How will Chinese GE Market play out in August?

China's graphite electrodes prices have not been showing any upward movement over past few months and given the internal factors in China's downstream sector, the outlook looks grim for the ongoing August month also.

According to market sources, the operating rate of EAF in the current month so far has been 57%, down by 15% from July's 72%. Since mid-July, the EAF enterprises have started incurring losses. At present, according to the steel cost model, the cost of steel production via electric furnace route stands to be at RMB 3,933 per tonne (USD 557/MT) and are subsequently registering a loss of RMB 273/MT (USD 39/MT), calculated based on scrap price (tax inclusive) of RMB 2,390/MT (USD 338/MT) in Changzhou area of Jiangsu province. Subsequently companies are opting for production cuts with shutdown becoming their last resort.

As a matter of fact since late July, most of the EAF plants have begun to incur losses of RMB 50-1000/MT (USD 7 - 14/MT) mainly due to the cumulative increase by RMB 30-140/MT (USD 3-19/MT) in steel scrap price pushing up the steel production costs. And although the companies are incurring losses, other costs such as labour continues to remain constant even after production cut or shutdown. Therefore, in late July, though the EAF enterprises had a willingness to reduce production, their plans suspended in the hope of a turnaround in August.

However, since the start of August month, the fundamentals of the steel market weakened further, amid eased policy on production cuts in Tangshan, and there is no other city that can boost participants' confidence by coming up with tougher policy. Along with this on the U.S. - China trade war continues to aggravate, and macro news such as tariff on RMB 300 billion on export goods from China, and the Yuan depreciation worsened the market confidence, resulting in tumble of domestic steel prices. Thus, in the face of high costs and weak steel prices, it is being anticipated that the EAF enterprise would reduce output in the coming time period, thus further weakening GE prices.

At present, the domestic GE prices in China are continuing to remain weak but slightly stable. The electrodes producers have high inventory resulting in the situation of oversupply. The EAF steel producers are exerting pressure on the GE producers to further lower their prices resulting which few of them have stopped production and few have suspended their expansion plans.

The prices of UHP grade 450mm GE are heard to be at RMB 19,000 - 21,000/MT (USD 2,690 - 2,970/MT) whereas that of 600mm are at RMB 45,000 - 60,000/MT (USD 6,370 - 8,500/MT). The price of 450mm HP grade GE are at RMB 14,000 - 16,000/MT (USD 1,980 - 2,265/MT) and that of 600mm are at RMB 19,000 - 22,000/MT (USD 2,690 - 3,115/MT).