“Power curtailment” in various places since September has been a hot topic recently. The cause of the “power curtailment” is the promotion of the goal of “carbon neutrality” and the dual control of energy consumption. In addition, this year, there have been endless news about the price increase of various chemical raw materials. Among them, graphite electrodes, a very important material in the steel industry, have received little market attention this year, and the steel industry is related to carbon neutrality. This article is the first in a series on graphite electrodes. It analyzes the fundamentals of the industry and sees what investment opportunities there are.
Industry chain situation: mainly used for steel production
Graphite electrode is a kind of high temperature resistant graphite conductive material. Graphite electrode can conduct current and generate electricity, thereby melting scrap iron or other raw materials in blast furnace to produce steel and other metal products, mainly used in steel production. Graphite electrode is a material with low resistivity and resistance to thermal gradients in electric arc furnaces. The main characteristics of graphite electrode production are the long production cycle (usually lasting three to five months), the large power consumption and the complex production process.
The industrial chain of graphite electrodes:
The upstream raw materials of the graphite electrode industry chain are mainly petroleum coke and needle coke. The raw materials account for a large proportion of the production cost of graphite electrodes, accounting for more than 65%. Because the production process and technology of needle coke in China is still relatively large compared to the United States and Japan. The quality of domestic needle coke is difficult to guarantee. Therefore, China still relies on high-quality needle coke imports. In 2018, the total supply of needle coke in China was 418,000 tons, of which 218,000 tons were imported. , Imports account for more than 50%; the main downstream application of graphite electrodes is electric arc furnace steelmaking.
Graphite electrodes are mainly used in steel smelting, and the development of China’s graphite electrode industry is basically consistent with the modernization process of China’s steel industry. China’s graphite electrodes started in the 1950s. The development of graphite electrodes in China is divided into three stages:
1. Development started in 1995-mass production in 2011;
2. Intensified differentiation among enterprises in 2013-the prosperity of 2017 increased significantly;
3. Entering a downward trajectory in 2018-price wars will start in 2019.
Supply and demand situation: electric furnace steel demand accounts for the majority
In terms of production and consumption, the production of graphite electrodes in China dropped from 0.53 million tons in 2015 to 0.50 million tons in 2016, showing a downward trend. In 2020, the epidemic will adversely affect the operations of manufacturers due to management restrictions on operating hours, labor disruptions, and changes in operating procedures.
As a result, the production of graphite electrodes in China has dropped significantly. The agency expects that in the future, with the recovery of operations and management’s policy support for the development of electric arc furnace steel, the output is expected to reach 1,142.6 kilotons in 2025, and the compound annual growth rate from 2020 to 2025 is about 9.7%.
The above is the output, then let’s look at the consumption. Since 2016, the consumption of graphite electrodes in China has begun to rise, reaching 0.59 million tons in 2020, with a compound annual growth rate of 10.3% from 2015 to 2020. Graphite electrode consumption is expected to reach 0.94 million tons in 2025. The figure below shows the agency’s detailed forecast of graphite electrode output and consumption.
According to the research, the output of graphite electrodes is consistent with the change trend of the output of electric furnace steel, and the future growth of the output of electric furnace steel will drive the demand for graphite electrodes. According to data from the World Iron and Steel Association and the China Carbon Industry Association, China’s electric furnace steel output in 2019 was 127.4 million tons, and the output of graphite electrodes was 742,100 tons. The output and growth rate of graphite electrodes in China are closely related to the output and growth rate of China’s electric furnace steel.
In 2019 and 2020, the total global demand for electric furnace steel and non-electric furnace steel will be 1,376,800 tons and 1,472,300 tons respectively. Fortune Securities predicts that the total global demand will increase further in the next five years, and reach about 2,104,400 tons in 2025. Among them, the demand for electric furnace steel accounts for the majority, and it is estimated that it will reach 1.809 million tons in 2025.
