Hi Guys,
{GE – Graphite Electrodes, GI- Graphite India}
The surge in GE prices have made many people join the wagon. But it always make sense to first research the story before taking the plunge.
The increases in share prices of GE companies over the last 1 year is good enough to make one rich($$$).
HEG prices jumped up by 12 times whereas that of its peer GI have grown by 6 times.
Why in the world this jump?
From making losses or marginal profit over the last few years, the company’s profit have a astronomical jump in their fortunes.
Everything happens for a reason and the sudden change in fortunes of these companies can be attributed to 3 factors:
Supply side constraint of GE due to pollution crackdown by the Chinese govt over the years
Spike in prices of key raw material used in manufacturing GE
All time high steel prices further increasing the demand of GE
As you can see that GE is used in the process of Steel manufacturing via EAF only. So the fortunes of GE is totally dependent on the steel making by EAF process.
Due to the high investment required to manufacture GE and sad state of the industry in the past years, no new capacity have been added in last 15-20 years but rather reduced. Also, it takes about 6 months to prepare 1 GE.
Around the world, the share of steel making through EAF process is 45% excluding China but as soon as China is brought into picture the share drops to below 25% as China produces world’s 50% steel of which more than 90% is through blast furnace.
Iron ore prices have seen sharp drop from $135 in January 2014 to $45 in 2016 whereas the price of steel scrap dropped from $285 to only $220 during the same period, placing the blast furnaces advantageously.
But something has been slowly happening in China for the last 4 years which started becoming visible.
Given the deteriorating environment situation in China with the mindless industrialization, the Chinese govt have started crackdown on polluting industries. They are closing down of blast furnaces and production of about 30-30% of low grade GE. This has led to cut down Chinese export capability of steel from 120MT /annum to 60 MT/annum. Third, on top of this an estimated more than 300,000 tonnes per annum of China’s electrode capacities have also been shut down since the beginning of this year again due to the same environmental issues.
With closure of these facilities, the production of steel through EAF has again become viable and is creating strong demand for EAF. It is expected that even if China restarts steel manufacturing, it will be only through EAF.
Second factor for the growth of GE companies was the sudden increase in the price of Needle Coke.
With the increase in prices of Needle coke, the key raw material for manufacturing GE(60% of cost) , the prices of GE increased by 15 times i.e. from $2000/ton to $30,000/ton.
The surge in the price of needle coke is mainly due to new found usage in lithium ion batteries used in elective vehicles & phones , thus constraining its supply.
With the huge increase in the price of the GE, Steel manufacturers have started to charge its customers an ‘Electrode Surcharge’ of $15/ton assuming 2 kg of GE is required to produce 1 ton of steel.
The current steel prices are at a multi year high and all these companies would want to increase the capacity further as well as enhance capacity utilization. This in effect increases the further demand for GE and ability to absorb the cost.
Now, will this trend going to continue, well I think so for the near future. But, as any other commodity business, there is a cycle and we need to keep a close eye on the prices of key items involved such as Steel, Needle Coke, GE.