The Ups and Downs of the Worldwide Graphite Electrode Market
It is widely known that graphite is used in the automobile and steel industries. Besides the classical markets, there are new and ever-growing markets, such as lithium-ion batteries, being driven by the megatrends of digitalization and the Internet of Things. Of global graphite production, 70% is being accumulated by China.
For meeting its own population‘s huge demand, China is already trying to keep the graphite inside of its own borders by applying export duties. Not least, these measures caused the increase of graphite prices, which oscillated $500-600 around the turn of the millenium. Reaching their peak in 2012 at roughly $3,000 per metric ton (mt), the prices quickly plummeted under the level of $2,000.
After the market cool-down, however, massive turbulences erupted in spring 2017 (Fig. 1). Panic purchases by steelworks managers, unreliability of many partners and general upheaval were the consequences. The result was an unprecedented high in graphite electrode prices rising from $2,000/mt to over $10,000/mt by February 2018.
But what caused this turbulence? We found a total of four main factors.
1. The decrease of available raw materials for graphite
2. An increase in demand for steel
3. The Chinese government introduced bold restrictions and shut down several electrode plants.
4. Partners involved acted unpredictably, and contracts were broken by some producers and traders.
As a result of all these factors, chaotic market situations emerged, which complicated the situation further. The common denominator? The biggest graphite producer – China!
The Well-Known Game of Supply and Demand
After the previous year‘s weak markets, the demand for graphite electrodes skyrocketed in 2017 due to steel demand. Unfortunately, the steel industry, which was driving the recovering global economy, faced empty warehouses because producers quickly sold most of their stock at relatively low price levels after they began to rebound.
Governance and Contracting Parties
Just as in the West, China is increasingly interested in environmental protection. The former workbench of the world wants to get rid of its dusty image and face a clean future. In order to solve this tremendous task, the government tightened environmental regulations to a strangling degree. This caused many graphite electrode producers to halt their production until inspections by the government, shrinking the total output in spring 2017 to almost zero.
Facing this supply bottleneck, end users paid double or triple the regular prices for graphite electrodes, causing further price increases. The Chinese suppliers noticed that willingness, disregarded contracts and sold in favor of the highest bid. Consequences were not to be feared, since the contracting parties were too far abroad. On the other hand, Western contractors also disregarded contracts in the hope for better conditions, causing further insecurity.
Why do graphite electrode prices still remain high?
Why have prices not come back to a level of $2,000 as in 2016 and before? Will they ever drop to this level again? We do not think so. And we have found mainly three reasons to support our claim. What follows is our attempt to explain those reasons mostly from an inside-China perspective because China is both the biggest producer of graphite electrodes as well as a fast-growing user. The relevant time period is April 2018-March 2019.
Reason 1: Global Market Demand Remains High
Due to new environmental regulations introduced in China, most of the heavily polluting basic oxygen furnaces (BOF) have been forced to shut down. Most of the induction furnaces were replaced by electric-arc furnaces (EAF), which consume graphite electrodes to melt steel scrap. In China, 353,600 mt of graphite electrodes have been consumed, which marks a 3.06% increase compared to 2016.
The demand for Chinese graphite electrodes worldwide increased even more sharply than the domestic consumption. The steel industry is increasingly relying on EAF technology worldwide and demands for made-in-China electrodes. In 2017, the total output of Chinese electrodes was 590,900 mt, from which 237,300 mt were exported to overseas markets, an increase of 47.39% compared to 2016.
Reason 2: Limited Stock Inventory
Compared to 2016 and before, stock inventory levels are still low, with batch productions mainly happening after orders are placed – make-to-order (MTO) instead of make-to-stock (MTS). Some sizes still need to be ordered many months in advance. The manufacturing time of most electrode grades takes at least 65 days, and the highest grade (UHP electrode grade) takes 90 days to produce.
Most of the manufacturers stopped production at the end of 2016 due to the depression of the electrode market. When the demand suddenly increased in spring 2017, manufacturers without strong capital backing and production resources had difficulties restarting their production. Therefore, stock inventories could not level off, and they remained insufficient to match market demand.
