HEG Limited (HEG) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the HEG Limited Q4 and FY '20 Earnings Conference Call. [Operator Instructions] Please note that this conference is being according. I now hand the conference over to Mr. Navin Agrawal, Head Institutional Equities, 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 great 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; Mr. Gulshan Kumar Sakhuja, CFO. We shall have the opening remarks from Mr. Ravi Jhunjhunwala, followed by a questions-and-answer session. Over to you, Mr. Jhunjhunwala, for your opening remarks.

Thank you. And good afternoon, friends, and welcome to our Q4 and full year 2019/'20 con call. Our results in this quarter, although lower than previous quarters, will remain one of the better ones in the industry. However, as you would have noticed, we had to take an abnormal hit on account of recognition of inventories at NRV in accordance with the applicable Ind AS accounting laws. This is typical of our industry, which has a very long production process cycle of anywhere between 6 to 24 weeks. And due to this, at any particular time, we would always carry substantially large stocks of WIP at different stages of processing. On top of this, our main raw material, needle coke, which is imported, adds another 6 to 8 weeks to the cycle due to the distance and some stocks that we have to keep. We enjoyed its resultant gains when we were carrying very low price inventory, WIP and finished inventory when electrode prices kept going up at regular intervals a couple of years ago. And now it's just the opposite. So we have to pay for that. The current COVID-19 pandemic, other than being a huge treat to public health, has also pushed the world economy towards worst ever slowdown, even worse than The Great Depression of 1930 and also the last one of the financial crisis in 2008-'09. As for the latest IMF announcements, the global economy is projected to contract sharply to minus 3% in 2020, and it expects to grow by 5.8% in 2021 as some economic activity normalizes. We see more or less similar figures from different agencies. But at the end of the day, these are just best guesstimates from between people and only time will tell what's in store. Last year, the Electric Arc Furnace steel production was down in some of the large steel-producing regions like Europe, Japan, CIS and Turkey, mainly resulting from slowdown in demand, trade tensions between U.S. and China and all other geopolitical tensions in some parts of the world that all of us are witnessing. Now due to COVID crisis, World Steel Association in its recent short-range outlook forecast for the current year 2020, the world steel demand is likely to contract by 6.4%, and the recovery in 2021 will be to the extent of about 3.8%. Since the past year, as we have witnessed, the electrode prices have been sequentially dropping quarter after quarter to reflect the market conditions, and many of our customers have reduced or suspended operations. Both of this has resulted in contracting the electrode demand. As you also know, given what happened to the electrode prices in 2017 and '18, the customers had substantially overbought the electrodes till the first half of 2019, and we are obviously carrying this extra inventory. And with the current pandemic, this has further slowed down the rate of inventory destocking and fresh purchases. The needle coke availability has substantially eased and accordingly, the prices of needle coke have also come down substantially. Due to our industry being a process industry, we were able to run part of power processes even when the first lockdown was announced on the 24th of March. In fact, we never closed down the plant completely, and we were lucky that we were only 40, 45 minutes away from the main city of Bhopal. And within 4 to 5 hours of lockdown being announced in the afternoon of the 24th March, we were able to mobilize about 150 workers and about 25 of our senior executives, who stayed inside the premises for the next 30, 35 days to keep running the plant and at least recoup all the in-process work in process, which is lying in the furnaces. By the end of April, the Madhya Pradesh government gave permissions to most of us to restart at about 50% of its operations. And these restrictions kept getting more and more eased from mid-May onwards, subject to following, obviously, the required precautions to deal with the COVID at the plant and the office premises. As you are aware, we've always been exporting about 2/3 of our production to more than 30 countries around the globe, and that helped us during this time to hold our ground. While we have seen the domestic market drop by about 50% in April and May, it is now set to improve with major steel companies increasing their production. What we also saw in May was that some of the large customers kept operating at between 80% to 90%, while many of the smaller customers more or less didn't start at all. So overall, we saw a drop of about 50%, 55% in the purchases of electrodes, at least in April and May. But now we are seeing an uptick as most of the other smaller companies have also started production, though at a smaller rate, whereas the large steel companies are surprisingly still operating at more than 75%, 80%. We see a gradual improvement, both in domestic and export markets going forward for the next quarter. However, the situation in the international market was not as bad as India. And to that extent, since we export about 2/3 of our production, we were not as badly impacted as some of the other international players are. With our 4 decades of experience in business, we expect to be a supplier of choice to all our global and Indian customers. We have taken significant measures to manage our operations in this COVID-19 crisis and ensure the health and safety of our workers and team members. We have taken enough steps to contain our fixed costs and as you have been following our company, you would have also noticed that in this particular product, the fixed cost doesn't amount to a very large amount. But given this current situation, obviously, we have looked at each and every aspect of our cost. And we have been able to make substantial savings, which we believe is now going to be a permanent feature. We are not going to go back to the olden date in terms of our fixed cost. And as I said, the needle coke and other raw materials have come off substantially from what they used to be, let's say, about 12 weeks ago. So friends, with this, I would now hand over the floor to CFO, Gulshan Sakhuja, to take you through the financial numbers. And then I, along with my colleague, Manish, and Group CFO, Mr. Ajmera, will be very happy to answer any queries that you may have. Thank you. Over to Manish and Gulshan.

