Graphite Electrode Crisis to Deepen in 2018?
In mid-2018 the real crisis for Graphite Electrodes will begin. Supply tightness and high prices of Graphite Electrode in 2017 – was a preamble. There will be three main strands for crisis in the Graphite Electrode market: Rising Chinese Electrode consumption and restricted exports, EAF route gaining popularity worldwide and Needle Coke prices soaring 4 times from early 2017 levels. Because of the scale and complexity of what lies ahead, steelmakers through EAF route should expect more turbulence over the year ahead on account of further dwindling supplies of Graphite Electrodes and soaring prices.
A crisis-like situation has engulfed steelmakers around the world that make steel through the Electric Arc Furnace route on shortage of graphite electrodes. So much so, that the rising costs of graphite electrodes is not the major concern; a bigger concern is securing adequate supply of electrodes. It is however noteworthy that graphite electrode producers are not entering into long-term contracts with steelmakers and are only settling for monthly and quarterly contracts on account of consistent upward price movement and the persistent supply squeeze of Needle Coke. Graphite electrode prices have jumped almost five times in 2017. Current spot prices are at around USD 25,000/MT.
What Got the Crisis Brewing?
The Chinese government early last year decided to cull down on some of the highly polluting Industries emanating from serious environmental concerns. It is reported that somewhere in the region of 125-140 MnT of steel capacities, primarily Induction Arc Furnaces, Mini Blast Furnaces and some very old blast furnaces had been shut down. Further, temporary closures of about 35-40 MnT were also announced at the beginning of winter months in Nov’17. These closures led to a sudden and significant drop of export of finished steel from China to the rest of the world. Traditionally, China was exporting around 150 MnT per year, which fell to about 75 MnT in 2017. In addition to this, China’s export of semi-finished steel also dropped from a level of 30- 35 MT in 2016 to below 10 MnT in 2017. All this, helped the other countries of the world to increase their own production of steel which led to a sudden increase in the demand of Electrodes outside of China.
Adding fuel to the fire was the consolidation in Graphite Electrode industry. Due to overcapacity in the Electrode industry, six plants mainly in Europe and America had to be closed down over the last three to four years bringing down the Electrode capacity by around 200,000 MT.
In addition to a shortage in Electrodes themselves, a primary raw material – Needle Coke was also in hot demand and continues to be pursued by a fast growing Lithium Ion battery industry.
All this led to a demand-supply imbalance with Graphite Electrode prices soaring and global buyers scrambling to secure adequate supplies.
<China’s Graphite Electrode Prices Trend 2017>
The Real Problem Begins When Chinese Graphite Electrode Exports Dry Up in 2018
The sharp rise in Graphite Electrode prices was largely attributed to shutting down of Chinese Graphite Electrode plants in 2017, resulting in a global shortage for the commodity. However, on the contrary official figures show exports of Graphite Electrodes from China in CY17 was 201,695 MT, which exceeded the exports in CY16 by around 58%.
The real supply squeeze of Graphite Electrode exports from China is likely to kickstart in 2018 and haunt the steelmakers around the world.
We forecast that Chinese Graphite Electrode consumption will rise rapidly on the growing importance of scrap in the country, and a push by the govt. to curb pollution has led to many companies to switch to EAF route of steel making.
Graphite Electrode Scarcity to Grow – A Real Concern
In 2017, China produced around 520,000 MT Graphite Electrode, out of which 201,695 MT was exported and the rest utilized for domestic consumption. However, this ratio of domestic consumption versus exports will be a thing of the past as the quantum of export volume will shrink substantially in 2018 due the increasing Graphite Electrode domestic consumption in China, which is expected to reach a mammoth level of around 532,000 MT this year.
China’s closure of inefficient induction furnaces and polluting blast furnaces are expected to be replaced by electric arc furnace. New policy measures announced in China ensures zero growth in steel capacity by requiring steel capacity replacement to be kept in ratio – 1.25:1 or 1:1 (regional differentiation).
China is rapidly increasing its Electric Arc Furnace capacities.About 56 new EAF furnaces are coming up by the end of the current year, with an aggregate capacity of 60-70 MnT, which is likely to come on stream within the next few months. Thus, Chinese production through EAF route is expected to rise from 5.2% (CY 2016) to about ~13% in 2018.
