Graphite electrode prices in China have climbed up this week by RMB 10,000 to 20,000 (USD 1,440 – 2,880/MT).
As of this week, the prevailing prices for 450-500mm UHP grade electrodes are assessed at RMB 76,000 – 83,000/MT (USD 11,000 – 12,000/MT), 600mm UHP electrode at RMB 105,000-130,000/MT (USD 15,000– 18,680/MT) and 700mm UHP electrodes at RMB 120,000-160,000/MT (USD 17,250 – 23,000/MT).
According to market sources currently the demand for UHP grade GE is quite good because of the ongoing steel production cuts from blast furnaces during winter heating season. The EAF (Electric arc furnace) steel producers are cashing on this opportunity and churning out steel resulting in an increase in GE demand and price subsequently.
@gurramlokesh - I think this could be due to the one week shutdown in China every year in Oct due to lunar new year golden week (Oct 1 - Oct 7 this year). If you notice the drop between Sept and Oct is roughly 25-30% which could be due to productivity loss of a week in a month. Am just guessing.
india will export graphite electrodes to china, in the world only 5 companies will make GE, out of that 2 are in India Graphide India and HEG, many are positive on these two stocks, share price daily falling, I am trying to dig information for falling, GI has fallen 4% today.
All the international Graphite stocks are below 200 DMA. If steel production goes down, may be Graphite electrode requirement will also come down. Was invested in Graphite and HEG for last one and half years. Got out of Graphite India recently.
If any of us expected 75 per ebit margin to sustain, we were fooling ourselves. In my opinion, for the next few quarters, should expect not more than 2000 usd per tonne fall in gross spread which stands at 11500 as of q2. 1000 for the needle coke cost increases and assuming 1000 dollar per tonne drop in realisation. so assuming gross spread comes to 9500 for next 4 quarters, ebitda per tonne can be closer to 8300 dollars per tonne. assuming 93k tonnes for gi and dollar rupee at 70, that gives an ebitda figure of 5600 crs including other income and close to 3600 crs in pat.
Having spoken to the IR point person of GI, he guided for a sustainable margin of between 60-70 per. 8300 ebitda on average 13500 ge realisation comes to around 63 per. assuming ebitda of 5500 crores for march 20 and net cash of around 4k crores by then, ev ebitda march20e is at 2.1.
Graftech is trading at about 3.5 ev ebitda dec19. all the other japanese players are close to 3-3.5 ev ebitda.
I have also had a word with the CFO of HEG. My understanding is its margins will def be higher than gi coz they have a higher exposure to exports where prices are better than in india.
The only way to make extraordinary profits in a commodity industry is when there is a supply crunch. But such extraordinary profits are always limited to a short duration of time since new capacity will come in and drive prices down. This situation in the Graphite electrode industry is a classic text book example of this. Profits are still at very high levels, but markets will start getting wary.
P.S : Had large positions in both HEG and GI, exited recently
An article in business standard about circular economy. India’s current positioning in circular economy. Why am I adding this on this article in Graphite electrode thread? The circular economy adoption points to Electric Arc Furnace(EAF) method for steel production. Consequently, demand for graphite electrode’s potential demand unless there is an alternative found. circular economy.pdf (1.1 MB)
the play from now on is not on eps growth but on some valuation rerating if the nos are sustainable. expect ebitda for fy20 to be 5000 crs for heg and 5500 crores for GI. GI is at 2x ev ebitda fy20. Should be a decent floor unless things change drastically.
Looking at market demand,future prospects,mngmnt commentory, recent correction trend,recent company takeover, recent financial ratios…GI is in a sweet spot to add on for next 2/3 years. Expecting 2/3 folds in next 6/8 months may be unfair expectation.
I think margins for these companies have peaked out. Steel cycle has also peaked for me. In a commodity business, when margins peak out, valuations look cheap. However, it is never wise to bet on such valuations when margins are at a high. I feel the stock is cheap and expect it to remain cheap until steel cycle turns very good.
