodes per tonne of steel manufactured. In 2004, graphite electrode’s consumption per tonne of steel manufactured through EAF route was ~2.4 kg, which over the years has gradually declined to ~1.7 kg owing to improved efficiencies of EAFs and better quality of graphite electrodes. In view of the fact that, graphite electrode is essential for steel making through EAF route and it accounts for only 2-3% of the total steel production cost, therefore, graphite electrode manufacturers have historically enjoyed high pricing power in relation to their customers.

However, at the same time, graphite electrode manufacturers have a lower bargaining power with the suppliers of key raw material, the needle coke. This is produced through a complex refining process involving crude oil and globally there are very few manufacturers of needle coke with a limited capacity. Hence, the availability and the prices of needle coke are governed by a small number of players and the graphite electrode manufacturers have been price takers. But, due to the high bargaining power in relation to their customers, they had been able to pass on any raw material price hike to their customers and enjoyed healthy profitability until 2012, even when the crude oil prices were soaring.

The global demand and production of steel increased at a CAGR of 6.0% and 6.7% respectively, during 2003-08 (pre-global financial meltdown). The steel production through EAF route in the same period registered a CAGR of 6.2% on the back of new EAF capacity additions.

An increase in the steel production through EAF route led to an increase in the demand of graphite electrodes. This increase augured well for industry participants leading to capacity additions and high utilisation levels (although capacity utilisation exhibited a declining trend due to the addition of new capacities at a faster pace than demand growth, capacity utilisation remained high for the industry). A healthy demand also led to improved realisations and profitability for graphite electrode manufacturers during the period.  

     

     

*HEG and Graphite India’s revenue declined in 2008 in US Dollar terms due to INR devaluation.

After the global financial crisis in 2008, the steel production through EAF route declined (in-line with the decline in the global steel demand and production due to weak economic conditions), which led to a low demand for graphite electrodes. However, the demand for graphite electrodes revived in 2010 with the recovery of steel manufacturing from EAF route (again in-line with the recovery in the global steel production). But, despite a recovery in the global steel demand, the industry faced an overcapacity situation (due to capacity expansion at a higher rate than demand growth in previous years) and this put pressure on the steel prices. Hence, capacity utilisation of steel manufacturers remained low all over the globe (excluding China). A similar trend was observed in EAF steel, leading to a decline in the demand for graphite electrodes and pressure on graphite electrode realisations. 

The situation worsened for the graphite electrode manufacturing industry after 2013. While steel manufacturers across the globe (including EAFs) were forced to operate at low utilisation levels and numerous capacity addition projects were cancelled owing to an overcapacity situation in China, the world’s largest producer and consumer of steel. The country continued to produce at a high rate buoyed by healthy domestic demand. China accounted for almost half of the total world’s steel output and consumed 44.3% of the steel globally in 2014. Although, China’s steel demand started to decline succeeding 2013 due to slowing down of its economy, but Chinese steel manufacturers continued the production at a high rate leading to an oversupply situation in the country’s domestic market. Furthermore, China increased its exports in a bid to liquidate high levels of steel stocks. The global steel prices, which were already under pressure due to the overcapacity and a slowdown in demand from China, came under more pressure with the flooding of the international market by the low-cost Chinese exports and declined even further to their lowest level in the past decade.

Additionally, with a decline in the demand from China and subdued steel prices, the prices of key inputs for steel manufacturing (through BOF) such as iron ore and coking coal also declined sharply. At the same time, prices of steel scrap (a key input for steel manufacturing through EAF) too declined due to a lower demand from EAFs, however, the decline in scrap prices was comparatively lower than the decline in iron ore prices, making the production of steel from scrap unviable. The EAF steel producers found it more viable to buy low-cost steel (manufactured through BOF) and convert them into end products. As a result, the share of EAF steel production declined to 25.2% in 2015 from ~30% in 2011. 

A reduction in EAF steel production further resulted in a decline in the demand of graphite electrodes and its consequent realisations. The overall global graphite electrode capacity utilisation continued to decline from 83% in 2011 to 65% in 2015 (on a reduced capacity). The pressure on demand led to a decline in graphite electrode realisation by 9% during 2009-11. Though the industry took a price hike of 10% in 2012 to maintain profitability, a constant demand pressure led to a continuing price decline of ~29% between 2012-15, this, in turn, led to a reduced profitability of graphite electrode manufacturers. However, needle coke’s (key raw material) price declined in 2015 due to a sharp fall in the crude oil prices, almost all major graphite electrode manufacturers witnessed margin contraction and some even recorded operating losses during 2013-15.

*Graphite electrode prices extrapolate from the information provided in Graftech International Ltd.’s annual reports and has been used as an industry benchmark. Actual prices might be slightly different from what is presented here, but the trend remains same.

     

*HEG and Graphite India have March ending of the financial year, while Graftech, SGL and Showa Denko have December ending of the financial year. 

A decline in demand for graphite electrodes and pressure on the prices pushed the industry into consolidation mode with the erstwhile top two graphite electrode producers, Graftech International Ltd. (Graftech), USA and SGL Carbon SE (SGL), Germany closing their graphite electrode manufacturing capacities. The global graphite electrode manufacturing capacity declined to 1.85 million tonnes in 2015 from 1.94 million tonnes in 2013. Moreover, Graftech was acquired by Brookfield Asset Management Inc. in August 2015 and SGL hived off its graphite electrode division in a separate entity and sold it to Showa Denko K.K. (SDK), Japan in October 2016, making SDK world’s largest graphite electrode manufacturer with an annual capacity of 290,000 tonnes.

Televisory believe that the graphite electrode industry’s consolidation and elimination of excess capacity will augur well for the survivors in the industry, in the long term and the prospects for the global graphite electrode industry seems bright. However, in the short to medium term the graphite electrode industry will continue to remain under pressure as the global demand outlook for steel is still weak and a sharp recovery in the steel manufacturing, especially through EAF route is not in sight. According to the World Steel Association (WSA), the global steel demand is expected to grow at 0.5% in 2017 after a marginal increase of 0.2% in 2016 and a decline of 3% observed in 2015. China’s steel demand is expected to decline by 2% in 2017 after the decline of 1% expected in 2016 and 5.4% witnessed in 2015. Similarly, steel production through EAF route is expected to remain under pressure in the short to medium term as well. However, the recent increase in coking coal prices has narrowed the production cost gap between BOF and EAF steel and economic viability of steel production through scrap steel is in sight. The oversupply situation in the global steel market is likely to wane away gradually with China expected to shut down 150 million tonnes of steel capacity in the next 3 years. A gradual recovery in construction and manufacturing activity in the U.S. and Europe (major EAF steel producing regions) along with developing nations will increase the demand for steel and thus, in turn for graphite electrodes.

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