In recent months an unexpected crisis has erupted for steel making. Graphite electrodes are in short supply, and without them some steel makers cannot continue production. Few people have heard of graphite electrodes; that is because they are one of those parts you assume will always be readily available. Now there is a disruption, and steel buyers will face price increase. Worse still, buyers might face the looming possibility of steel shortages, shutting down manufacturing lines or construction projects.
Why are graphite electrodes important for steel? They are literally essential in one type of steelmaking, electric arc furnace, or EAF. Globally just over 25% of steel is made in electric arc furnaces. In the United States 67% of steel is created using the EAF method, and in some other major markets like Italy it is over 75%. Even blast furnaces make use of electrodes during the refining process. Stainless steel uses electrodes faster than regular carbon steel. Stainless steel is generally more processed and higher specification than carbon steel. This extra value requires extra refining.
There are several causes for the shortage, all coming together at the same time. The primary reason is that in the recent past prices were too low. Electrode prices had declined for several years. Producers were at best breaking even and most were losing money. Not surprisingly they made sharp cutbacks in electrode output. Adding to low profitability, two outside influences served to disrupt supply. Chinese production was cut as a casualty of their anti-pollution drive, while Hurricane Harvey temporarily curtailed work at a major site in the United States. The curtailment in China will abate but not go away completely. The impact of Harvey will be short-lived and should be fading by early 2018.
Ramping up electrode production is not an instant process, so just because they are needed now does not mean they can be delivered promptly. Electrodes have a lead time of several months before they are ready for shipment. A crisis that erupted in late summer will not show signs of improvement until late this year or early 2018.
Electrode prices were generally around $1/lb in early 2017. For August and September prices surged to between $14 and $16/lb. This adds about $35 to the cost of producing each ton of steel at electric furnaces. The impact is even greater for some mills, including most stainless producers. Availability started to improve in recent weeks, and prices are easing downwards toward $12/lb, while further declines are expected through early 2018. However, prices are not likely to retreat back to $1. A level of $4 to $6 is more likely, and is more in line with historic averages.
Steel prices are already feeling the impact of electrode shortages, but so far only in select countries. European prices jumped €30 to €50 in September, and remain elevated. Electrodes were not the sole reason for the hike, but they are probably the most referenced cause when sellers negotiate with buyers for 2018 contracts. The blame is somewhat misguided. Most steel in Europe is not made at electric arc furnaces. For sheet steel in particular the impact of electrodes should be minimal. But that is not what buyers are being told: we know of at least one sheet buyer who was told he would have to pay more, and electrodes were the primary reason cited. To be fair, much bar, rod, and wire in Europe is made at EAF facilities. Also to the extent that Europe imports bar and plate steel from Turkey there is an indirect push. But buyers should beware of mills overstating the electrodes influence.
Most electric furnace mills in the United States seem to be covered by contracts that last into early 2018. Supply and price are both fixed. Thus the impact in the US has been muted, despite Hurricane Harvey temporarily disrupting an important supplier in Texas. There was some chatter about declaring force majeure after Harvey, but it did not happen. As contracts start to expire in early 2018 (exposing mills to the shortage) the shortages will already be fading as increased electrode production will have begun to reach the market.
There is risk however. If the ramp up in electrode supply is delayed beyond January or February, not only will prices rise sharply in the United States, but mills will likely have to cut production. Shortages of steel – particularly bars, rods, and structurals – will become a real danger.
John Anton, Director of Steel Service for IHS Markit.
Posted 31 October 2017