Graphite electrode makers’ prospects look bright

Light supplies to keep prices firm, help Graphite India and HEG book contracts for higher realisations

Shares of graphite electrode producers HEG and Graphite India hit new highs on Thursday on firm outlook for that business. The uptrend in demand and realisation for graphite electrodes, which has helped these stocks gain substantially in the past year, is likely to sustain. This is keeping the Street bullish on both.

Graphite electrodes, used in production of steel through the electric arc furnace method, have had a surge in demand from 2016, till when it was subdued. With supplies tightening and capacity additions limited for graphite electrodes, the companies benefitted. Electrode prices surged around five times in the past year. This is expected to rise further, on the back of strong demand.

According to analysts, needle coke, a key raw material for ultra-high power grade graphite electrodes, is seeing no growth in supply. Graphite India and HEG command 22 per cent market share globally. Additionally, reduced supply of Chinese steel has led to revival of steel manufacturing in importing countries, which predominantly produce via electric arc furnace. This, too, is adding to the demand for graphite electrodes.

Constrained supply of needle coke and consolidation in the electrode industry is restricting the increase in electrode supply, according to analysts at Jefferies.

With constrained supplies, foreign brokerage Macquarie expects graphite electrode prices to stay strong for the next three years, despite the five times rise seen already. With no substitute, growing demand and limited supply, graphite electrode is more a ‘strategic resource’ than a ‘commodity’.

HEG and Graphite India have also booked new contracts at higher prices compared to the March-quarter realisation of $8,500-11,800 per tonne. Analysts are building in per-tonne realisation at $12,500 and $13,500 in 2018-19 and 2019-20, respectively.

With annual demand growing 12 per cent and rise in supplies at eight per cent over 201722, electrode manufacturers should see more gain. Macquarie estimates a 267 and 147 per cent year-on-year growth in earnings per share for Graphite India and HEG. Target prices of the two foreign brokerages indicate an upside potential of 30 per cent for Graphite India and 15-27 per cent for HEG.