Thank you, sir. Good afternoon. Yes. During the year, the company's performance was effective due to lower volumes and realizations. Furthermore, the profitability declined mainly due to recognition of inventory at net realizable value as per Ind AS by INR 427 crore in quarter 4 FY '20 and INR 459 crore in the year ended FY '20. For the quarter ended 31st March 2020, HEG recorded a revenue from operations of INR 374 crore as against INR 394 crore in the previous quarter and INR 1,347 crores in the corresponding quarter of the last financial year. Further revenue from operations of FY stood at INR 2,149 crores as against INR 6,593 crores in FY '19. EBITDA including other income stood at INR 138 crores in FY '20 versus INR 4,767 crores of previous financial year. The company reported a net profit of INR 53 crores in FY '20 as against profit of INR 3,050 crore in FY '19. Further, in light of the heightened concern on the spread of COVID-19 pandemic, Government of India announced a lockdown to contain the spread of disease. Thereafter, on announcement of lockdown, there was no operating business activity, except in case of some specific processes, which are of continuous in nature. We started again from 23rd of April 2020, but at a lower capacity. Presently, it is very early to assess the future impact of COVID-19 with reasonable certainty. However, the company is operating its business by optimal utilization of available financial resources and also implemented stringent cost-control measures across the organization to conserve cash. The company is long-term debt free and having a treasury size of nearly INR 1,250 crores, yielding an average return of approximately 7% per annum. Our working capital is in line with the historical cycle with customers paying us per the terms, we continue to make payments to our vendors as per our obligations and all payments were being paid on respective due dates. Hence, there is no liquidity concerns. The company has not opted for the option provided by RBI of deferred payment of interest on working capital facilities. The company has adequate internal financial reporting and control system and also having the mechanism to continuously review and monitor its policies and procedures to adopt with the dynamic environment. We would now like to address any question or queries you may have in your mind. Thank you.

[Operator Instructions] The first question is from the line of Sonali Salgaonkar from Jefferies.

Sir, my first question is from the industry perspective. What is the level of inventory of finished goods and needle coke that the industry is carrying currently?

So Manish, will you take it up?

Yes. Yes. I will take it up, sir. Sonali, did you mean, what is the level of inventory of electrodes steel companies have?

Yes. Yes. And separately, needle coke as well with us? With us as in the graphite electrode companies from the industry?

Yes. See, I can answer this question in a way that if you ask -- first, let's move India out of this, because in India, they have brought down their inventory levels. But globally, still people are caught with contracts with extra electrodes. So if -- like earlier when -- you must have heard our competitors also, when they were saying that this inventory correction should have taken place by end of 2019 and then they pushed to H1 2020, but -- and then that's when the COVID start. And now we believe that more or less the inventory correction should take place by the end of this year, totally out of the system. And about your second question of how much needle coke we have. I mean, just because our product is such that we always have 2 months with us in the factory and 2 months on the way from [ high field. ] But just because we had bought and committed extra needle coke last year, I think we can easily say that depending upon level of production, we are probably having around 6 to 7 months of needle coke inventory with us. And it is quite a similar situation with many companies. I will not say all, but many.

And from when did the prices of needle coke start coming off materially?

Coming up or going down?

Coming off, going down.

Oh, yes, yes.

See, I'll answer this in a simple manner. You see, it's a very theoretical question because not just us, all the other graphite manufacturers are holding such large stocks of needle coke. Because if you remember, just about 12 to 18 months ago, the needle coke availability was so poor that everybody was buying whatever is available at whatever price because the electrode prices are so high that nobody cared and everybody was expecting the needle coke to be not available at any particular time. So everybody kept buying more and more and more, pushing the prices even higher. So to that extent, it's probably a similar situation with everybody that everybody was caught unaware, so the sudden drop and then whatever has happened in the world in the last 3, 4 months. So each one of us is sitting with a fairly large inventory.

