Graphite India and HEG, are the largest manufacturers of ‘Graphite Electrodes’ in India and major competitors in the global market. These two stocks are highly correlated and almost always rise and fall together in the markets. 

Graphite electrodes are used majorly in producing steel. They are used in electric arc furnaces, where they form the main heating element of the furnace. Electricity is passed through these graphite electrodes till they reach high temperatures, where the steel is then smelted. These electrodes are also used to recycle steel from scrap waste.

There was a time when both HEG and Graphite India used to trade at almost 2x-6x their present-day value. Over a period, these companies lost their value due to global factors and slumped demand. During the COVID-19 pandemic, the demand for steel slumped and so did the demand for graphite electrodes. However, both HEG and Graphite India have gained ~65% over the last three months. What are the factors that made them lose value? Will history repeat itself in the graphite sector? Let us find out.

2018, A Bad Year For Graphite

  • China was the largest consumer, producer, and exporter of graphite electrodes in the world. Essentially, it controls the industry. In 2018, the Chinese government gave orders to shut down factories that were highly polluting. Thereafter, the steel industry took a hit. 
  • China shut down a LOT OF factories that used electric-arc furnaces that used these electrodes. This caused a slump in demand for graphite electrodes and therefore production. There was panic in the global markets and a lot of panic buying happened. Steel mills filled their inventory with graphite electrodes. The prices of these electrodes rose ~5x in a year’s time. 
  • The steel mills across the globe had filled their inventories so much, that there was no need to buy more for almost 2 years. This suddenly caused a SLUMP in demand for graphite electrodes. 
  • In late-2018, India lifted anti-dumping duties on imported electrodes from China. The domestic market, therefore, took a hit. It was at this time when HEG and Graphite India took a hit and came down crashing.

Rising Prices? Graphite for Electric Vehicles?

  • From the above points, we know that the graphite electrode inventories were full for quite some time, the demand for steel wasn’t as much. Moreover, with the COVID-19 vaccine in sight, the prices of steel were skyrocketing and demand for steel was increasing. Steel mills have now managed to use up their excess inventories of graphite electrodes and their demand for more. Steel production has crossed pre-COVID levels. 
  • Graphite India in its Q3FY21 results declared an increase in revenue by ~20% at Rs 641 crores and a net profit of Rs 23 crores over a loss of Rs 41 crores in the last quarter of Q2FY21. HEG on the other hand declared revenue of Rs 344.9 crore where its loss narrowed down to Rs 80 lakh from Rs 15.4 crore. A well-rounded result along with increasing demand for steel and therefore graphite electrodes explains the rally in the graphite stocks.
  • Electric Vehicles need rechargeable batteries. These batteries need electrodes. There have been news pieces circulating around, that Graphite India or HEG might supply these in the future. However, this might not be the case in the near future. According to Manish Gulati, Executive Director at HEG India, “EV doesn’t find any use for graphite electrodes as such. Entire sales are going for the steel industry. There is a very small market of titanium smelting, magnesium, silicon, these types of companies and there also we sell some of the portion, but that is minute maybe 1-2% of sales”. So while it does not currently supply a considerable portion, this could be a major part of their business going forward, especially if capacity is expanded or steel production falls.

The graphite electrode industry faced a patchy phase, the past few years. Volatile steel prices and a glut of excess electrodes impacted the balance sheet of graphite electrode companies. A few months ago, steel prices(Hot Rolled Coil(HRC) variant) reached their record high of Rs 58,000/tonne. This had made certain infrastructure projects financially unviable. The steel prices now are getting back to normal. The demand for steel has been sustained and there is sufficient demand for graphite electrodes. The trouble in the global graphite electrode industry was a long-term one, the post-COVID period has shown signs of recovery for the industry as a whole. One can expect some really good sales figures at HEG and Graphite India provided the Indian steel industry does not face any turbulence. Surely counting on these stocks for the Electric Vehicle revolution as well.