10 Things We Learned From HEG Investor Presentation

HEG Ltd, fifth largest graphite electrode producer in the world, posted stellar results for Q3 FY18. Standalone revenue for the quarter came in at INR 842.71 crore, registering 235.4 per cent Y-o-Y increase.

1. Going forward, capacity utilization for Graphite Electrodes will increase further due to strong demand amid supply tightness. Growing steel production across the globe and supply of the electrodes is getting tighter in China are the main factors behind the demand-supply imbalance.

2. In the near term, margins of steel makers are set to improve as the global demand is going to shift towards non-Chinese nations as the Chinese government has reduced steel production capacity there to curb atmospheric pollution. In China, 140 MnT of Induction Furnace capacity and 25-30 MnT of Mini Blast Furnace capacity were already cut, which had lowered the steel exports. Steel exports from China had dropped to 75 MnT in 2017 from 115 MnT in 2016.

3. Steel production through the Electric Arc Furnace in China as well as in the rest of the world is expected to scale upwards, which will trigger further push to the rising demand for electrodes. Pollution concerns in the Blast Furnace route of steel production are limiting capacity expansion of the production mode.

4. The diminishing Billet exports from China are also responsible for compounding to the strengthening demand for the electrodes across the world. Billet exports from China had declined to 7-8 MnT in 2017 from 35 MnT in 2016, forcing the Billet producers across the world to ramp up their own production.

5. Supply of the electrodes is, however, not in sync with the rising demand. The global supply of the electrode is constrained due to capacity cuts in China and other parts of the world. On environmental concerns, 300,000 MT of electrode capacity was cut in China, and 200,000 MT was eliminated in the other parts of the world.

6. The acute electrode supply tightness and soaring Neddle coke price has contributed towards the abrupt price rise for the electrodes.

7. The escalating electrode price pressure is also factored by the dwindling supply of Needle Coke, a key ingredient in the electrode manufacture. Due to the demand from Lithium Ion Battery industry getting stronger, substantial quantity of the Needle Coke supply is now consumed by the battery makers, constricting the availability for electrode makers.

8. As fall out of the stronger electrode demand, the electrode sales of HEG escalated by 104.2% in Q3FY18 over the sales in Q2FY17. The Q3FY17 sales also surpassed the Q3FY16 sales by 242.5%.

9. During Q3FY18, HEG had clocked 84% capacity utilization rate, thanks to the stronger electrode demand.

10. Graphite Electrode prices are expected to stabilize at higher levels in the near future on account of the supply tightness and stronger demand.