Sure. Sir, and since when did the needle coke cost start dropping off?

No. It has -- it started dropping off from February-March onwards. But one thing, which I forgot to mention -- to finish my description of coke to the extent I said it's a theoretical question, I mean, nobody's buying. The prices have dropped a lot. But even at those very low prices, nobody is interested to buy any coke, I mean given the stock position that everybody else is carrying.

Understand, sir. Sir, and my second question is, I mean, you mentioned in your starting remarks that the electrode realization has been sequentially dropping off for the industry as a whole. So where do you envisage the electrode realizations kind of stabilizing around at what levels?

See, again, this number will not give you anything because everybody is carrying such huge stocks of inventory, somebody bought more coke at $4,000, somebody bought a little less coke at $5,000. And so it's such a big mix of different type of coke purchase at different times in the last 6 to 9 months, so I can understand what you're trying to get at. But the question is so difficult to answer that it's all a mix of everything. So probably an easier way to answer will be what is the spread on -- from the selling price to the needle coke price, probably that's a much easier way to understand what you're asking for. Because if I give you the selling price of electrode today, you will not be able to make out anything because price may be X, but your needle coke costs, in some cases, maybe more than that X price of needle coke -- of selling price. In some cases, it may be similar. In some cases, it may be lower.

Got it. So sir, any ballpark number that you would like to share where you think the spreads could normalize or stabilize?

See, I can only tell you that, that having taken the hit on account of the NRV accounting, obviously, whatever stock of coke we had at a higher price versus whatever is the currently available price of needle coke, we've taken that entire hit in one go in January-March quarter. So going forward, the margins and the spread and everything has to only improve whatever be the electrode price, that margin has to only improve. It cannot deteriorate compared to what we have gone through in the last quarter, especially with the timing of the COVID and the demand going down further and people not being able to produce more electrode and things like that.

Understood. Sir, my next question is, what was our capacity utilization in Q4 FY '20 and for FY '20 as a whole? And what is current utilization that we are working at amidst COVID?

Yes, I'll take this question. For the Q4, if you look in terms of production-wise, it was in 50s, but we sold more than that. So sales-wise, it was in the mid-60s for Q4. And for whole of the year, it was lower 60s, both by capacity-wise and sales-wise, it was in 60s.

Sure. Sir, and amidst COVID right now, I mean, in the resumption status, what is the current capacity utilization that we are looking, say, on an average in May and mid of June?

See, currently, if we talk about the quarter because this quarter was kind of imbalanced because we had a lockdown and then we started the full plant around 23rd of April and then there's a process time also. So just look -- if you look at April, May, June, put together, it's 50%. It's close to 50%.

Sure. Sir, my next question is, which are our key current geographies? And any key risks particular to any countries that we are witnessing right now?

Sonali, we are very well diversified. As far as customer base is concerned, we -- I mean, we are fortunate to have done that in the past for many, many years. So we are quite evenly placed between India and the Middle East and the Southeast Asian countries and Europe and Turkey. So we are not as heavily dependent on 1, 2 or 3 countries. And as you know, the geopolitical things keep changing on the -- all the time. I mean if we just put the country count, it's around 30-plus countries where we export. And region-wise, it's quite evenly between all the 5 continents. So we are not endangered by any trade barrier or anything coming from one-off country per se.

Sure. Sir, and my last question, any comments or updates on your CapEx front of 20,000 metric tons?

The CapEx plan is very much there. It's very much on. However, there are bound to be some delays because of this COVID, which we are assessing. A lot of equipment had to come from overseas, and a lot of things had to be procured locally also. So the plan is very much on, but there might be delays.

Got it, sir. So our date of commissioning -- our estimated date of commissioning is the first quarter 2022?

Yes, that's correct. That is what we had originally given. That's right.

No, that was original. No, but that was the original.

Yes, that was the original date.

We'd always said January-March '22 should be the time when we will come out with the new production from that expansion. But given the situation where most of the suppliers are not able to work and we have more than 30, 40 very major suppliers from different parts of the world, so even 1 or 2 of them getting delayed by 3 months or 6 months, it will impact the entire thing.

I understand, sir. Sir, and what would be our estimate that outgrow towards this CapEx?

It was INR 1,000 crores, actually.

About INR 1,000 crores.

It was INR 1,000 crores.

