Vertical Group's Johnson Has Contrary View On Graphite Electrode Pricing, Issues Warning On GrafTech

The market is misreading the price picture for graphite electrodes used in the steel industry and will soon see falling prices that will negatively affect the stock of American producer GrafTech International Ltd EAF, Vertical Group analyst Gordon Johnson said Thursday.

What To Know

GrafTech is a major supplier of graphite electrodes, which are the primary heating element in electric arc furnaces used in making steel from scrap metal. Most analysts are recommending a Buy on GrafTech's stock, but Johnson downgraded it late last year to a Sell rating and said during an interview Thursday the market is missing falling prices.

“Consensus is that graphite electrode prices are rising,” Johnson said on Benzinga's PreMarket Prep trading show. “The reality, we believe, is that they’re falling. And when that becomes consensus, we believe these stocks are going to come under pressure.”

The market appeared to be coming in line with Johnson’s argument, with GrafTech falling 3.39 percent Thursday to $12.54.

Indian Graphite Market

Johnson also said he expects two major Indian graphite electrode companies, Graphite India and HEG Ltd, to cut prices, but that it isn’t widely understood and isn’t being reflected in the stock prices for other producers like GrafTech.

Johnson also said many industry observers appear to believe there’s a shortage of the key input in manufacturing graphite electrodes, petroleum needle coke.

“We believe that is completely incorrect,” Johnson said. He said major needle coke producers, including some in China that observers may not be aware of, are ramping up production, and that supply isn’t being accurately reflected in the market yet.

Johnson said Chinese-made high-performance graphite electrode materials are also starting to be accepted by the industry, and that’s putting price pressure on all global electrode makers.

Listen to the full interview with Johnson, including his commentary on Tesla, at 34:50 in the clip below.

PreMarket Prep is a daily trading show hosted by prop trader Dennis Dick and former floor trader Joel Elconin. You can watch PreMarket Prep live every day from 8-9 a.m. ET here. The replay can be found on Benzinga's YouTube channel, and the podcast is on iTunes, Google Play, Soundcloud, Stitcher and Tunein.

Related Links:

BMO Says GrafTech Is 'Turning Graphite Into Cash,' Will Benefit From Strong Industry Fundamentals

Steel Stocks Have Wall Street's Attention