It is worthwhile to note that while the rest of the world produces approximately 45% of the total steel through Electric Arc Furnace route. China till recently has been producing just about 7-8%. So as far as China is concerned, they are just about starting to catch up with the rest of the world in this environmental -friendly way of producing steel. China has announced its intentions to produce about 20% of its steel through Electric Arc Furnace by 2020 which is 3x more than what it used to be only one year ago – which means that their Graphite Electrode requirements could go up by as much as 3x over the next three to four years. Additionally, due to the same environmental concerns around 250,000-300,000 tonnes per annum of Electrode capacity in China have also been shutdown since the beginning of last year which led to the shortage.
Rising Scrap Generation in China Imparting Added Weight to Domestic Consumption
Chinese Scrap consumption will increase with closing down of sub-standard steel capacities after realizing the hazardous effects of CO2 emissions caused through the use of induction furnace. China is shifting towards the greater use of electric arc furnace for steel production.
Official figures indicate that, China consumed around 90 million tonnes of steel scrap last year. According to industry estimates, this figure will rise to 150 million tonnes by 2020-as China pursues a 30% scrap ratio by 2025.
In addition, 40% custom duty is applied to Chinese scrap exports, owing to which Chinese scrap exports may discontinue and will use its scrap for the expanding EAF production.
EAF Gaining Importance
Graphite Electrode purchase by Chinese steel Makers is expected to gain steam in 2018 on account of rising consumption in the country going ahead. Graphite Electrode Prices would likely stay at elevated levels on account of supply side factors, driven by changes to demand for Graphite Electrode from the Chinese Steel Industry.
According to Industry estimates, China’s EAF Output in 2017 was around 52MnT, which is likely to increase to 82 MnT in 2018 and 120 MnT by 2020.
For Steel-making via the EAF route, there is no substitute for Graphite Electrodes. Global manufacturers, who have high dependence on Electrode imports from China, need to prepare themselves for further supply tightness of Graphite Electrodes as China rapidly increases its EAF capacity and implements reforms aimed at culling polluting capacities.
Trade dynamics of Graphite Electrode – World Wide
In 2017, China remains the biggest producer and consumer of Graphite Electrodes, followed by the European Union and Japan. Whereas, the major countries that imported graphite electrodes are the United States of America, Russia, Iran and Turkey. Globally just over 25% of steel is made in electric arc furnaces. However, this trend is fast changing, and EAF route of production is gaining more and more popularity due to the inherent environmental friendliness over the Blast Furnace method. In the United States 67% of steel is created using the EAF method, and in some other major markets like Iran it is over 85%.
The increased volume of Graphite Electrode trade is the result of an improvement in demand driven by growth in the EAF production and also the soaring Graphite Electrode prices coupled with lack of availability of the same created a panic like situation among the EAF steelmakers. Earlier, steelmakers that used to stock for one month of Graphite Electrode inventory, increased their buffer stock to last for 2-3 months in view of uncertain supplies and rising prices. All this gave further impetus to the Graphite Electrode suppliers with heightened trade volumes and in turn firm prices.
New Needle Coke Contracts to Intensify Wreckage from mid-2018
Needle coke is the major raw material used in the manufacture of ultra-high power (UHP) graphite electrodes, and accounts for approximately 60% of the total raw material cost. Needle coke production is limited to a few suppliers, the biggest being U.S. oil major ConocoPhillips followed by Japan’s C-Chem Co Ltd. The needle coke industry is oligopolistic, with the top 5 major players accounting for over 80% of the world’s capacity. Most refineries don’t produce needle coke because it takes longer to make than more traditional forms of petroleum coke, analysts say.
Apart from graphite electrodes, needle coke is increasingly being used to make lithium-ion batteries, used in phones and electric cars, further tightening availability for the steel sector. And any increase in Needle Coke production could be easily offset by the rising demand from Lithium Ion battery makers.
Graphite Electrode manufacturers do not yet have firm contract for Needle Coke in hand, and do not know whether Needle Coke contracts will be on a quarterly basis or a six-monthly basis but know it is not going to be annual.
