Will the Downtrend in China's Graphite Electrodes Prices Continue?

The Graphite electrodes (GE) prices in China which were on an uptrend for the majority of months in 2018 have suddenly experienced a notable drop towards the end of the year. In just ten days after the start of December month, the electrodes prices (450mm UHP grade) have fallen by more than RMB 10,000/MT (USD 1,450/MT).

Subsequently, this has raised a big question in the minds of market participants that, is this price decline a change caused by a real demand-supply mismatch or it is just a phase of short-term volatility and will this downtrend in Chinese GE prices continue in the long run? Let us analyse a few of the important factors that will help us answer the above queries.

The growth in China's electric furnaces will continue

The uptrend in China's graphite electrodes prices will ultimately depend on the development of the electric furnace steel market in the country. According to IC Carbon statistics, from January to November 2018, China's cumulative production of electric furnace steel was about 105 MnT an increase of 43% y-o-y basis. At present, the proportion of electric furnace steel manufacturing in the country's total steel producing facility has increased to about 12%, but this is far from the average level of 40% in developed countries.

This means that China will continue its policy requirements for energy conservation and emission reduction in the steel industry thus leading to growth in electric steelmaking and so its demand for graphite electrodes.

Environmental restrictions will limit GE output

With the start of winter heating season from mid-November, the environmental protection and production restrictions have been effectively implemented in "2+26" cities, and the production of graphite electrode enterprises in Shandong, Henan, Shanxi, and Hebei has been halved. Even in case of very stringent environmental protection measures in few places, graphite electrode companies have altogether stopped working. This means that graphite electrode production will show a downward trend in the coming months of the heating season till Mar'19, thus creating its shortage and positively impacting its prices.

China's Graphite electrodes inventory has not improved significantly

According to the statistics of the China Carbon Industry Association, in October 2018, the domestic inventory of graphite electrode enterprises fell by 19.69% year-on-year basis, of which high-power graphite electrode inventory fell by 11.84%, and ultra-high-power graphite electrode inventory fell by 8.18%. Also in the next two months, the graphite electrode inventory is likely to decline due to production restrictions in the winter heating season.

New GE capacity release is slow

From the latter half of 2017, the domestic GE demand in China has increased significantly resulting which the profits of GE manufactures have also added up motivating them to expand existing or add up new capacities.

However, the capacity additions in 2018 have been not as expected. According to IC Carbon statistics, 19 companies have planned to produce 821,000 tonnes of graphite electrodes, but as of November 2018, only five graphite electrode companies have completed the construction of their plants and are put into production which means that GE demand in China still higher than its supply.

Needle coke prices continue to remain high

The domestic needle coke prices in China which is a key raw material for GE continue to remain high amid its tight supply in China. The supply of high-grade needle coke is quite tight resulting in its high prices. In the start of Dec'18, the domestic needle coke prices have remained stable at RMB 2.8-3.4 million per tonne. However, as far as needle coke supply in next year is concerned, it is expected that in the first half of 2019, the tight supply situation of the needle coke market will not change.

Conclusion

Analysing the whole GE market situation in China, it can be concluded that the recent fall in GE prices in China is majorly due to drop in country's steel prices and tepid domestic steel demand during winters. However, this trend will not continue for long given the stricter output curbs announced by China's Tangshan and Xuzhou cities this week, China's promotion to EAFs for steel production, slow growth in GE capacities, lesser electrodes inventory, and an uptrend in GE prices of other countries like Japan and India which is also used as reference for deciding domestic prices in the country.