HEG Limited (HEG) Earnings Call Transcript

Good day, ladies and gentlemen, and welcome to HEG Limited Q4 and FY '21 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I now hand the conference over to Mr. Navin Agrawal, Head Institutional Equities at SKP Securities Ltd. Thank you, and over to you, sir.

Good afternoon, ladies and gentlemen. On behalf of all of us at SKP Securities, it is my pleasure and privilege to welcome you to this financial results conference call with the leadership team at HEG Limited. We have with us Mr. Ravi Jhunjhunwala, Chairman, Managing Director and CEO of HEG Limited; along with his colleagues, Mr. Manish Gulati, Executive Director; Mr. Om Prakash Ajmera, group CFO; and Mr. Gulshan Kumar Sakhuja, CFO. We will have the opening remarks from Mr. Jhunjhunwala, followed by a question-and-answer session. Over to you, Mr. Jhunjhunwala, for your opening remarks. Thank you.

Thanks. Good morning, good afternoon and welcome to our Q4 and full year 2020/'21 con call. As we are all aware, India is reeling through the second wave of COVID pandemic. We have given top priority to the safety of our employees and put stringent control at workplaces and offices, including social distancing, use of marks, sanitizing, vaccination, extensive use of online interactions, work from home, et cetera. The outcome of that has been that today, after initial spurt of cases at plant, end April, early May, we have no active cases at all at our plant currently. Our results in this quarter were significantly better than the previous quarters, and sales volumes were highest among all the 4 quarters of the year. I'd just like to explain to you our production cycle to produce electrodes is a very long time, which is anywhere around 6 weeks to as long as 4 to 5 months for certain products. Along with this, our main raw material, needle coke, is imported all the way from U.S., U.K. or Japan. A combination of these 2 means that at any given time, we do have to carry substantial stocks of not only the raw material, but we always have to carry a large stock of work in process also at different stages of production. As you all know, the electrode prices, as well as needle coke prices were very high about 6 to 8 quarters ago, then it started to drop steeply. This meant that we had to write off large sums of money in the past few quarters as we were carrying large amounts of raw materials and WIP at the time when electrode demand started to fall steeply, leading to a decline in selling prices, resulting into company incurring heavy losses and, according to the accounting practices, revalue all the stocks. With a strong rebound in the world economy, including India post the first wave of COVID, especially in the steel sector, electrode demand started to pick up in the last quarter, which saw the highest volume sales in the last year, along with bottoming out of selling prices. As per IMF's latest announcements, the global economy had shrunk by 3.3% in 2020 and is now projected to grow at about 6% in 2021, moderating to about 4.5% next year in '22. As you all know, steel has a very high correlation with the GDP growth in most of the countries. Steel demand has been severely impacted in the last year but was fortunate enough to end with a minor contraction of just about 0.2% towards the end of 2020. Steel prices, not only in India but around the world, have witnessed a continuous increase in the past few quarters, and current ruling prices are at all-time high levels. With the world without China producing about 47% of its steel through electric arc furnaces, which is their -- which is what our target customer base is, it has a direct bearing on the demand of electrodes, which has been going up quarter after quarter. We have now fully exhausted our high cost of inventory, WIP, needle coke while we are seeing a steady increase in the demand of our products month after month. As you are aware, we sell our products to more than 30 countries, with 2/3 of our production being exported. We are very well positioned to cater to the increasing demand of our products in the future. You are also aware that we had announced expansion of our 80,000 tonne plant to 100,000 tonnes in November 2018. Fortunately -- sorry, for 2019. Fortunately, we have ordered most of our long delivery equipment before the COVID first struck in the last week of March/April 2019. Construction activities have started in full swing in early 2020, but it did get impacted for a couple of months last year as well as about 1 month or so during the second wave of COVID last month. However, we still believe that the time loss will be minimal, and we should be out in the market with our expanded quantity by the end of calendar year 2022 or, at the latest, early 2023. This is more or less what we had initially targeted for. So the loss of time is very, very minimal, maybe a month or 2, but all the equipment are coming at a bad time. The only loss of these couple of months is because of the COVID striking last year as well as this year. We have been lucky with the timing of our expansion when the world is seeing a very strong demand of steel and, consequently, electrodes. While except HEG, no other Western graphite company has announced any expansion whatsoever. Now turning to a couple of main -- a couple of important announcements which we have seen in the last 2 months or so coming out of China. China's medium-term goals of emission reduction and restricting steel production continues. They started by cutting inefficient steel capacity in one particular area near Beijing called Tangshan in early -- in February '21, when they announced reduction of 38 million tonnes of blast furnace activities. And they will target fresh round of steel capacity cuts to eliminate old and inefficient steel capacity and update them with efficient and less polluting capacities like electric arc furnaces to reduce carbon emissions. More important than that is that China has announced a removal of a 13% VAT refund on exports of 146 steel items and abolished import duty of 2.5% on pig iron, crude steel and scrap through 1st of May. Obviously, both of these mean good for electric arc furnace industry and, consequently, the electrode industry. These measures will assist rest of the world, where 47% of steel comes out of electric components and creating new opportunities for expanding steel production. In addition to above, China is also mulling an export duty on some finished steel items in a bid to further restrict export of steel and control inflation. This will achieved dual goals of Chinese government: One; order discourage steel exports and potentially reduce production, which will indirectly or directly help other parts of the world, all the other countries except China, to build more capacity and work at higher capacity utilization. And as I said, 47% of that steel comes out of electric components. And number two, increase domestic availability of steel and deflate domestic prices of steel in China. As per the Chinese Iron and Steel Association's (sic) [ China Iron and Steel Association ] chairman, the Chinese government aims to eliminate old and inefficient 236 million tonnes of crude steel capacity, including its 14th 5-year plan from 2021 through 2025. So you will all realize, I mean, 236 million tonnes is a number which is like 2.5x more than the second-largest country in the steel, which is us, India. So we are talking of some very, very large numbers here. China also plans to update 221 million tonnes of capacity during the same time to reduce carbon emissions. At the cost of repetition, I'll again remind you that electric arc furnace emits 1/4 of carbon emissions for each one of steel produced as compared to the blast furnace. Meanwhile the Ecology and Environment Ministry of China has announced that it will strengthen controls on energy-intensive, polluting industries such as steel and aluminum to promote low-carbon developments. And all above the preferences bode well for steel production, especially the electric arc furnace industry, and consequently, the electrode demand from the rest of the world likely to go up. WSA, World Steel Association, in its recent short-range outlook forecasts that in the current year 2021, the world steel production is likely to grow by a sharp 5.8%. Going forward into the next few quarters, for our company, we see a robust demand for our products all over the world. And with our strong presence in the most of the large steel-producing countries, we are very well positioned to take advantage of this, especially with the single largest plant of electrodes in the world that we have and the economies of scale that it offers, which will further get strengthened in about 18 months' time, when our capacity goes up by about 25%. With our 4 decades of experience in international businesses, we expect to be a supplier of choice to our global and Indian customers. With this, I will now hand over the floor to our CFO, Gulshan, to take you through the financial numbers. And then I, along with our Executive Director Manish Gulati and our group CFO Mr. Ajmera, will be very happy to answer any questions that you might have. Over to you, Gulshan.