[Operator Instructions] The next question is from the line of [ Sandeep M from HEG. ]

Can you hear me?

Yes, yes. We can you hear you. Go ahead.

Yes. I just have a question, but as the Chairman sir told that steel demand is likely to go down by 6.5%, and he said that the electrode prices are also dropping down in last 1 or 1.5 years, so whether that trend still continues? Or do you expect the electrode prices to stabilize or something like that?

See, as I just said, I mean, we think that probably the worst is over. What we have seen in terms of pricing and sales in April, May and June, we only see an upside from July onwards.

Okay. Okay. So given the issue that your main raw material prices are also going down, so that would be a better thing for the company?

Yes. But again -- to again, clarify, I mean, we still are carrying large stocks of finished products and needle coke, as Gulshan just explained, which is typical of this industry or any industry, which is a very long process time. So that impact will continue for at least 2 more quarters.

[Operator Instructions] The next question is from the line of [ Akhil Jilani from Kamal Charan Securities. ]

You mentioned, sir, that you were using INR 1,000 crores for expansion. I wanted to just understand how much of that INR 1,000 crores has already been used? And what is the deployment charge for the same?

We have already spent about INR 200 crores to INR 250 crores. Obviously, a lot of actual construction activities had already begun end of last year, middle of last year. So some money has gone into that. And as I said, a very large part of this INR 1,000 crores is against imported equipments. So several letter of credits have been established. Advances have been paid to international suppliers. So in total, it is in that region of INR 200 crores to INR 250 crores.

And is there any plan for backward integration in terms of setting up a needle coke plant in future or something like that, which is a part of this INR 1,000 crores expansion unit?

No, no, no. That is not. It is simply a 20,000 tonnes expansion of electrode. And as far as the backward integration is concerned, it's very, very difficult because this technology is extremely complicated. This technology has been in the hands of 3 or 4 international companies and that scenario hasn't changed for the last 50, 70 years.

The next question is from the line of Bhavesh Chauhan from IDBI Capital.

Just wanted to know where are we in terms of spreads, gross spreads. So electrode prices minus the raw materials based on current prices. So I'm not talking about the inventory that you carry historically, just based on -- are we near to that 2015, '16 lows? Or we are better than that or even lower?

No, we are certainly better, certainly better than if you're considering with '15, '16.

Okay. How much, sir, if you can give some -- quantify it, slightly better or maybe far better?

Somewhat better.

Okay. That helps, sir. And sir, secondly, what is the price differential between UHP and HP today? Have the spreads between both these products came off?

See, I will -- let me take this question. See, the Ultra High Power grade uses this needle coke, which has a completely different pricing and HP grade uses the Indian coke, which has a completely different pricing. Although the cost of conversion would be the same, but you start with a completely different raw material price space. So it will be difficult to compare the 2 spreads. But normally speaking, the HP always remains under more pressure because of Chinese competition because Chinese are not as much of a competition in UHP, but HP they do are. So -- I mean, historically also speaking, the HP prices have -- are more under pressure compared to the UHP pricing.

[Operator Instructions] The next question is from the line of [ Chandramouli Srinivasan ], who's an individual analyst.

How is the competitive intensity from the China...

Srinivasan, sorry to interrupt, but we can't clearly hear you. Request you to use the handset.

Yes. Hello?

Yes, go ahead.

Yes. So how is the competitive intensity now on the pricing comes from China because in between, there was a lot of selling at low prices, the China is what we had heard?

See, as Manish just explained, China, we compete with China only on that non-Ultra High Power. And if my memory serves me right, I mean, our -- that's about 1/3 of our total production, about 35% to 40%. So we do compete with China on that 30%, 35% kind of non-UHP. On the major part, which is the UHP and which is where we are exporting more than 2/3 of our product, we don't compete with China.

The next question is from the line of Anuj Sharma from M3 Investment.

Actually, I call -- I joined in the call late, so I don't know if this question has been answered. But is there a positive contribution between incremental revenue and incremental cost of raw material today?

Gulshan, will you take this?

Yes. Yes, there is incremental contribution to that because already we have taken a hit on our inventory that is sitting on our books on 31st March 2020.

Okay. Okay. So the new material which comes into our factory and the new realization which you see, there's a positive contribution. And does it absorb the fixed costs as well?

Yes. Definitely, it would absorb the fixed costs as well because we have already taken a major hit in our books of accounts in last year.

Okay. Okay. And what is the broad range of realizations which you are looking at the UHP market?

