Since September, "power rationing" in various places has become a hot topic recently. The cause of "power rationing" is the promotion of the "carbon neutrality" goal and the dual control of energy consumption. In addition, since the beginning of this year, there has been endless news about rising prices of various chemical raw materials. Among them, graphite electrodes, an important material in the iron and steel industry, have not received much attention in the market this year, and the iron and steel industry is related to carbon neutrality. This article is the first in the graphite electrode series, analyzing the fundamentals of the industry and looking for investment opportunities.
Industrial chain situation: mainly used for steel production
Graphite electrode is a high-temperature resistant graphite conductive material. Graphite electrodes can conduct electricity to generate electricity, thereby melting scrap iron or other raw materials in blast furnaces to produce steel and other metal products, mainly for steel production. Graphite electrodes are a low-resistivity material that resists thermal gradients within an electric arc furnace. The main characteristics of graphite electrode production are a long production cycle (generally three to five months), high power consumption, and a complex production process.
Graphite electrode industry chain:
The upstream raw materials of the graphite electrode industry chain are mainly petroleum coke and needle coke, which account for a large proportion of the production cost of graphite electrodes, accounting for more than 65%. It is difficult to guarantee the quality of domestic needle coke, so my country's dependence on the import of high-quality needle coke is still high. In 2018, the total supply of needle coke in the Chinese market was 418,000 tons, of which 218,000 tons of needle coke were imported, accounting for more than 50% of the total; the main downstream application of graphite electrodes is electric arc furnace steelmaking.
Graphite electrodes are mainly used in iron and steel smelting. The development of my country's graphite electrode industry is consistent with the modernization process of my country's iron and steel industry. China's graphite electrodes started in the 1950s. Huabao Securities divides the development of graphite electrodes in my country into three stages:
1. Started research and development in 1995 - mass production in 2011;
2. In 2013, the differentiation of enterprises intensified—the prosperity in 2017 was greatly improved;
3. Entering a downward trajectory in 2018-2019 will be a price war.
Supply and demand situation: the demand for electric furnace steel accounts for the vast majority
In terms of production and consumption, according to Frost & Sullivan's analysis, China's graphite electrode production dropped from 530,000 tons in 2015 to 500,000 tons in 2016, showing a downward trend. In 2020, the pandemic adversely affected manufacturers' operations due to administrative restrictions on business hours, workforce disruptions, and changes to operating procedures, among other things.
Affected by this, my country's graphite electrode production has dropped significantly. The agency predicts that with the resumption of work and production in the future and the management's policy support for the development of electric arc furnace steel, the output is expected to reach 1.1426 million tons in 2025, and the compound annual growth rate from 2020 to 2025 is about 9.7%.
The above is the output and then look at the consumption. Since 2016, the consumption of graphite electrodes in China has begun to rise and will reach 590,000 tons in 2020, with a compound growth rate of 10.3% from 2015 to 2020. It is estimated that the consumption of graphite electrodes will reach 940,000 tons in 2025. The figure below shows the organization's detailed forecast for graphite electrode production and consumption.
Huabao Securities Research believes that the output of graphite electrodes is in line with the changing trend of electric furnace steel output, and the increase in the output of electric furnace steel in the future will drive the demand for graphite electrodes. According to data from the World Iron and Steel Association and the China Carbon Industry Association, my country's electric furnace steel output in 2019 was 127.4 million tons, and the graphite electrode output was 742,100 tons. The production and growth rate of graphite electrodes in my country is closely related to the production and growth rate of electric furnace steel in my country.
In 2019 and 2020, the total global demand for electric furnace steel and non-electric furnace steel will be 1.3768 million tons and 1.4723 million tons respectively. Huabao Securities predicts that the total global demand will further increase in the next five years, reaching about 2.1044 million tons in 2025, of which the demand for electric furnace steel will account for the vast majority. According to estimates, it is expected to reach 1.8095 million tons in 2025.
Compared with iron ore steelmaking, electric furnace steelmaking has obvious advantages in terms of carbon emissions compared with iron ore steelmaking. Using 1 ton of scrap iron and steel to make steel can reduce 1.6 tons of carbon dioxide emissions and 3 tons of solid waste emissions. The brokerage research report believes that the carbon emission ratio of electric furnace steelmaking and blast furnace steelmaking per ton is at the level of 0.5:1.9. A securities researcher said, "The development of electric furnace steel must be the general trend."
In May, the Ministry of Industry and Information Technology issued the "Notice on Printing and Distributing the Implementation Measures for Capacity Replacement in the Iron and Steel Industry", which will be officially implemented on June 1. The implementation of measures for capacity replacement will greatly increase the proportion of steel substitution and expand the key areas of air pollution prevention and control. The agency believes that the new version of the capacity replacement method will further reduce steel production capacity and integrate the steel industry to resolve excess capacity. At the same time, the implementation of the revised alternative method will accelerate the development of electric furnaces, and the proportion of electric furnace steel will increase steadily.
Graphite electrode is the main material of electric furnace. Driven by the demand for electric furnaces, its demand is expected to increase further, and the price of graphite electrodes will rise accordingly.