Thank you, sir. Thank you. Good afternoon, friends. I will now briefly take you through the company's operating and financial performance for the quarter and year ended March 31, 2021. For the quarter ended March 31, HEG reported a revenue from operations of INR 380 crores as against INR 324 crores in the previous quarter. And of these, INR 270 crores in the corresponding quarter of the last financial year. Revenue for the year saw a decrease of 42% to INR 1,256 crores versus INR 2,149 crores in the previous year. The performance was encouraged by improvement in volumes, which was offset by the lower realization as prices continued to remain under pressure during the year. EBITDA, including other income, stood at INR 20 crores in the quarter as against INR 24 crores of previous quarter and a loss of INR 455 crores in the corresponding quarter of last financial year. EBITDA also saw a decline of 51% on a year-on-year basis to INR 54 crores versus INR 138 crores in the previous year on account of lower sales utilization. The company reported a net loss of INR 7 crores in the quarter as against profit of INR 5 crores in the previous quarter and a loss of INR 366 crores in the corresponding quarter of the last financial year. Further, profitability was on a muted side in quarter 4 of FY '21 because of the company in accordance with the amended provisions of corporate social responsibility, which mandates incurring of 2% of the average profit of 3 financial years. The company has incurred expenditure amounting to INR 34.85 crore during the quarter ended 31 March 2021, INR 0.14 crore during the quarter ended December 31, 2020 and INR 41.86 crores during the financial year ended 31 March 2021, which has been included under the other expenses in the published results. Furthermore, the company is eligible for various export incentives on the export need. The Central Government of India had announced a new scheme on remission of duties or taxes on export product, which has replaced existing MEIS with effect from 1 January 2021. As the rates under RODTEP have not been announced till date, the income on account of export incentives under the new scheme has not been recognized for the quarter ended 31 March 2021. With respect to direct taxation, the company during the financial year ended 31 March '20 has elected to exercise option permitted under Section 115BAA of Income Tax Act as introduced by taxation laws. Accordingly, the company has recognized reason for income tax and major deferred tax liabilities on the basis of rates described in the taxation. It had resulted in reversal of deferred tax liabilities amounting to INR 32.66 crores. And the impact of this change had been recognized in the year ended 31 March 2020. Therefore, the income tax expense for the year ended 31 March 2021 is not comparable with the income tax expenses of the previous year ended 31 March 2020. Effective tax rate applicable to the company stood at 25.17%. The company is operating its business by optimal utilization of available financial resources and also implemented stringent cost control measures across the organization to funds of cash. The company is long-term debt-free and having a crazy size of nearly 1,500 crores as on March 31, 2021, yielding an average return of approximately 6% per annum. Further, the Board of Directors have recommended a dividend of INR 30 per share, which is subject to approval of shareholders at the Annual General Meeting. Now we would now like to address any questions or queries you have in your mind. Thank you. Now over to you, Ravi.

