The Black Grit That Beat Bitcoin’s Rally and Didn’t Slump
Your content is very informative. In this you have mentioned about " If we study the Commerce Dept. data published recently, there are big quantities of GE sold to countries like Spain, Turkey etc. for average prices more than $17,000, $16,000 etc. in Q1 itself.". Can you please help me with the link for this data.
Hi Payal, Please find it at the following link: http://commerce-app.gov.in/eidb/
You can use the option “Export :: Commodity-wise all countries”. Please use the Commodity code 85451100 for Graphite Electrodes
I think, this data is updated with a delay of 2 months. Also, it may not always have complete set of data, but still helps in making a very reasonable assumption about the export quantity and the price.
What we currently have is the Q1 data. I think, we can expect the July month data to be uploaded in a week or two.
Thanks a lot for the information.
Whitefield Rising Association has complained about environmental pollution by Graphite India in Bangalore and met MLA PC Mohan and pollution control Board president as per Kannada news paper Vijaya Karnataka dated 19/09/2018…
Karnataka State Pollution Control Board (KSPCB) Chairman Lakshman on Wednesday said the Board will file an appeal to the National Green Tribunal to ensure that the factory is permanently closed down.
In my opinion, the local residents have little edge in this case as Graphite India has already been given go ahead in 2013 by honourable court. The issue of broken roof at the plant can be easily fixed up.
I am one of the local residents, the factory now sits in the middle of 100s of residential complexes. I don’t see Whitefield Rising and Doddanekkundi Rising groups giving up on their fights because the pollution is in the plain sight and graphite residue found in houses around. It’s quite surprising how the company managed to get a favorable order earlier.
Wast this an opportunity to buy HEG?
I think the issue is with the planning by Authorities. Graphite had been there as long as I remember. Authorities should have asked them to move much before when they have allowed residential complex along the line.
china restarted UHP graphite electrode productions comissioned on nov 17
i remeber in HEG annual report "china doesnt have technology of producing UHP graphite electrode technology
This is intresting
This is Jan 2018 article , pls check the dates and also the capacity is 20,000 tonnes . There is always a difference of Opinion in what China says about UHP and the rest of the world
Some analysis and thoughts on HEG and GI stocks:
The correction in price seems to be overdone in both these stocks. The correction is because of the following reasons:
Overall Market correction: This, primarily being a function of banks and NBFC stocks correcting substantially, has had a contagion effect on other stocks.
Supreme Court’s ruling on the ban on usage of Petcoke released on 26th July. This has led to both HEG and GI, as well as other companies like Rain Industries to correct. The point here though is that the ban is only on Low quality Petcoke (characterised by a high content of Sulphur) being used as fuel. Needle coke is a form of Pet coke. Neither GI/HEG nor Rain Industries uses low quality petcoke and further neither use pet coke as fuel. However, when the ruling came out, exemptions were given to a few industries like Cement manufacturing companies. Calciners (like Rain), Aluminium (NALCO) and Graphite manufacturing companies need to get an exemption and these companies are confident of getting one. The exemption should be given by October 1st as per the article below.
Here are some details from the latest conference call conducted by HEG, where the company has stated that they use low Sulphur needle coke, and not as a fuel source, and that they are confident of getting an exemption.
- The news around GI’s plant in Bengaluru being a source of pollution for neighbouring residential areas. The potential EPS impact, as per the company as well as the research note by ICICI securities, should be minimal if the company moves the relevant processes to other plants. (marginal increase in power cost)
My opinion here is that the correction is overdone. The exemption from the court should be obtained next week on using needle coke and the market correction should end sooner than later. I think the stocks have bottomed out.
However, this is a wakeup call of sorts for both HEG and GI. The highest priority should be to ensure that the necessary checks/approvals are in place when it comes to environment related clearances. Not saying that this has not been done, but to be extra-cautious in these matters as this can put a spanner in the works w.r.t the Graphite story.
Another reason to be bullish on both HEG and GI is that, Tokai Carbon has again revised their Graphite Electrodes related profitability forecasts for July-December 2018. They expect sales to go up further by ~13% and EBIT by ~21% as compared to the previous forecast which was released at the end of May.
The increase in sales and profits is primarily because of increase in electrode prices and to a limited extent, the depreciation of yen and changes in capacity utilisation.
The rupee having significantly depreciated compared to prior quarters should impact EPS positively too.
Disclosure: Hold both HEG and GI in equal proportion
The Ministry of Commerce and Industry had issued a notification on Friday, September 28th, that Petroleum Coke can now be imported by Graphite Electrode companies. When the court ruling came out, cement, limekilns, calcium carbide and gasification industries had an exemption, but GE firms have been now added to the list.
the production from GI whitefield plant is minimal and so will not impact at all.Rather they wud shift production to Nasik which is lying idle, as per what i have read.
Besides, whitefiled land if they sell, will be a blessing in disguise for GI
Residents are intensifying their protest - https://www.ndtv.com/video/shows/trending-10/pollution-blackens-whitefield-how-residents-have-taken-on-big-industry-495242
Checkout the media coverage, the citizen’s groups have vowed to take it forward until the pollution problem is resolved.