GrafTech is the only exception in this industry who are in a privileged position because they have an equivalent capacity of Needle Coke under their own belt. They have 150,000 tonnes Needle Coke plant in US which is exactly matching with the requirement for producing Graphite Electrode, which is currently around the same level.
The process of manufacturing Electrodes is pretty long, the quickest or the easiest Graphite Electrode takes anywhere between six to seven weeks to be produced and the longest one takes as much as four to five months to produce.
According to industry sources, new prices of Needle Coke will come into force from April’18 onwards. In 2017, the difference between the first half and the second half of the year was an increase of about 100% and what is likely to happen in the next six months, starting from April onwards – it would be somewhere in the region of 100% to 150% above the current prices.
For example, if we take 100 as the base price for Needle Coke contracts in Apr-Sep (last year), which climbsup to 200 till March this year, and then we are talking of something like 400-450 in the next six months.
The impact of the higher Needle Coke prices will start showing in three to four months after the old contracted price material has been exhausted and will be factored in to the cost of Graphite Electrode, which is likely to be passed on to the final consumers.
New Graphite Electrode Capacities Unheard of?
After consolidation of many graphite electrode facilities around the world, the steel industry leaned heavily on China, particularly for smaller diameter sizes. Now this supply chain has broken down because the Chinese cracked down on production for environmental reasons, and buyers are scrambling to buy from supplier from other countries. Moreover, going forward China’s self-consumption of graphite electrodes is also going to rise substantially, leaving very little quantity for exports. There is an urgent need for new capacities of Graphite Electrode to come up to ramp up the electrode supply, if not mills will likely have to cut production.
Ramping up electrode production is not an instant process, so just because they are needed now does not mean they can be delivered promptly. Electrodes have a lead time of several months before they are ready for shipment.
It takes over 2 years for any Greenfield Graphite Electrode capacity to come up, and only one such plant has come up in the last 40 years.
Possible Impact of Graphite Electrode Crisis
Graphite Electrode prices have multiplied manifold during the course of the last year, whereby prices in the international markets crossed USD 30,000/MT from around USD 2,000/MT.
- Cost of production increases for EAF
EAF steel producers have been compelled to raise the cost of steel owing to high raw material costs which has put them under pricing pressure to remain competitive against steel manufactured from other routes.
- Shift from long term to short term contracts
Availability of Graphite Electrodes is the prime concern for EAF steelmakers worldwide. Graphite electrode suppliers now prefer to trade more in the spot market and at maximum ready to commit to quarterly or monthly contracts against annual contracts to hedge against the disadvantages of long-term contracts in the event of upward price movement and the persistent supply squeeze of Needle Coke.
The global demand and supply gap for Graphite Electrodes is set to widen substantially in the coming days as the consumption will increase amid supply tightness.
And without any new capacity additions for electrodes in the near future, the demand and supply gap will in fact widen further to exert further upward momentum to the electrode prices.
Moreover, rising demand will lift graphite electrode prices, and rising prices for needle coke, the key raw material making up 60% of total cost, is likely to play a greater role in increasing graphite electrode prices.
- Will it impact global scrap prices and increase demand for billet?
The cost difference between steel production through blast furnace and electric arc furnace is likely to bring down scrap prices, as global scrap buyers will negotiate for lower prices to mitigate the high electrode cost.
Steel mills are likely to prefer to roll billet over melting scrap, worried about the supply concerns of Graphite electrodes.As availability of Graphite Electrode gets tighter amid uncertain supply situation, steel mills would likely import billet over buying scarp. As a result Scrap prices will be under pressure and billet prices will be going up.
Graph – CIF Turkey Scrap Prices vs FOB Russia Billet Prices in 2017
Demand for graphite electrodes and needle coke is likely to increase in the future; for instance, new capacity in China is likely to be EAF based due to environmental restrictions and use of battery technology will become more prevalent.
Graphite electrodes represent only a small share of input costs for steel producers. However, they are an essential input material with no available substitute; hence the story going forward will be one of whether EAF producers can manage to source sufficient electrodes to allow EAF production to continue unaffected rather than a story of steep prices for Graphite Electrode producers. The growing EAF capacity in China will be a key determining factor of Graphite Electrode prices this year.