In recent years, the economic operating environment under the new normal has undergone significant changes, with an important manifestation being the unprecedented increase in environmental governance efforts by the government. Especially in the past year, the central environmental inspection hurricane has made various industries walk on thin ice, with production costs in mining, ceramics, glass, chemical, doors and windows and other industries continuing to rise. In the corundum industry, on the one hand, due to environmental restrictions on production, the supply side is tight, and it is reasonable for prices to rise. At the same time, the investment and operation of environmental governance have directly increased production costs; On the other hand, the shortage and price increase of raw materials such as bauxite have also led to an increase in production costs. Due to the combination of multiple factors, the price of corundum products has been forced to rise all the way this year. Recently, the skyrocketing situation of graphite electrodes, one of the basic consumables for corundum smelting, has added a touch of turbulence to the price trend of corundum.

Data source: China Business Network, Everbright Securities Steel Team, not just steel goods

Trend chart of graphite electrode price index (base period: June 1, 2017)

Data source: China Merchants Nonferrous Metals

On July 6th, mainstream transaction reference prices for commonly used specifications of graphite electrodes in China

According to analysis, the surge in graphite electrodes is mainly caused by downstream demand, upstream raw material price increases, and environmental protection production cuts.

Downstream steel companies have strong demand

Graphite electrodes are mainly made from petroleum coke and needle coke as raw materials, with coal tar pitch as a binder, through calcination, batching, mixing, molding, roasting, graphitization, and machining. They are mainly used in electric arc steelmaking furnaces, mineral thermal electric furnaces, resistance furnaces, etc. Graphite electrodes for steelmaking account for about 70% to 80% of the total amount of graphite electrodes used.

In 2016, due to the sluggish electric furnace steelmaking, the overall profitability of carbon enterprises declined. According to statistics from China's carbon industry, the total sales of graphite electrodes in China decreased by 4.59% year-on-year, and the top ten graphite electrode companies suffered a total loss of 222 million yuan. Various carbon companies are engaged in a "price war" to maintain market share, and the decline in sales prices of graphite electrodes is much greater than the decrease in costs.

This situation has reversed this year. With the deepening of supply side reform, the steel industry continues to recover. In addition, various regions have thoroughly cleaned up and rectified "strip steel" and medium frequency furnaces, leading to a sharp increase in demand for electric furnaces by steel companies, which in turn drives the demand for graphite electrodes. It is expected that the annual demand will be 600000 tons.

At present, there are more than 40 enterprises in China with a graphite electrode production capacity exceeding 10000 tons, with a total production capacity of about 1.1 million tons. However, since the beginning of this year, due to environmental inspections, graphite electrode production enterprises in Hebei, Shandong, Henan and other provinces have been in a state of production restrictions and shutdowns. It is expected that the annual output of graphite electrodes will be about 500000 tons.

Upstream raw material prices continue to rise

The price increase of graphite electrodes quickly transmitted to the upstream of the industrial chain. Since the beginning of this year, the prices of major raw materials for carbon production, such as petroleum coke, coal tar pitch, calcined coke, and needle coke, have continued to rise, with an average increase of over 100%.

Among the rising raw materials, needle coke, as the main raw material for graphite electrodes, has experienced the largest price increase, with a peak of 67% in one day and over 300% in six months. It is understood that needle coke accounts for over 70% of the total cost of graphite electrodes, and the raw materials for ultra-high power graphite electrodes are entirely composed of needle coke. For every ton of ultra-high power graphite electrodes produced, 1.05 tons of needle coke are consumed. Needle coke can also be applied in fields such as lithium batteries, nuclear power, aerospace, etc. It is a scarce product both domestically and internationally, and most of China relies on imports, resulting in high prices.

Environmental restrictions on production lead to difficulty in releasing supply

Domestic graphite electrode production capacity is mainly distributed in North China, Central China, Northeast China, Northwest China and other regions. Since the beginning of this year, some small and medium-sized carbon enterprises in Hebei, Henan, Shandong, Shanxi, Liaoning and other provinces have restricted production and reduced emissions due to national environmental protection policies.

As of now, graphite electrode enterprises in some areas of Henan are still under a 20% production limit, while some enterprises in Shandong are under a 30% production limit. The national production capacity affected by environmental factors has reached 200000 to 300000 tons due to production stoppages or reductions. As the environmental protection team gradually enters various places for supervision, the short-term resistance to enterprise resumption of production remains significant; The production and raw material factors further exacerbate the tight supply situation: the production cycle of graphite electrode products takes at least 4 months, plus the stocking cycle, which takes about 6 months. Therefore, although prices have started to rise significantly since April this year, it is difficult to increase production in the short term.

The graphite electrode consumed in smelting one ton of brown corundum is calculated at 15kg. Taking the high-power graphite electrode with a specification of 500mm as an example, from 10000/ton in January 2017 to 40000/ton in July, the cost of smelting one ton of brown corundum has increased by 450 yuan only for graphite electrode. The price of brown corundum raw blocks has increased from 3200 yuan/ton at the beginning of the year to 3500 yuan/ton currently, but the overall price has only increased by 300 yuan. Therefore, under the situation of environmental protection production restrictions and rising prices of raw materials such as alumina, iron filings, and carbon materials, the crazy rise of graphite electrodes will catalyze further turbulence in the corundum market, and the price of corundum market may continue to rise in the second half of the year. At present, there is a tight supply situation in the market. Some corundum factories have shut down some production capacity due to cost issues, and are observing the stability of the raw material market and market demand before producing according to the situation. There are also some larger enterprises buying goods everywhere, digesting industry inventory, and trying to lower costs to maintain customers. Overall, in the second half of the year, corundum companies may face pressure on their profit margins as they explore product prices. (China Abrasives and Grinding Tools Network Grinding Gold Colonel)