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Graphite electrode is one of the most important graphite products.
With its unique metallic and non-metallic properties, it occupies a pivotal position in the energy and industrial sectors. Its excellent electrical and thermal conductivity and chemical stability make it an indispensable raw material for downstream industries such as steel smelting, among which electric furnace steelmaking is the most demanding. According to the national standard, graphite electrodes can be divided into three types: ordinary power graphite electrode (RP), high power graphite electrode (HP) and ultra-high power graphite electrode (UHP).
Graphite electrode industry chain, source: Jinghang Special Carbon
In the industrial chain of graphite electrodes, petroleum coke is the main cost source, and its price fluctuation has a significant impact on the cost of graphite electrodes. According to the 2023 annual report of Fangda Carbon (600516), the cost of graphite electrode raw materials accounts for about 70%. The price of petroleum coke rose more than 5 times in 2020~2022, and began to fall at the highest point in the second quarter of 2022, but the recent price has always been higher than the trough in 2020.
Changes in the price of petroleum coke, source: Kaiyuan Securities Research Institute
The cost of raw materials remains high, but the price of graphite electrodes has plummeted, which makes the industry mourn. In the short term, it is difficult to change the demand side of the industry, and the industry will remain bleak.
First, most enterprises have negative gross profits
Since 2017, with the optimization of production capacity in China's steel market, the proportion of electric arc furnace steelmaking has increased, and the demand for graphite electrodes has grown steadily. In the second half of 2017, under the background of a sharp decline in the price of raw materials for electric furnace steelmaking, the economic benefits of electric furnace steelmaking enterprises have been significantly improved, which has driven the whole chain of the industrial chain. However, this price decline has not ended, and the price of graphite electrodes has been fluctuating and declining since 2018.
Graphite electrode price and profit, source: Everbright Securities Research Institute
Since the second quarter of this year, the price of graphite electrodes has further declined, and this decline can be described as the last straw that crushes the camel. Compared with the price of petroleum coke, we can find that the price of petroleum coke does not fluctuate much, which leads to the decline in the price of graphite electrodes, which further compresses the profit margins of enterprises, and for most enterprises, even falls below the cost line. According to Xinchun information, the current industry average cost of UHP600 specification is 17,410 yuan/ton, and this price is nearly 2,000 yuan/ton higher than the purchase price of steel mills. The performance of listed companies also confirms the market of graphite electrodes, although the leading enterprise Fangda Carbon still maintains a positive gross profit, but such as Yicheng New Energy (300080) annual graphite electrode sales are also close to 1 billion yuan, the gross profit margin in the first half of this year was -16.25%, and even last year has begun to be a negative gross profit margin of -2.68%.
Gross profit margin of Yicheng New Energy products, source: wind
In the context of declining prices, the competition in the graphite electrode industry is becoming more and more fierce. In order to maintain market share, many companies do not hesitate to sell products at prices below cost, which exacerbates the phenomenon of involution in the industry.
2. Anti-dumping for export
In the face of the downturn in the domestic market, graphite electrode companies actively increase their export share. As a result, China's surplus graphite electrodes poured into the international market at lower prices. This has led to anti-dumping investigations in many countries and regions. For example, in April this year, Japan launched an anti-dumping investigation on mainland graphite electrodes, because Japan believed that the unreasonably low price sales of mainland graphite electrodes had caused substantial damage to Japan's industry. In principle, the survey is completed within one year.
Fortunately, Japan is not a major exporter of graphite electrodes from the mainland, so this measure has not had a great impact on mainland exports. Since the beginning of this year, the export of graphite electrodes in mainland China has shown a more stable trend than domestic sales. According to customs data, China's graphite electrode exports in August 2024 were 29,400 tons, an increase of 60.13% month-on-month and 22.43% year-on-year. From January to August 2024, China's graphite electrode export volume was 199,600 tons, a year-on-year decrease of 0.72%.
2024 China's graphite electrode export volume, source: Xinchun information
According to the export situation in August this year, the top three export destinations of the mainland are the U.A.E., Korea and Malaysia. Among them, the amount of graphite electrodes exported to the U.A.E. was 3,900 tons, a surge of 351.86% from the previous month; Graphite electrode exports to Korea and Malaysia also increased by more than 150% month-on-month. Among them, U.A.E. and Malaysia are both regional trade centers, and it is not excluded that they assume part of the role of trade transit, which also provides a good channel for mainland enterprises to avoid anti-dumping.
3. The world's largest producer
The reason why the export of graphite electrodes from mainland China has attracted the attention of other countries is that mainland is the world's largest graphite electrode producer, accounting for about 65% of the world's production capacity. The production capacity concentration of the graphite electrode industry in mainland China is moderate, with CR10 reaching more than 45%.
In the haze of falling prices, leading enterprises remain strong, but small and medium-sized enterprises that do not have scale advantages and market competitive advantages are in a difficult situation. For example, Fangda Carbon, in the first half of 2023~2024, its revenue and profit have both declined compared with previous periods, but from the perspective of its gross profit margin performance, it is much better than other companies in the same industry.
Gross profit margin of Fangda Carbon products, source: wind
Although the graphite electrode industry is facing the challenge of sluggish demand in the short term, the active price support and market adjustment of leading enterprises are expected to bring a ray of light to the industry. In the next market competition, leading enterprises should not only be independent, but also actively play a leading role in raising prices and making short-term adjustments. However, from the perspective of industry supply and demand, it is difficult to increase the demand side in the short term, and it is difficult to break through the downturn in the industry.
Note: This article does not constitute any investment advice. The stock market is risky, and you need to be cautious when entering the market. There is no harm in buying and selling.