Graphite electrodes sector sees rosy outlook ahead

The Indian economy has been experiencing some good growth over the past few years. It is picking up and is expected to see even more growth in the next few years.

The government has realised that if it wants the economy to grow at about 7 per cent to 8 per cent consistently then it has to spend considerably on infrastructure.

With this in mind, the government has been spending on infrastructure quite a bit and is also encouraging the private sector to do the same.

By spending on infrastructure, the government has given a fresh lease of life to sectors related to it. Sectors that have really done well in the last year or so include cement, iron and steel.

Good growth

It is not just these sectors that have done well, but also ones related to the above mentioned sectors. In today's article I am going to cover one such industry: the graphite electrode industry, which has been seeing good growth and is expected to continue to do so in the near future.

Graphite electrodes are used in Electronic Arc Furnaces (EAF), which are used by steel plants to melt scrap, from where the process of steel making is taken forward.

A graphite electrode is a device to conduct electricity down into an electric arc furnace, which generates sufficient heat to melt scrap. The reason why graphite is used in EAF is that it has a low electrical resistivity and a high thermal stock resistance, making it most suitable for the furnace.

Graphite electrodes are of two types: High power (HP) electrodes and Ultra High Power electrodes (UHP). The difference between HP and UHP is that in the case of UHP, one consumes a less amount of electrodes for making a tonne of steel. As a result, the demand for UHP grade of electrode is going up considerably.

The steel industry world has started to accept the EAF route of steel production and this can be seen in the growing share of EAF based steel production units.

Its share in the steel production units has gone up from about 18 per cent in 1975 to about 34 per cent in 2002 and is expected to be about 43 per cent by 2010.

The reason for the steel manufacturers accepting this method of production is that EAF gives a lot of cost and quality advantage.

If one sees this industry, one will see that the major areas where production of graphite electrodes is concentrated are Japan, the United States, Europe, China and India.

Striking feature

What is happening around the world is that the players in the West are either closing down or moving to economical operations due to the cost of production.

Some time ago, two plants with about 70,000 million tonne capacity closed down, emphasising that cost along with the production capacity is a crucial factor in this industry.

Another striking feature of this industry is that technology to make high quality UHP electrodes is in the hands of a few. This has acted as a barrier for new entrants and a saviour for the existing players having the knowhow and expertise.

The world's capacity of graphite electrodes is about one million tonnes and the demand is also similar to this. With demand for EAF going up by steel manufacturers the players in the graphite electrode industry are going to see some good times ahead. India has two manufacturers of graphite electrodes, namely, HEG and Graphite India.

The total installed capacity is about 65,000 million tonnes in the country whereas demand of graphite electrodes in the country is about 19,200 million tonnes. This demand has been stable over the years and is now expected to go up as more and more players are shifting to the EAF way of making steel.

The Indian manufacturers have an edge over the Chinese manufacturers as they can produce the higher end UHP electrodes which the Chinese cannot. In fact, the Chinese at the moment are net importers of higher end UHP, which is helping the Indian producers to do well globally.

The Indian producers have seen the global demand and are on an expansion mode. This act of theirs will help them reduce the cost considerably as economies of scale will come into play.

The major component of the raw material cost is power in this industry. To keep a check on this, players in the industry have started to go in for backward integration and started to have their own captive power plants.

The fortunes of this industry are to a great extent correlated with the steel industry. The steel industry is seeing an upward cycle and it is expected that this will carry on for some time to come. This is going to act as a catalyst for the growth of the graphite electrode industry, too.

The international prices of graphite electrodes have been rising over a period of time and are expected to remain firm in the near future, too. This will help the players make good profits and go ahead with their expansion plans and R&D with ease.

The only cause of concern for this industry has been the imposition of an anti dumping duty by the EU. Though the industry has been able to get the imposed duty reduced from 12.8 per cent to 7.3 per cent this is hurting the companies to some extent as the total amount of exports to this region is to the tune of about 15 per cent to 20 per cent of their total exports.

The Indian players in this industry are going to see some good times in the years ahead. The fact that they have the knowhow and the expertise to make high end UHP will put them in a good position as the margins are better in the higher grade UHP.

With the industry growing by about 7 per cent CAGR in the past three years and expected to grow by the same rate for the next few years, it is an industry to watch out for in the near future.

Siddarth Razdan heads the Dubai office of Karvy Stock Broking Ltd.