[Operator Instructions] The first question is from the line of Rahul from Sumitomo Capital.

Good to have you on call. And I hope for you and your family and everybody, actually, is doing safe. Sir, so firstly, I know you don't talk about prices, but like could you speak about how the trends have been for both electrode and needle coke? Say, like if it was X last time around last quarter, how it is currently in both domestic and exports market?

So as you rightly said, I mean, we don't discuss prices specifically. But as I alluded in my opening remarks, the prices are going up, and they are going up practically every quarter. And in the current situation, we are not even -- we can't even bid for more than a quarter of prices, whether it is the Indian market or international prices because our leading coal prices also change every quarter. So unless we are aware about the needle coke prices, it almost becomes impossible for us to announce in advance about the electrode prices. But as I explained a minute ago, it's a very peculiar industry, which -- the raw material is all imported. So necessarily, you have to keep fairly large stock of at least 2 to 3 months. Secondly, given the process -- long process cycle that we have of 4, 5 weeks to 4 to 5 months, at any particular time on any particular day, whether it is a good day or a bad day, whether it's a high market or a low market, we will always have this problem in this industry. So currently, we are in a volatile situation because we have reasonably priced needle coke. We have reasonably priced WIP. And so if the prices are going up, our margins increase. But again, it's a matter of time, I mean, 3 months, 6 months, 9 months. Again, then once we exhaust these stocks, obviously, we will then, again, get back to buying at a higher price and selling at a high price or low price, whatever the needle coke price. I mean our prices will always be dictated by the cost of needle coke.

Sir, just to follow up on the answer you gave, so like how are you booking the contracts right now? Is it only the volumes that we are booking? Or it's both volume and price we are booking? And if it's just volumes that -- could you give us like how much percentage of the capacity has been booked for FY 2022?

So generally, as I explained, in this industry, we more or less book on a quarterly basis, except some very specific countries and within those specific countries, some very specific customers, who tend to only buy on an annual basis. The trend is that you normally talk about the quarterly price. So Giving you a very clear answer is really not possible. And as far as the domestic market is concerned, there is a set of customers, there are very few electric arc furnace companies, so to say. So there is no long-term commitment, but you know, more or less, I mean, what your market share is with the customer A and B and C. So assume going forward that we'll retain that customer and we'll keep selling in the X quantity that you're used to buying from us. In the international market, it's slightly longer because, obviously, it takes time. So -- but your shipment -- let's say, for July, August, September, we are right now in the middle of negotiating for the shipments of electrodes in Indian market as well as export markets.

