Graphite India and HEG gain on hopes of demand revival, lower input costs

Turnaround in global steel production four successive quarters of de-growth seen as a positive for the two graphite electrode makers

Shares of Graphite India and HEG have risen 51 per cent and 17 per cent, respectively, in the past month as analysts estimate demand to revive, aided by higher steel production and reduced inventory levels.

The Chinese economy has seen sustained and robust rebound from the pandemic-driven slump. This is evident from the fact that China’s manufacturing sector logged its strongest growth in a decade in November.

Global steel production, too, snapped its streak of four consecutive quarters of contraction and reported a 2.3 per cent increase on a year-on-year basis in the September quarter. This is seen boosting the earnings of these companies as prices of graphite electrodes, used in electric arc furnaces for making steel, hit a 13-month high in China earlier this week.

Investors were not too enthused by these stocks earlier given the sharp fall in realisations. Weak demand from user industries, growing imports following the withdrawal of anti-dumping duty and huge stock in the system saw realisations decline over 67 per cent in the last two years. However, a focus on reducing inventory over the next six months coupled with improving demand should aid realisations, say analysts.

And there is the additional comfort of lower raw material prices. Prices of needle coke, a key raw material for graphite electrodes, have not risen as much due to high stocks and long-term forward contracts entered by manufacturers at lower prices. “In the last one year, too, various needle coke companies globally have invested in greenfield/brownfield expansions. Hence, competition among producers would intensify, keeping prices competitive,” said Ashwani Sharma, research analyst, Anand Rathi.

China’s crackdown on polluting units had sent prices of graphite electrodes soaring between 2017 and early 2018. The shares of these companies delivered multibagger returns during this period. But a combination of factors like weak demand, high raw material costs, reentry of one of the largest graphite electrode makers in China that forced prices to crash nearly 90 per cent worsened the situation for the firms.

However, recent developments indicate that the worst may be over. “We remain cautiously hopeful that the down cycle of the electrode industry is bottoming out and with the uptick in overall economic activity, we can expect growth in the medium term,” said KK Bangur, chairman, Graphite India.