Large price fluctuations: showing cyclical characteristics
From 2014 to 2016, due to the weakening of downstream demand, the global graphite electrode market fell, and the price of graphite electrodes remained at a low level. In 2016, graphite electrode manufacturers cleared their production capacity due to falling below the manufacturing cost line, and social inventory reached a low point. In 2017, the policy canceled the intermediate frequency furnace for strip steel, and a large amount of scrap iron flowed into the electric furnace of the steel mill. Affected by this, the demand for China's graphite electrode industry surged in the second half of 2017. Due to the increase in demand for graphite electrodes, the price of raw material needle coke rose sharply in 2017, reaching US$3,769.9/ton in 2019, an increase of 5.7 times compared to 2016.
Since 2017, the global electric arc furnace steel market has picked up, resulting in a tight supply of graphite electrodes around the world. In 2017, the demand for graphite electrodes outside China soared, and the price hit a record high. Since then, due to excessive investment, production, and procurement, the market has had too much inventory, and the average selling price of graphite electrodes plummeted in 2019. In 2019, the price of ultra-high power graphite electrodes stabilized at 8824.0 US dollars/ton, but it was still higher than the historical price before 2016.
In the first half of 2020, the epidemic caused the average selling price of graphite electrodes to drop further. With the recovery of the economy, the production and sales of graphite electrodes in my country have improved since August, and the operating rate of electric furnace steel has remained at 65%. Market inquiries are also gradually increasing. The price of graphite electrodes has also rebounded since September 2020. The price of graphite electrodes has generally increased by 500-1500 yuan/ton, and the export price has risen sharply. As can be seen from the figure below, around 2017, the graphite electrode market price experienced a surge, but then the price fell sharply and fell into a downturn.
The author inquired about the price trend of graphite electrodes in the past two years (from January 2020 to the present) on the WIND terminal and found that even short-term prices fluctuated significantly (see the figure below). The price of graphite electrodes bottomed out around the end of 2020, and a short-term rebound began this year, with the price returning to the level at the beginning of 2020.
Huabao Securities predicts that with the recovery of domestic and foreign markets and the growth of electric furnace smelting under the domestic carbon-neutral policy, the price of graphite electrodes will remain stable in the second half of 2021.
For the price trend of graphite electrodes in the next few years, & is expected to go higher (by 2025). The agency gave the following reasons:
The global electric arc furnace steel market has picked up, and overseas demand for graphite electrodes has increased since 2017, resulting in a worldwide shortage of graphite electrodes. However, since February 2017, my country's environmental protection regulations have become stricter, many graphite electrode factories have been shut down, and domestic supply is tight, resulting in a further shortage of graphite electrode supply in 2017. In 2017, the price of advanced ultra-high-power graphite electrodes rose sharply in 2017.
The agency believes that in the foreseeable future, the demand for electric arc furnace steel, raw material supply, and prices may remain stable, and the supply of graphite electrodes is expected to remain stable. In addition, the graphite electrode market is highly concentrated, and major domestic market players will maintain stable operations in the future. Therefore, it is expected that in the foreseeable future, there will be no substantial changes in China's graphite electrode market, and the price of high-quality ultra-high power graphite electrodes is expected to maintain steady growth.
Domestic Competition Landscape
The next step is the "key point" that everyone loves to see. Having said so much, which companies are the leaders?
The middle reaches of the graphite electrode industry are graphite electrode manufacturers, and the participants are mainly private enterprises. China's graphite electrode production accounts for about 50% of the global graphite electrode production.
Regarding enterprises, Fangda Carbon (.SH) is a well-deserved leader in graphite electrodes. Fangda carbon graphite electrode has a market share of more than 20% in China, and overseas exports account for more than 30%. The production capacity of graphite electrodes ranks third in the world.
Kaifeng Carbon (, .SZ) is also worth mentioning. Kaifeng Carbon took the lead in developing high-quality needle coke raw materials for ultra-high-power graphite electrodes, breaking foreign monopolies and realizing self-sufficiency in graphite electrode raw materials. In September 2019, Yicheng New Energy Company completed the issuance of shares to purchase 100% equity of China Pingmei Shenma Group Kaifeng Carbon Co., Ltd. Kaifeng Carbon became a wholly-owned subsidiary of Yicheng New Energy Company. A high-tech enterprise that sells ultra-high-power graphite electrodes. The products are mainly used in electric arc furnace steelmaking, and can also be used as conductive electrodes in industrial silicon furnaces, yellow phosphorus furnaces, and corundum furnaces. Since then, Yicheng Xinneng has become the second authentic graphite electrode company in the A-share market.
In addition, in terms of Hong Kong stocks, on October 5, (hereinafter referred to as "") submitted a prospectus to the main board of the Hong Kong Stock Exchange, intending to list in Hong Kong, and Southwest Securities International is the only listed company. sponsor. Founded in 2012, it is a global ultra-high power graphite electrode manufacturer. Its customer base covers more than 25 countries around the world, including the world's largest electric arc furnace steel manufacturers in the Americas, EMEA, APAC, and China. , electrical appliances, machinery, equipment, and transportation industries to sell its products.
Xu Tengyao