Okay. So -- but I mean like -- but could you give a sense, like for the July, August, the second quarter, because like your factories would also be operational now, how much percentage -- what kind of utilization levels you would be running on? And of that utilization levels, how much would have been booked by now?

See, while Manish -- I'll ask Manish to answer to that. He is more on the ground than me. But today, to tell you -- to give you a very clear straight answer, I mean, selling the volume is not a problem. So if you produce at 80% or 85% or 90%, selling that 85%, 90%, is not an issue. The issue is just price hike. So if we have not, let's say -- I mean, again, to clarify, I suppose if we have not booked like 80%, 85%, 90% now, we're not going to lose out on our dispatches in that quarter. I mean we are confident that we'll be able to sell everything that we produce.

Okay. All right. And the other follow-up would be on the needle coke. So like in the last cycle, super cycle or last up cycle that we saw, there was a shift of needle coke towards EV battery manufacturing as well, which I believe faded away. So like how is the current scenario? Like how difficult is it to get needle coke?

So I'd like to clarify, it's not exactly right what you just said. I mean while some quantity of the needle coke that we buy, while some quantity of that goes into the battery, it's not a very large volume. So it's not exactly the same problem that we are talking about. And every needle coke producer has the capacity for needle coke for the graphite industry and also has capacity which is dedicated, let's say, to the battery. And it is not very easily switchable from A to B. So if the market is extremely strong for, let's say, the graphite industry, all that capacity would be dedicated to the graphite industry. If the graphite industry is not doing well and the steel -- and the EV industry is doing extremely well, then a part of that needle coke, which is meant for electrode, would go to the battery guys. So it is not really comparison of the same quality and the same product.

Okay. Got it. All right. And sir, before I like give others a chance to ask, lastly from my side, like with the change in the U.S. government, are there any talks about removal of the sanction on Iran? Like would we be anytime soon seeing some dispatches to Iran?

We are hearing the same thing that you hear from the press. I mean it's a matter of time, maybe 1 month, maybe 2 months. I mean we don't have any more information than any one of you have. Of course, it's on the way to go out.

Sir, could you remind us how much was the -- like when you supplied last, how much was the volume share that you supplied to Iran? And like how much quantity was supplied to Iran?

I'll have Manish answer that. Manish?

Yes. See, in good times, I mean, Iran was one of our very significant customers. And we went up to the extent of even supplying 10% to 12% to even as high as an average of 15% of our produce to Iran. But when Iran stopped, we had to reallocate that 10% to 15% of the tonnage to the rest of the 30 countries we supply to. So initially, it was a little difficult to do so, but it was, I guess, in almost in every major steel-producing nation of the world. So that quantity overtime got absorbed in other markets. So even without Iran, we are able to achieve good capacity utilization compared to our peer group in the industry.

And Manish, could you give the capacity utilization number for the last quarter and like for what you're planning to run in the...

Well, we are at 85% today. Let's say, since the Q4, you can call us at 85%. And it is our, I think -- we believe that this will be the level which will hold gold for the next 2, 3 quarters so far as we have visibility.

Right, no, but you said 85% since Q4. I mean...

Yes, Q4 FY 2021. See, our -- sales-wise, we were at almost that 85% level. And that level continues in Q1 of this year, I mean, April to June. And going forward, we see that we can probably operate at that level, considering the demand as far as we can see.

Okay. So I mean despite the lockdowns and -- I mean like you were allowed to operate, but still you operated at 85% during month of April and May.

April and May, yes, that's right. See the lockdown. All this has -- India has the second-wave impact too much. And as we are exporting 2/3 of our production in so many countries, so we could just manage to retain that level of capacity utilization and sales. But our plant, actually they were flowed down even for a day. I mean, last year, as well as this year, it may have -- capacity utilization may have come down by about 50%, 20% or 10% on some particular day, but it was never shut down.