Bank of America has given the target price of HEG rs. 6700. This will boost the prices of both HEG and Graphite India in coming days.
Lets Re-Analyse the story and see why so much of interest of late in GE twins . The Rationale for the meteoric rise in their price performance has been due to the Demand Supply Mismatch and lets see has anything on the ground changed
A. Supply Side (Ex China)
- Difficulty in Capacity Addition - This still exists in my view , if you analyse all the major GE players in the world , we have seen hardly any major increase in capacity for more than a year.
a. Grafftech was able to increase capacity of upto 35K ton through debottleneck
b. However its St Mary’s Facility is still not operational due to lack of Needle Coke. Plan is to start this facility in 2019 and this can add another 30K of capacity. But point to note is that Grafftech is the only integrated player that also producers NC as well . It clearly demonstrates that it is not easy to produce NC and new capacities of NC will take time
c. Tokai Carbon also added some GE capacity through debottleneck . But nothing major
d. Heg has anounced that they will add 20K over the next 2-3 years.
e. There are no expansion plans announcement from other major players GI, Showa Denko, Tokai etc
f. Summary overall 45K already added in this year and another 50K in plan jointly from Grafftech and Heg. So around 6% already added and 6% may be in store over the next few years. This clearly demonstrates the difficulty in adding new capacity for a product that has gone up from 2.5K to 15K-20K . Still only 6% increase in supply has happened (assuming World Ex China Capacity of 750K)
B. Supply Side (China)
- We have heard that 80K capacity is about to come (no confirmation though)
- Additionally China is also adding EAF Steel Capacity , we are hearing this year it might be 75Mn Ton and 100 Mn Ton by next year. So 80K GE capacity may not be enough for the new demand coming through EAF demand
- Its very hard to predict the supply additions in China but with the Spot Rates of 15K - 20K per ton of GE declared in Graftech and Showa Denko Conference confirms that there may not be enough capacity addition
C. Supply Side - Overall shortage of NC will ensure that new capacities of GE wont come so quickly . This is clearly demonstrated through non-opening of St Mary’s facility by Graftech
Price Realization - Two of the International players have already increased their forecast for the year as recent as in August 2018. This further demonstrates that prices are in excess of 15K at least in the spot side. Also as per recent Heg mgmt discussions on CNBC confirms that prices are stable if not going up . Spot Price in the range of 15K -20K per ton would be music to GE players. in addition the INR depreciation will help both the GE twins in a big way in the coming quarters
Demand - We can easily forecast that EAF capacity will keep on increasing that is evident from action taken by China and rest of world as the steel production through EAF route is on the rise.
China alone would produce around 120 Mn Ton by 2020 through EAF from 50Mn Ton from 2016-17 . This itself would mean additional demand of 140K Graphite from China alone (assuming 2Kg of Graphite for per ton of EAF as increase in EAF is approx 70 Mn Ton) .
ROW - As per initial estimates from the Q2 Heg Conf call there is an increase of atleast 40 Mn EAF capacity last year and also we can assume additional 40Mn Ton this year . This will require additional 80K this year and 160K by next year.
Demand / Supply Gap - We will need roughly 300K of additional GE capacity by 2020 (160K from ROW and 140K from China) and in all we have heard only 175K of Supply addition (95K from ROW and 80K from China)
Lets analyse the GE twins now
- If we assume forward EPS of 800 , then currently it is trading at PE of 5.5
- Heg Mgmt has clearly communicated multiple times that they will stay consistent with Dividend Payout policy which has been in the range of 30% or so. This will mean a payout of 200 - 250 INR this year. Also implying a dividend yield of around 6%
- If we assume forward EPS of 200, then currently it is trading at PE of 4.5
- We can assume a similar dividend payout of 25% - 30% like Heg so roughly 50-60 INR of dividend and a yield of 5% to 6%
GI Bangalore plant is in the news for all the wrong reasons , pls check NDTV and there is a hearing in SC as well . There is a strong case that the factory may be shut. However the company has clealry stated that they have 3 other facilities and this wont impact them . But we cant rule out some impact on Rev and NP in one quarter. Hence i prefer Heg over GI
Also this may impact some investments in GI as people dont like to get associated with a company being accused of spreading pollution etc
New supplies of NC may open up quickly - This may lead to announcement of aggressive capacity addition by GE players which we have not seen so far. However the actual production may take few years but this can dampen the prices of GE for sure
New Graphite capacity suddenly coming up in China - Chances are low as it would have come up now already. If this hasn’t happened so far then i would consider this as low risk
INR appreciation - As GE is world commodity , any INR appreciation will impact both the GE twins but it should also bring down their cost of NC (but cant offset the appreciation completely)
Shift back to BOF - Very very low risk in my view
Alternate to GE - Very very low risk in my view
Disclaimer : Heg is part of my core portfolio, so my views can be biased. Pls do your own research