Reason 3: Overcapacities of Electrode Producers
While market supply and demand are reaching a balance, producers’ capacities have yet to be fully realized due to the still-high raw-material prices and scarcity of production resources.
The current capacity utilization of Chinese producers is approximately 60%. In particular, smaller manufacturers with lower market capitalization are struggling. In 2017, raw-material costs and production costs made up 83.65% of total costs for graphite giant Fangda. In the prior business year, the raw-material cost position had increased 15%.
Additional capacity limitations are set by the manufacturers’ make-or-buy decisions, and most manufacturers choose to outsource graphitization and machining. Only a few manufacturers actually invest to integrate both stages. Graphitization of electrodes constitutes a long process cycle requiring vast experience. Machining is a key process that influences the overall quality of the electrodes and also requires high technical standards.
Several factories specializing solely on graphitization/machining processes are in high demand. As a reaction to sudden market price increases of electrodes, these outsourcing factories may also raise their processing fees. They often do this disproportionately since the run for electrode graphitization is so great they can practically choose their customers. Those are often the electrode producers with the highest willingness to pay.
Will new electrode manufacturers bring relief?
The year 2019 will bring about major changes in the global market for graphite electrodes. New entries are happening right now. The newcomers see their opportunities in a still-lucrative market with high average returns on their investments. New investments in 2017 will free up the capacities for an additional 524,000 mt of electrodes that might start operations by the middle of 2019.
According to a recent OECD report (2018) and a GF Securities analysis (2018), steel production capacity increases taking the EAF route are projected as follows:
- The increase of world output capacity without China amounted to 37 mmt in 2017 and is projected to be 88 mmt in 2018/2019.
- China planned to increase its capacity for steel by 31 mmt in 2017.
- In 2020, the whole world demand for graphite electrodes will be 1.3 mmt.
If we assume an average electrode consumption rate of between 1.0 kg and 2.0 kg for each ton of steel output, then the additional electrode consumption needed for 2018 and 2019 will be somewhere from 119,000 mt to 238,000 mt.
Let us compare these overestimated demand figures with the projected capacity increases of Chinese electrode manufacturers alone. This was predicted to amount to 524,000 mt, and we can see that supply will be exceeding demand by far. We write “overestimated” because we compare the increase in steel production capacity but not the actual increase in steel production.
Electrode prices between April 2018 and late 2018 were still high because of constantly rising global demand, scarce stocks and overcapacities at electrode manufacturers.
On the other hand, GES forecasts a dramatic increase in the number of manufacturers for 2019. As a result, the supply of graphite electrodes will far exceed demand. Whether or not prices will fall back to a level of $2,000/mt will be determined. After all, the factories have to be put into operation and also deliver high-enough-quality products. GES Group will therefore be very intensively involved in the analysis of new producers and their products as well as the impacts on both quality and prices.
After submission of this article in late 2018, predictions by GES have proven to be correct. Since the beginning of December 2018, prices for graphite electrodes have dropped significantly by about $3,000-4,000/mt and have stabilized at a level of $4,000-6,000/mt, depending on the grade and size.
- Fangda (2018), Fangda Carbon Annual Report 2017
- GF Securities (2018): graphite industry study report part two: graphite electrodes. GF Securities, supply&demand development of electrodes worldwide (http://pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2018/3/23/6cdd507d-f846-444e-aaac-55a493f02ed8.pdf, Retrieved 21.09.18)
- Miningscout, “Graphit hat Zukunftspotenzial,” In: miningscout.de, 19.01.2018, (https://www.miningscout.de/blog/2018/01/19/graphit-hat-zukunftspotenzial/, accessed: 22.05.2018)
- OECD, (2018): recent developments in steelmaking capacity. OECD, capacity developments in the world steel industry, (http://www.oecd.org/industry/ind/recent-developments-steelmaking-capacity-2018.pdf, retrieved 21.09.18)
- Zhong, Frank (2018), World Steel Association - China Iron Ore 2018, Beijing