Stainless Steel MMI: Electrode Surcharge Doesn’t Appear Justified as Stainless MMI Drops
The Stainless Steel MMI dropped four points this month for an October reading of 63. The drop was driven by decreasing LME nickel prices, together with Chinese and Indian stainless steel prices trending downward.
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However, stainless steel surcharges have increased this month. Buyers of stainless steel will see a new graphite surcharge starting in November. Outokumpu announced this new surcharge first and AK Steel shortly followed suit, explaining that production costs have risen. We expect to see other stainless mills announce similar surcharges.
This surcharge, a graphite electrode surcharge, came as a result of tighter global supply of graphite used in electrodes in the electric arc furnace (EAF) steelmaking process.
How is Graphite Used in the Steel Industry?
To better understand the impact this surcharge may have on stainless steel prices, let’s examine how graphite is used in the steelmaking process.
Graphite is a polymer of carbon that is used in the steel industry to produce steel (both stainless and carbon steel). Due to its heat and electric properties, graphite serves as the main component of the electrode, also known as a consumable. EAF production methods require the use of graphite electrodes, which require replacement every 8-10 hours.
Graphite prices, like other opaque markets, come as a result of direct negotiations between buyers and sellers.
Both the flake size and purity (large +80 mesh and XL flake +50 mesh) drive the negotiation process. Graphite prices have increased by 25-30% in the last couple of months on the back of improving steel demand. Prices are currently at $1,100/ton, still well below the 2012 peak of $2,800/ton.
Supply and Demand
China produces 70-80% of the world’s graphite supply; thus, the world depends, like it does for many metals, on China.
Back in the 1990s, China dumped graphite on the market to earn foreign exchange, which caused graphite prices to decline.
Chinese mines remain small and seasonal, which means production appears lumpy and, in some cases, not guaranteed throughout the year.
However, recent environmental policies have impacted graphite mines.
This modernization and consolidation of the mining industry has translated to increased costs and lower production, caused by the closure of illegal miners and the elimination of marginal producers.
Moreover, China has imposed a 20% export duty on graphite and a 17% VAT to help protect its own industry. This has created supply concerns all over the world.
Both the European Union and the United States have declared graphite a strategic material. Furthermore, Hurricane Harvey impacted the domestic supply of needle coke (the primary raw material used to make graphite electrodes). This led to the an increase in graphite electrodes spot prices up to seven times the previous contracted price.
In terms of demand, growth for flake graphite increased by 7.5% each year from 2004-2011. The steel industries rely on the flake graphite and therefore saw a price lift from increased steel demand. Graphite prices peaked in 2012, then fell for the next five years until 2017.
Recently, graphite demand increased again due to battery demand (such as lithium ion batteries or vanadium redox batteries, among others).
In fact, graphite demand from lithium ion batteries has grown in six years from essentially nothing to around 130,000 tons per annum, which represents about 30% of the flake market. This battery demand will also support rising graphite demand (and prices).
What is Behind the New Surcharge?
The introduction of a new surcharge for stainless steel came as a surprise to MetalMiner.
Even an increase in graphite prices doesn’t explain the new surcharge, since prices in 2012 were much higher than they are now.
Here are the relevant questions to ask when considering the new surcharge:
- What percent cost of an electrode is the graphite content? And what is the cost of that graphite per metric ton of steel produced?
- What percent of the total cost to produce one metric ton of steel does the electrode represent?
- How does the new surcharge reflect the actual underlying increased costs to produce steel?
To answer the first part of the first question — what percent cost of an electrode stems from the graphite content — we examined data from Graftech, the largest graphite electrode producer. We discovered the following cost breakdown to produce an electrode:
Please note the 44% coke represents the graphite portion of the electrode. So, the answer to our question is 44% — that is, the graphite content is 44% of the electrode cost structure.
Now, when we consider the average consumption of graphite in the steelmaking process and the current average price of graphite, we can create a back-of-the-napkin model of the cost of graphite per metric ton of steel produced:
The average amount of graphite consumed in electrodes on a per-metric-ton basis ranges between 1-5 kg/mt of steel. Our model, therefore, uses an average consumption of 2.5 kg/mt steel for purposes of this cost build-up. The total cost of the graphite per metric ton of steel is $2.75.
Some forms of steel (including stainless steel) require a secondary process that goes through a ladle furnace. In this second process, both the chemistry (by adding alloy elements) and the temperature are adjusted using graphite electrodes. If we include both processes, the total cost of the graphite per metric ton of steel is $5.50.
So, even if we consider the secondary process for some steels, the total cost of the graphite per metric ton of steel will be $5.50.
Now we need to address the second question: how much of the total cost to produce one metric ton of steel do electrodes represent?
The answer, according to the table below, is $43.22/mt — or 9% of the total cost.
So, Does the Surcharge Amount Make Sense?
Outokumpu published an electrode surcharge at 30 Euro/mt. Our “should-cost” model results in quite a different number.
Perhaps a bold buying organization will take this into their next mill negotiation to have the mill explain its model in detail.
Are we missing something? Drop us a line at firstname.lastname@example.org.
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[Editor’s Note: This article was updated at 12:23 p.m. EDT, Oct. 11, to include a paragraph about the ladle furnace process.]
Actual Stainless Steel Prices and Trends
Chinese 304 stainless steel cold rolled coil dropped by 2.68% to $2,419.01/metric ton, while Chinese 316 stainless steel cold rolled decreased by 8.4% to $3,425.68/mt. Chinese FerroChrome prices also decreased by 9.15%, reaching $2,336.37/mt.
Meanwhile, U.S. stainless steel surcharges have increased again this month.
The 304 stainless steel surcharge climbed to $0.61/pound (up from $0.49/pound), while the 316 stainless steel surcharge increased by 20.5% to $0.80/pound (up from $0.66/pound).
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