DSIJ Interview with,R Rustogi CFO,HEG Ltd

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R Rustogi 

Chief Operating Officer & Chief Financial Officer HEG Ltd 

"The structural changes in graphite electrode industry have led to shortage of electrodes worldwide"

As a CFO of HEG, what are your top three strategic priorities?

Invest for growth, enhance shareholders' value and align finance and operational decisions based on data

Currently there is surge in demand for your product (graphite electrodes) and you are operating at more than 80 per cent capacity utilisation. Can you share your capacity expansion plan? 

The entire graphite electrodes industry is globally facing a tremendous shortage of needle coke - one of the critical raw materials. We fully import this raw material which is supplied by only three companies worldwide. Due to the raw material dependency, the entire graphite industry is constrained in achieving its full utilisation. However, we are looking at the possibilities to debottleneck around 20,000 MT capacity at our existing plant and take it to 100,000 MTPA. We are rigorously working on this project and should be able to take a decision on this in the next few months. 

We are also looking at opportunities in carbon adjacencies in the area of carbon and carbon-related material, which is currently under evaluation. 

Your operating margins in the recent quarters were quite high. Are you confident of maintaining it going forward? 

The industry has witnessed positive development relating to trend in order bookings. Earlier, the bookings would be for 12 months, which has come down to 3-6 months. This has led to reasonable level of certainty on maintaining margins safely for the next couple of quarters and we do believe we will be able to maintain these margins. There is a structural change in the supply scenario of the industry as a whole, thereby leading to healthy margins that will continue in the near foreseeable future. 

What are your plans to mitigate the rising raw material cost (needle coke)? 

As mentioned earlier, the production and availability of single largest raw material — needle coke is with three major suppliers only. Hence, we believe that that the prices would be mainly governed by overall demand and supply scenario of graphite electrodes. Our analysis of the industry dynamics in the near future gives us comfort that we shall be able to pass on the impact of increase in prices of needle coke to the electric arc furnace (EAF) steel industry customer base.

Please share your outlook on graphite industry for next two years? 

There is a structural change in the graphite electrode industry, both on the demand as well as supply side. The major influencing factor to increase the demand for graphite electrode globally including China has been the conscious effort to replace the highly polluting induction furnaces and small blast furnaces since early 2017. We have witnessed the continuity of the drive in 2018 and anticipate the same going forward. This has resulted in large-scale closing down of steel capacities in China, thereby reducing the export of steel to the rest of the world by 40% to 50%. 

Also, as the rest of the world is producing approximately 50% of its total steel (approx. 825 MMT) through the EAF route, wherein our products are used, the production of steel has suddenly jumped up by 30 to 50 MMT in the last 12 to 18 months. This has resulted in an increase in demand of graphite electrodes at a time when the graphite electrode capacities have been shut down by around 25% globally. 

On the supply side, there have been permanent closure of nearly 200,000 MTs of graphite electrode facilities in the past 3-4 years and most of them have been dismantled/razed to ground. Also, with the alternate use of needle coke into lithium batteries, none of the electrode producer is able to get their full requirement of coke, thereby restricting operations between 80-90%. 

These structural changes have resulted in the demand growth exceeding supply and hence shortage of electrodes worldwide.


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