The next question is from the line of Bhavin Chheda from Enam Holdings.

Few questions. Sir, in the quarter, there was a sharp increase in other expenses. So was there a one-off there in...

Gulshan explained to you, because of the sudden change in the CSR rules, while up till last year, we were not allowed to -- I mean, we could have gotten away by not spending 2%, let's say, easier way to explain. And this year, there's a lot changed that we had to spend the 2% of the average of last year profit against CSR. And even that the company were not able to spend 2%, then we had to either send it to financial relief fund of 6, 7 different funds we paid by the government, or they had to carry it forward by booking in the P&L account to be spent this year. This is part of our notes in the results.

So it's a higher CSR expense, basically, you're seeing, like INR 35 crores during the quarter. Out of INR 120 crores, INR 35 crores relates to CSR.

Okay. And the other thing, by the end of this year, has the high-cost needle coke all been consumed or accounted for in the inventory cost and Q4 margins, adjusting for this CSR or normalized margins? Or there were a few high-cost inventories still there?

As I said it in my opening remarks, it's all exhausted now. We don't have any high-cost inventory or the needle coke.

So it's a normal quarterly contracts on the needle coke also and on the electrodes also, more or less?

Yes. More or less, yes.

And you mentioned, sir, you operated at around 85% utilization for quarter 4, and currently, also the same utilization is going up.

Yes. More or less, yes.

Okay. Other thing I got from your commentary, sir, you mentioned since your business is a mix of both exports and domestic market. And exports, you normally have to plan much ahead of the domestic market. So -- but the contracts, you said, quarterly. So how does that work out? Because if you are booking September month volumes for the export market, but I think needle coke will get contracted later, so is there still a mismatch between these 2?

That will always be there. I mean in a long product cycle of 6 weeks to 5 months, that will always be there. I mean we cannot match needle coke versus selling prices. There are lots of large customers in the world market where they would not even talk about the quarterly pricing. They would insist on at least 6 months, if not yearly. So that mismatch will be there. It's only in the domestic market that you can manage to match the needle coke price and the selling price. By experience, you can sense what's happening. So you can always try to defer your sales or purchases of needle coke.

Sure. And is there a spot element in your volumes also? Or your entire volumes are getting contracted now on electrode side?

Manish, volume?

Yes. You see now the way business is going on, there's 3 months we are booking at a time. So now this is all going to our regular customers. We don't normally encourage these spot opportunities here and there for customers who are not with us for the long run. So whatever is happening -- there was a time in 2018, and there was a contract there and there were some on spot, but now it is more stable. Our customers understand that, yes, these graphite companies do not have co-contracts valid for 6 months or 1 year. So we are also doing 3 months at a time, and we are also selling 3 months at a time. So there's nothing now -- as we see, there's nothing like a spot something. Everything that we are booking is with our year-old customers.

Sure, sir. And I believe on the expansion, that was a INR 1,200 crore project, right? How much have you spent till date on that project?

Yes. See, out of that INR 1,200 crore, about -- till March '21, about INR 450 crores, INR 556 crores has been spent. And the plan for this quarter, April to June, is around INR 120 crores to INR 140 crores, depending upon the shipment schedules of our equipment that are coming in. For the whole of the year '21, '22, probably, it will be around INR 600 crores. So INR 450 crores spent, INR 600 crores to be planned -- is planned for '21, '22. And the rest will spill over to '22, '23.

And what's the commissioning date? I missed out on the opening remarks.

See, by end of 2022, as far as our construction and establishment, it should definitely be ready. And the commercial production should be out from early 2023. So we are also watching the situation. This 2-month delay has happened. And every time this COVID wave comes, the labor, the migrant labor goes away. Then we again have to get them back, and again, work resumes. So we are still at the early 2023 target for the expanded volumes.

And sir, last question on the China thing because that would be a bit more, that you are planning to replace almost 230 million tonnes of new capacity by closing down the old ones which are inefficient or which lead to decarbonization. So do we have data on this 230 million? How much is coming via blast furnace route? And how much is coming via electric arc furnace route?

