Decarbonization And EAF Transition Will Revitalize Steel Supply Chains

Key Takeaways

• Shift to electric arc furnaces and supportive government policies are driving sustained demand and higher pricing opportunities for graphite electrodes.
  
• Vertically integrated supply chain and new growth channels in Western anode and EV markets are strengthening margins and supporting future revenue diversification.
  
• Persistent oversupply and weak pricing, heavy US reliance, raw material uncertainty, and subdued steel demand combine to threaten future margin stability and sustainable earnings recovery.

Catalysts

Research, develops, manufactures, and sells graphite and carbon-based solutions worldwide.

• Ongoing shift of steel production from blast furnaces to electric arc furnaces (EAF), particularly in the U.S. and Europe, due to increased infrastructure spending and decarbonization initiatives, is set to drive sustained long-term demand for graphite electrodes, supporting future revenue growth.
  
• Expansion of U.S. steel tariffs and government-backed policies are incentivizing more domestic EAF steel output and creating a favorable competitive environment for GrafTech, which has already gained significant market share in the U.S.; this is likely to boost both top-line revenue and average selling prices in the coming years.
  
• GrafTech's vertically integrated supply chain, especially its proprietary access to petroleum needle coke, supports lower input costs and greater resilience against raw material price volatility, positioning the company for sustained improvement in net margins and earnings as volumes grow.
  
• Recent and expected future price increases on uncommitted electrode volumes, combined with shifting geographic sales mix toward higher-priced U.S. and Western European markets, are expected to improve average selling prices and enhance EBITDA as industry pricing recovers from the trough.
  
• The company's strategic position and technical capabilities in providing critical raw materials for emerging Western anode and EV supply chains-bolstered by recent U.S. regulatory actions and potential public-private partnerships-point to a medium
• to long-term new growth avenue, supporting future revenue diversification and additional margin expansion.

GrafTech International Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming GrafTech International's revenue will grow by 5.1% annually over the next 3 years.
• Analysts are not forecasting that GrafTech International will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate GrafTech International's profit margin will increase from -43.2% to the average US Electrical industry of 11.0% in 3 years.
• If GrafTech International's profit margin were to converge on the industry average, you could expect earnings to reach $65.9 million (and earnings per share of $2.46) by about June 2029, up from -$223.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $162.4 million in earnings, and the most bearish expecting $-227.4 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 5.3x on those 2029 earnings, up from -1.2x today. This future PE is lower than the current PE for the US Electrical industry at 40.1x.
• Analysts expect the number of shares outstanding to grow by 0.9% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.46%, as per the Simply Wall St company report.

Risks

• Persistent global oversupply of graphite electrodes, especially due to increased low-priced exports from China, continues to exert downward pressure on prices across most regions; this ongoing excess capacity threatens sustained revenue growth and could compress net margins long-term if industry pricing does not materially improve.
  
• The company's cost improvements have partially offset lower average selling prices, but management acknowledges current pricing is still below sustainable levels for long-term profitability-suggesting that without a durable recovery in market pricing, future earnings and free cash flow generation may remain under pressure.
  
• Heavy reliance on the U.S. market (over 50% of revenues) and further strategic effort to increase market share in this region exposes GrafTech to potential policy, demand, or competitive disruptions in a single geography, increasing the risk of future revenue and earnings volatility.
  
• The needle coke market, while currently stable, faces uncertain medium
• to long-term dynamics-including limited new Western supply announcements and rising raw material demand from both graphite electrode production and the emerging EV/energy storage sector-which could tighten supply, push up input costs, and negatively impact net margins if not carefully managed.
  
• Although management anticipates long-term structural tailwinds from decarbonization and electrification trends favoring electric arc furnace steelmaking, the relatively flat or declining steel production in key regions (EU down, global ex-China flat), delayed EAF transition plans in Europe, and muted near-term end-market recovery present ongoing demand-side risks to revenue growth and normalization of profitability.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $9.25 for GrafTech International based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $11.0, and the most bearish reporting a price target of just $8.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $601.0 million, earnings will come to $65.9 million, and it would be trading on a PE ratio of 5.3x, assuming you use a discount rate of 12.5%.
• Given the current share price of $9.98, the analyst price target of $9.25 is 7.9% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.