The Black Grit That Beat Bitcoin’s Rally and Didn’t Slump

LAGOS (Capital Markets in Africa) – China’s push for blue skies has caused an obscure steelmaking ingredient to fuel gains of as much as 2,600 percent since the start of 2017 for the few companies that supply it, minting at least one new billionaire.

The material is graphite, a form of carbon that has seen demand soar because of its use in electric-vehicle batteries and the lower-pollution steel mills that China is favoring to clean up its air. That double-whammy pushed shares of Graphite India Ltd. up more than 1,200 percent since January 2017, boosting the wealth of founder K.K. Bangur to about $1.75 billion, according to Bloomberg calculations. HEG Ltd. fared even better, rising more than 26-fold to add $1.4 billion of value for its owners including Chairman Ravi Jhunjhunwala.

China unveiled a 3-year “blue-sky protection plan” in July, widening anti-pollution controls that are shuttering plants that make the graphite electrodes and traditional blast-furnace steel mills. Companies that recycle China’s increasing mountains of scrap metal are being forced to switch to electric-arc furnaces that burn through about 2.5 kilograms of graphite electrodes for each ton of steel produced.

China’s pollution curbs could double the share of electric arc mills to 20 percent of total production by 2020, from less than 10 percent now, pushing global demand for electrodes up 60 percent, according to Mitsubishi UFJ Morgan Stanley Securities Co.

“This uplift should be viewed as structural and not just an up cycle,” said Bangur, 58, who hails from a Kolkata-based industrial family that split its businesses spanning cement to jute mills to textiles in the 1990s. “The outlook looks promising.”

The graphite crunch has had repercussions around the world. In Japan, industry leader Showa Denko KK’s value has tripled to $6.7 billion, giving it ammunition to consider buying assets in Europe. Rival Tokai Carbon Co., which has seen its market value jump to $3.8 billion, from $691 million two years ago, forecasts that the market won’t peak for at least another four to five years. U.S.-based producer GrafTech International Ltd. has risen 15 percent since an initial public offering in April.

Brokerages such as Jefferies Group LLC and ICICI Securities Ltd. predict the shares will continue to rise as the shortage of electrodes keeps prices at elevated levels for the next two years. In a note last month, Jefferies recommended a one-year target price of 5,430 rupees for HEG while ICICI Securities has a target of 1,400 rupees for Graphite India, both at least 30 percent above current levels.

Shares of HEG climbed 1.2 percent to 4,130 rupees in Mumbai on Tuesday, the first gain in six days, and Graphite India rose 1.5 percent. Showa Denko advanced 2.8 percent in Tokyo and Tokai Carbon gained 5.2 percent.

The graphite electrode market has been on a tear since the start of 2017, about when Bitcoin took off. While the cryptocurrency slumped from its peak in late 2017, graphite has held its gains.

The two Indian producers, which together account for about a quarter of global supply, belong to an industry that hasn’t seen a new competitor since HEG started 41 years ago. The technology to make the electrodes, high cost of setting up and running a plant, tight supply of raw materials, and increasingly strict environmental laws have deterred investment.

Only three years ago, HEG posted it’s first loss in 39 years as it struggled with a global steel glut. “We were with our back to the wall,” said Jhunjhunwala in a message on the company’s website.

Now the company is planning to raise capacity at its existing plant by a quarter to 100,000 tons.

“Even then, it is going to take us a minimum of 2.5 years” to complete the expansion, said Jhunjhunwala, 63, in an interview. “Due to challenging entry barriers and being a highly capital intensive business, supply constraints are expected to continue for the foreseeable future.”

Graphite electrodes are manufactured using needle coke, a material made from coal tar or the carbon residue from refining crude oil, while natural graphite is mostly used to raise the carbon content of steel in a blast furnace. An unexpected factor boosting synthetic graphite is the diversion of some needle coke to making lithium batteries, according to consultant Roskill.

India’s domestic steelmakers have also been hit by the rise in electrode prices and concern that export demand may leave them unable to secure supplies. The Indian government responded in February by introducing a 20 percent tariff on exports of the material that would be implemented if the need arises.

Meanwhile, prices for electrodes continue to rise with one-off shipments reported as high as $25,000 a ton in the export market. Most contracts are fixed for a year’s supply and producers are estimated to get about $14,500 a ton for electrodes this fiscal year, up from $2,446 in 2016-17. The rapid price increase is prompting some producers to offer shorter contracts rather than lock in supply at lower rates.

Bangur and Jhunjhunwala were “far ahead of their time,” said Sanjiv Bhasin, an executive vice president at IIFL Securities Ltd. “Nobody realized what the potential could be,” said Bhasin, who has tracked the companies since 1999. “Now they have been raking in the bucks that they have not seen in a lifetime.”

Source: Bloomberg Business News