See, electric arc furnace was a very small portion, as small as 5%, 6% in 2016. So whatever replacement they talk about, it is always about the blast furnace. So whenever they're seeing a figure, let's say, this is public as what we said, 236 million metric tonnes. It is blast furnaces because electric arc furnaces is only now catching up from a level of being 5% to 6% in 2016, '17. It is only now that it has reached the level of about 15%, while rest of the world is around 47%. So they have a lot of catch-up to do. So whatever development in the last 10, 20 years, capacity expansions happened. Historically, they've all been the blast furnaces and smaller, inefficient polluting blast furnaces. This is what they want to get rid of. So it is all about blast furnaces, the 236 million metric tonnes.

Sure. So that I know that they will be shutting down that much, and incremental matching capacity would come. I'm saying the new capacity, what they plan to put, replacing the old ones, which are closed, that can be any of the routes, right? They don't have to match blast with glass.

Yes. But the proportion, what is going -- the trend is going to be that EAF going to catch up and reach the rest of the developed world because then -- I mean, of course, there may be a new class 1 is more efficient here and there. But largely, it will be the shift will go to electric arc furnaces because we see, if you have read their papers, they were talking about reaching a level of 20% of electric arc steel production, which means still 200 million metric tonnes. And they are still at 120 million, 140 million. So even -- I mean just imagine if they go and they catch up with the rest of the world later at 40% someday, they will be making 400 million metric tonnes only from EAF suite. So the path is very clear. It is just the speed with which they do it. And their own local scrap generation was also increased. There's a forecast that the local scrap generation will go up to 300 million metric tonnes by year 2025. So it all remains to be seen, but the long-term trends are very, very clear. And this is -- they have been doing it year after year. But yes, they say more, they are able to do less, and we see that's what is happening. But they seem pretty serious about this change.

The next question is from the line of Sonali Salgaonkar from Jefferies India.

Thanks so much for the detailed comprehensive opening remarks. Very helpful, sir. So my first question was regarding the CSR expense. I mean how should we look at it going forward? Should we look at this about INR 40 crores as a recurring expense every year? Or this is like once in 2 or 3 years that we have to deposit in the CSR front?

Sonali, you have asked something which is very dear to my heart these days. That number will obviously depend upon the profit. The regulation is that you need to spend 2% on your -- 2% of your previous 3 years' profit on CSR. So it's not our choice. I mean our choice is that from 2%, we can go to 3%. The government will welcome that. But we cannot go from 2 to 1. We have to spend that 2%. If we don't spend, then -- in any case, we have to take a hit on the P&L for that year. And that residual amount has to go to the PM's relief fund and the likes of PM fund. There are 10, 12 of them. So I'll -- so if that number is 40, 45, 50, I'll be very happy because that's a derived number from 2%. So higher the profit, the higher that number would be.

I understand. I understand, sir, very clear. Sir, my second question is regarding the demand scenario. We understand that about 65% to 70% of our top line was exported. So apart from the COVID disruption in India, which probably would not impact us as much, how are the other economies faring up in demand? I mean Europe would be our main one, considering that EAF is very high as a percentage over there as well as Middle East. So how is the demand scenario panning in the other geographies right now?

See, in our case, Europe is, in fact, the lowest. I mean it's not right, what you just said, that Europe produces more electric arc furnace. And the other reason is that in our case, there is an anti-dumping duty that EU authorities have imposed on us good 15, 16 years ago, which keeps getting extended and extended all the time. So our exports to Europe is, in fact, as a block, pretty small. We are just there because we want to keep -- or to hold in that. The day the import duty is abolished, then we can go very aggressively. And in terms of percentage of speed through electrical arc furnace, the #1 is U.S. 70% of the steel in the U.S. gets produced with electric arc furnace. So that is one of our very large markets. We talked about Middle East. Middle East, in fact, has 100% of steel through electric arc furnace only because they have -- the power cost is extremely cheap and electric arc furnace needs a lot of power. So basically, we -- as Manish said, we are exporting to more than 30, 35 countries, including the South American companies, African countries and Asian countries. So while -- basically, the steel industry in the whole world, as I said, produces more than 47%, 48%. And that percentage is -- it keeps going up and up and up because no newer blast furnace capacity is coming up anywhere in the world, except China and India in some cases. So any growth which happens in the steel industry outside of China typically happened on electric arc furnace. I mean just to give you an example, U.S. is adding about 15 million tonnes of new electric arc furnace capacity between now and end of next year. I mean we have the names. We have the locations. We know what size plant, what size of electrode, what quality of electrode will be needing. So 15 million tonnes is a very large number in the Indian context. I mean we produce 110 million tonnes. You will be adding 15 million tonnes of only electric arc furnace, and that is 100%. I mean they are adding 15 million tonnes and -- the entire 15 million tonnes on electric arc furnace. And this is only the next 18 months I'm talking about.

