Tardy pace of new capacity additions in and shortage of key raw material – Needle Coke to support Graphite Electrode prices.
Graphite Electrode manufacturers around the globe had a wonderful run for almost a year starting from the latter half of 2017 amid supply side structural changes in China that led to promotion of steel production through the electric furnace (EAF) route, ultimately resulting in significant rise in Graphite Electrode demand and prices in China.
The Chinese government’s decision to shut down old polluting steel capacities, mainly blast furnaces, resulted in a 31% drop in steel exports from the country in 2017. This forced other countries to increase their production capacities, which was mainly done via the EAF route thereby resulting in huge demand for graphite electrodes – approximately 2–2.5 kg of Graphite Electrode is used in the production of one tonne of steel.
However, after hitting new highs last year, Chinese electrodes prices started rallying towards the end of 2018 with the start of the winter heating season. According to data maintained by SteelMint, Graphite Electrode prices in China have plunged by an average of 50-55% in just four months starting from Nov’18 till Feb’19.
Subsequently, this has raised the big question whether this price decline was caused by real demand-supply mismatch or was it just a sign of short-term volatility. But will this downtrend in Chinese Graphite Electrode prices continue in the long run? Let us zero in on a few of the most important factors:
China’s Expanding EAF Capacity
Despite the plunge in the last four months, Graphite Electrode prices remain at elevated levels even today compared to price levels in 2016 and 2017. Going forward, the prices are expected to remain buoyant mainly on account of new EAF capacities coming up in China. Electric steel’s share in total Chinese crude steel production is expected to increase to 20% by 2020, compared with 6% in 2016, 9% in 2017 and 12% in 2018. This, in turn, could increase EAF steel output to 120 MnT by 2020 compared to 52 MnT in 2016, thereby creating an additional demand of 240,000–300,000 tonne of Graphite Electrodes.
China’s Strict Replacement Policy in Steel Sector
China’s decision to keep a lid on steel capacity in the country by way of the 1.25:1 steel replacement policy will force other countries to increase their steel production. This is because, according to the policy, for every 1 MnT of new steel capacity in China, 1.25 MnT of old polluting capacity needs to be closed down. This should drive higher steel production in other countries and, in turn, boost demand for Graphite Electrodes, as additional steel production is likely to come through the EAF route.
Tardy Pace of Capacity Addition
From the latter half of 2017, domestic Graphite Electrode demand in China has shot up significantly. This has resulted in the profits of Graphite Electrode manufacturers rising simultaneously thereby motivating them to expand existing capacities or add new ones. As per current forecasts, China is likely to add about 2.12 MnT of Graphite Electrode capacity by 2020.
However, if past records are anything to go by, the capacity additions in 2018 have been less than expected. According to IC Carbon statistics, 19 companies had planned to produce 821,000 tonne of Graphite Electrodes but, as of November 2018, only five companies had completed the construction of their plants and were yet to start operations, which means that demand for Graphite Electrodes in China is still higher than supply.
High-quality Needle Coke in Short Supply
The supply of good quality needle coke, which is a key raw material in the production of high-grade electrodes, is limited in China resulting in tight supply and high prices. Domestic needle coke prices have remained stable at RMB 2.8-3.4 million per tonne over the past few weeks. However, as far as needle coke supply in the ongoing year is concerned, it is far from certain whether the tight supply situation will change in the first half of 2019. This is because although the country has plans to add more needle coke capacity, a majority of the new plants are for pitch coke and face significant challenges in sourcing high quality coal tar pitch and producing at consistent quality levels.
Also, according to estimates, China’s needle coke supplies in 2019 – including both production and imports – are estimated at 728,000 tonne whereas demand – both from Graphite Electrode and the lithium battery segment – is expected to be around 817,000 tonne. This means that needle coke supply in China will witness a shortage of 89,000 tonne in 2019, which will ultimately affect Graphite Electrode output and support prices.
SteelMint’s China ‘Roadshow’ to Assess the Ground Reality
Therefore, it can be asserted that the recent fall in Graphite Electrode prices in China is majorly due to the drop in the country’s steel prices and tepid domestic steel demand during winters. However, this trend is unlikely to continue for long given a plethora of factors: a) the strict output curbs announced by China’s Tangshan and Xuzhou cities this week; b) China’s promotion to EAFs for steel production; c) slow growth in Graphite Electrode capacities and small electrodes inventory; and d) the uptrend in UHP grade Graphite Electrode prices in other countries such as Japan and the US, which is used as a reference for deciding domestic prices in China.
To know more about how the Graphite Electrode market in China will pan out in the days to come join SteelMint at the ‘International Graphite Electrodes & Needle Coke Roadshow – China’ to be held from 8 to 12 April, 2019.