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Japan-Update

Graphite electrode demand spurs Tokai Carbon outlook ever higher

Lithium batteries hold potential to alter boom-and-bust cycle

The market for graphite electrode is growing as China cleans up its steel industry.

TOKYO -- Tokai Carbon anticipates big gains from brisk demand for graphite electrode, with the spread of lithium batteries possibly playing an indirect role in changing the market's cyclical dynamics.

The price of graphite electrode, used in electric arc furnace steelmaking, has soared since the second half of 2017 thanks to a spike in demand from countries like China. Tokai Carbon's share price climbed nearly fourfold in 2017, topping all other Nikkei Stock Average components, as investors bought in anticipation of earnings growth.

Then Daiwa Securities changed its outlook for the Tokyo-based company from "bullish" to "neutral" in a Jan. 17 report, citing such risks as a possible drop in graphite electrode prices. The report sparked a sell-off by investors looking to take profits, sending the stock as low as the 1,400 yen range.

Tokai Carbon's earnings guidance released on Feb. 13 took investors by surprise, with net profit in the year ending in December projected to surge 150% to 30 billion yen ($278 million). The company's share price rose as much as 18% the next day and then hit an all-time high of 2,016 yen on Wednesday.

Electric arc furnace operators periodically purchase graphite electrode from producers to replenish supplies. These contracts typically set the price for a fixed period, such as six months. Given the tight market in 2017, Tokai Carbon sees prices jumping for 2018. It predicts the price of graphite electrode in 2018, both at home and overseas, to be more than triple last year's.

Tokai Carbon has seen ups and downs before. The company's stock rose rapidly from 2007 to 2008 as the price of graphite electrode soared, but crashed in the wake of the financial crisis. The company's net profit for fiscal 2009 totaled 2.6 billion yen, just a quarter of the figure from the previous year.

The current spike in profit has been driven again by overseas demand from China and elsewhere. The catalyst was the Chinese government's crackdown on illicit substandard steel. Roughly 100 million tons were produced in the country each year, equivalent to Japan's crude steel production. 

After a blanket ban on low-grade steel, however, demand shifted to product from electric arc furnaces, which require graphite electrode. But this steep rise, created by a one-time event, may not last long.

Needle coke is a key material used to make both graphite electrode and lithium ion batteries. Needle coke prices are high as lithium ion battery demand rises for products like electric vehicles. Given costlier raw materials, Tokai Carbon expects "current price levels for graphite electrode to last about four to five years," said President and CEO Hajime Nagasaka. Some see even further increases on the horizon.

Tokai Carbon shares are trading at 14 times projected per share earnings, slightly lower than the average of 15 for the Tokyo Stock Exchange's first section. "It's a cyclical industry," said Masayuki Kubota at Rakuten Securities Economic Research Institute. "Although there is still room for growth with a P/E ratio of 14, there will probably be fluctuations in the future as well."

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