I understand, sir, very helpful. Sir, my third question is regarding the pricing of electrodes. I understand we did not talk about in terms of absolute pricing. So -- but it would be helpful if you could share the quantum of increase YTD. So from January this year to right now, what could be the approximate increase in the electrode prices?

Manish?

Yes. I mean let's say -- but this is going to be very, very rough. And if we are talking about just quarter-to-quarter, probably, we are talking in terms of 20% or something. But again, this is a very, very ballpark. Very, very ballpark. I mean we are -- fortunately or unfortunately, we are meeting today in early June. And we are talking about July, August, September, which is only a month away. So these discussions have just started. I mean it's a very, very fresh discussion. In the next 10, 15 days, we will be able to give you a very firm answer because these discussions have just started or about to start in the next 2, 3 days.

I understand, sir. Sir, my last question is you mentioned about the capacity utilization in Q4. So sir, in FY '21, would the capacity utilization be about 70% for us versus 60% in FY '22?

Yes. If you take the whole year, including when the first COVID wave struck in April to June, that was bad. It was less than 50%. So combined everything, it's about lower 70s, low 70s in the year of 2021. And in quarter 4, we are looking at 85% of last year. And we continue to do that this quarter. And 1 or 2 quarters more are visible that we should be at this level.

The next question is from the line of Dhawal Doshi from Pinpoint Asset Management.

Sir, I understand you are refraining a bit in terms of giving some color in terms of the pricing. If you can just elaborate what was the Q4 average realization. And Q1, we've already contracted. So at least some sense out over there, in percentage terms is fine.

I think it's the same question asked in a different way. So I think we would not be able to disclose this because then everybody can add it up. So whether you ask the price and then the percentage decrease, then you can easily estimate. And it's really not a nice for one to do that, especially when...

We are a one products company. So once you have the turnover and 80%, 85% capacity utilization, it's particularly very easy to even calculate that.

So in the -- going ahead, sir, in terms of the outlook, you did mention in your opening remarks that it's looking quite positive, and prices have been just moving up each quarter. What can actually come as a spoiler to this? Can China capacities once again come and be a spoiler the way they were during the last cycle? Or you don't see that kind of a scenario playing out in the current environment?

No, Dhawal, China was never a spoiler. I mean just to repeat what we have already spoken about many times, we or, let's say, any other Western player of graphite, we don't compete with China for, let's say, 65% to 70% of our production, which is called ultra-high power. So China doesn't produce the ultra-high power electrodes, which the rest of the world requires. So China was never a spoiler as far as 70% of the ultra-high power market was concerned because neither anyone of us exporting to China, nor China is exporting and competing with any one of us in Europe or America or Middle East or anywhere. So China is a spoiler for the 25%, 30% of the lower grade, what we call the non-UHP. So yes, to that extent, China can spoil. But given the kind of growth that China has seen in electric arc furnace, as Manish explained, only 3 years ago, they had only 5% of their steel through electric arc furnace, which is currently at about 16%, 17%. And if we believe any of these announcements that they are talking about, they're talking of replacing the 200 million, 250 million tonnes from blast furnace to electric arc furnace. And all the indications and all the new announcements that they have made, 1 or 2 that I spoke about, like removing the import duty on scrap. I mean, obviously, there is intent. It shows the intent they want to make electric arc furnace more competitive, so they remove the duty on import. So then, they're even considering an export duty on steel exports. So our main advantage that we had in '17, '18 and '18, '19 was because China's export of steel practically came down to half over a 3-, 4-year period from about 115 million tonnes currently to 55 million tonnes. So that drop of 60, 65 million tonnes of steel that they were doing to the rest of the world which came down, that helped the other part of the world, the rest of the world, as we say, to produce another additional 60 million tonnes of steel. Because they certainly found a gap of 60 million tonnes not coming from China. And half of that, 47% of that steel is through the electric arc furnace. So suddenly, all the electric arc furnace which were either not operating or operating at a lower capacity utilization in any part of the world, minus China, suddenly started operating. So that's where we saw the demand of electrode rising. So this is -- so what China has recently done all in the last 2 months or so, it's reinforcing again by saying that we want to clear another 200, 250 million tonnes of blast furnaces to replace by electric arc furnaces.