Electric furnace steelmaking and higher furnace steelmaking have obvious advantages in carbon emissions. Compared with iron ore steelmaking, steelmaking with 1 ton of scrap steel can reduce 1.6 tons of carbon dioxide emissions and 3 tons of solid waste emissions. The brokerage research report believes that the carbon emission ratio per ton of electric furnace steelmaking and blast furnace steelmaking is at the level of 0.5:1.9. A brokerage researcher said, “The development of electric furnace steel must be the general trend.”
In May, the Ministry of Industry and Information Technology issued the “Notice on Printing and Distributing the Implementation Measures for Capacity Replacement in the Iron and Steel Industry”, which was formally implemented on June 1. The implementation measures for capacity replacement have greatly increased the ratio of steel replacement and expanded key areas for air pollution prevention and control. The agency believes that the new version of the capacity replacement measures will further reduce steel production capacity and consolidate the steel industry to resolve excess capacity. At the same time, the implementation of the revised replacement method will accelerate the development of electric furnaces, and the proportion of electric furnace steel will steadily increase.
Graphite electrode is the main material of electric furnace. Under the stimulation of electric furnace demand, its demand is expected to increase further, and graphite electrode will increase in price due to its influence.
Large price volatility: showing cyclical characteristics
From 2014 to 2016, due to weaker downstream demand, the global graphite electrode market declined, and the price of graphite electrodes remained low. As graphite electrode manufacturers cleared their production capacity due to falling below the manufacturing cost line in 2016, social inventories reached a low point. In 2017, the policy side canceled the medium frequency furnace for ground steel, and a large amount of scrap iron flowed into the electric furnace of the steel plant. Demand surged in the second half of the year. The price of raw needle coke rose sharply in 2017 due to increased demand for graphite electrodes, and reached US$3769.9 per ton in 2019, an increase of 5.7 times compared with 2016.
Since 2017, the global electric arc furnace steel market has recovered, leading to a shortage of global graphite electrode supply. The demand for graphite electrodes outside China rose sharply in 2017, and the price reached its highest point. Since then, due to excessive investment, production and purchase, the market has too much inventory, and the average selling price of graphite electrodes has plummeted in 2019. In 2019, the price of ultra-high power graphite electrodes stabilized at US$8824.0 per ton, but still remained higher than the historical price before 2016.
In the first half of 2020, the epidemic led to a further drop in the average selling price of graphite electrodes. With the economic recovery, the domestic production and sales of graphite electrodes have improved since August, and the operating rate of electric furnace steel has remained at 65%. Inquiries from the market have gradually increased. The price of graphite electrodes has also started to rebound since September 2020. The price of graphite electrodes has generally increased by 500-1500 yuan/ton, and the export price has increased substantially. It can be seen that around 2017, graphite electrodes experienced a surge in the market, but then the price fell sharply into a downturn.
The price trend of graphite electrodes in the past two years (January 2020 to present) has found that even short-term prices have shown obvious fluctuation characteristics. The price of graphite electrodes bottomed out at about the end of 2020. This year, the road to a short-term rebound has started, and the price has returned to the level of early 2020.
With the recovery of domestic and foreign markets and the growth of electric furnace smelting under the domestic carbon neutral policy, the price of graphite electrodes in 2021 will remain stable in the second half of the year.
For the price trend of graphite electrodes in the next few years, Frost & Sullivan is expected to rise (until 2025). The reasons given by the agency are as follows:
The recovery of the global electric arc furnace steel market and the continuous increase in overseas demand for graphite electrodes since 2017 have led to a global shortage of graphite electrodes. However, since February 2017, China has imposed strict environmental regulations and closed several graphite electrode factories. The domestic supply is tight, resulting in an even more shortage of graphite electrodes in 2017. The price of high-grade ultra-high power graphite electrodes rose sharply in 2017.
The agency believes that in the foreseeable future, the demand for electric arc furnace steel, the supply of raw materials and prices may remain stable, and the supply of graphite electrodes is expected to remain stable. In addition, the graphite electrode market is highly concentrated, and major market participants in China will maintain stable operations in the future. Therefore, it is estimated that in the foreseeable future, China’s graphite electrode market will not see any substantial changes, and the price of high-quality ultra-high-power graphite electrodes is likely to maintain steady growth.