Okay. Do we, in this type of situation where in -- and it's not going to happen immediately. But China could actually be an importer of high-grade UHPs or other high-grade products? Or that, you don't think that it's going to be a situation?

No, it could. It would happen one day. But if you see the data, Chinese import, export data of electrodes, I mean they had not -- you see the kinds of electric arc furnaces that they are replacing with the 100 -- the 50 million tonnes of electric arc furnace that they were doing for last many, many years, currently, it's in the region of 140 million, 150 million tonnes. So they've added 100 million tonnes of electric arc furnace in the last 3, 4 years. But they have not -- they are not importing any of these UHP, high power electrodes from anybody else outside of China. The kind of furnaces that they have built, at least up till today, they don't really need the real ultra-high power electrodes, which is what we or Graphite India or other players in Japan and U.S., everybody -- each one of us produces.

Okay. Sir, in terms of the global capacity, what portion of the mothballed capacity can actually be revived in your estimate, given the kind of surge in demand that we're seeing in the U.S. and Europe end markets?

So currently speaking, there's only one plant that was closed down in Austria about 3, 4 years ago. That's the only mothballed excess capacity, which is existing anywhere in the world. Everything else has already restarted in the last 12 months or so. And that's a small 25,000 tonne plant. And basically, that plant produces mostly non ultra-high power.

Okay. So we don't really see a supply issue as well as far the industry is concerned.

No, nothing beyond this 20,000, 25,000 tonnes. And it's a small plant, and it produces non-UHP electrodes. And it's probably one of the most expensive plants in terms of cost of production. It will be very difficult this year to restart. You can't switch on and switch off a plant at your will. So if you start the plant, you have to really take a very conscious decision about the market to being good or bad for the next 5 years at least.

Okay. Sir, lastly, just one more question on the contract structures, if I may. When we changed some annual 6 monthly contracts to quarterly contracts, both from needle coke as well as graphite, I believe there was some kind of a formula or an adjustment factor that we were working with in terms of needle coke prices. We, at least, put in a multiplier of 1.2 in terms of margins and revising our graphite electrode pricing accordingly. Does that still prevail? Or that is no longer the case?

No, there was never such a formula that if you multiply, maybe to start, by 1.2%, you get to the more normal. Not at all. We never had this kind of a formula. Of course, since needle coke is a majority -- a major cost in electrode making, so obviously, we have to watch for our -- all our input costs. And only on the base of that, we can quote in the market. So there about 3 years back, in a stable environment, there were -- we had annual contracts from needle coke suppliers. And on the back of that, we used to make annual contracts with our customers. But then this market went hot and then we started -- our needle coke suppliers started giving quarterly pricing, and we did the same with our customers. So there's no set formula to that. It's all market supply and demand. And that's what still continues as quarterly pricing.

The next question is from the line of Pratim Roy from B&K Securities.

Congratulations on the good set of numbers. So my question is that, that recently, China steel price is going down due to this renewed [indiscernible] in the market that they are going to production part. Even though that production part doesn't happen, because they are saying that is how much they can raise production definitely if they were by EAF route, and if they start the investment on the steel part in the near future and industry infrastructure and all. So how much it is sustainable this year of steel margin, which will impact the graphite electrode requirements? Can you please explain something on that? Is how the pricing is -- will support that GE demand?