That is a difficult question to answer, actually, because you see it's a basket actually. So there are some old businesses, take our old contracts still continuing, new ones getting filled. So it's -- today's price, if you say, it's a very difficult question to answer, what is the price realization. So in every quarter, there are a mix of some carryover contracts, some no orders being booked. And I wouldn't like to mention a particular price because of competitive reason.

Sure. Sure. And in terms of needle cook pricing, how is the pricing behaving? That's my last question. Again, I don't know if this has been answered, but how is the cost of raw material behaving? You think in terms of our booking the high-cost inventory is completely over, and we are realizing the new cost? Or that will again, say, take some more time for us to realize?

See I had answered this question exactly about 5 minutes ago. So this is a very typical kind of an industry where our process time is very long. I mean, once we get the raw material, the easiest product takes about 6 to 8 weeks to produce, while some of the difficult ones take as much as 5 to 6 months. So given that -- given this long-production cycle, at any particular time, we do have to carry a lot of inventory, whether it was lower cost coke or a higher-priced coke. So that is going to be there in any case at any time. And in addition to that because our main raw material is imported, so obviously, one has to keep a margin of 2 months in terms of carrying stock, which one would not normally carry if it was an Indian stock. So that's number one. Secondly, say, talking about the needle coke price, the needle coke price has also come down substantially -- pretty substantially in the last 3, 4 months. Again, given the scenario where everyone, not just us, practically every graphite supplier in the world is also sitting with very large stocks of needle coke because in the -- in last 2, 3 years, needle coke was in such a short supply that everybody bought whatever was available to him to buy. So everybody is carrying a large stock. But again, as Gulshan just explained, having taken the hit on the NRV, so we have taken all that into account while giving the results for the whole year. So going forward, we do -- we expect that probably the worst is over. And the margins and everything should hopefully improve. The markets are also improving. Indian market was more or less down by about 50% in April and May, which is now increasing. It has probably gone up to about 60%, 65%. International market was down by about 15%, 20%. So it was much better than the Indian market. And to that extent, because we have been exporting about 2/3 of our production, so that obviously helped. So our overall production and sales for this quarter is in the region of about 50% to 55%.

The next question is from the line of Mr. Manish Kayal from Nippon India.

Sir, I have 2 questions. First is related to your competitor. So a couple of months ago, Graftech mentioned in its PPT that some of their customers are renegotiating the past contracts, which were made at very high prices. So is there any benefit that would accrue to us? Because as you mentioned earlier that there are only 3, 4 players who do UHP product. So any color on that? And second is related to scrappage policies. So I'm not sure when the scrappage policy would be announced, but whenever it's announced in India, what would be the opportunity for graphite electrodes player? And whether it's for the UHP, HP or any other category of HP, which would benefit? So if you can give some color on that opportunity, volume-wise realization margins, so that would be very helpful, sir?

Yes. I'll take up the first one, and Manish will answer the second one, probably. You see, on the first one, if you -- if I take you back into history, about 3, 4 years ago, when the electrode prices had certainly shot up to very abnormal levels, Graftech being the only company out of the 5 or 6 that we are in the world, who has the full needle coke backing with them. I mean they have more or less 75% to 80% of their own coke. That is the only company which has backward integration into coke. And major raw material for producing the needle coke is a very high quality of oil. And in U.S., as you know, you can hedge your oil, you can book your oil for the next 5 to 7 years if you want. So when they came out with this policy and they went around committing for 5 years, so they had a policy of 5 years take-or-pay kind of contract at a fixed price. So they had this luxury that because they had their own needle coke and they hedged their oil, their raw material for the next 5 years at a particular price. So given that they were -- they more or less fixed their margins because they were -- their needle coke cost was fixed for 5 years, which was not the case for anybody else in the graphite industry except themselves. So what you just mentioned is happening to them because their contracts for 5 years are still due for the next 18 months. I think 3.5 years have passed out of 5 years. Until December of '21, they are fully booked at a take-or-pay contract. So their margins will -- are obviously much, much better than anybody else. They are still able to sell at about $10,000 against those take-or-pay contracts. So what you mentioned is probably what you probably meant was a lot of the customers who had booked for 5 years at $9,000, $10,000, so some of them are trying to renegotiate with them because the electrode prices have dropped substantially below $10,000.

Okay. And whenever that comes for renegotiation, do we have a chance to get in front of those clients? Or...

No, no, there is no renegotiation. You see in America, when you have a take-or-pay kind of contract for 5 years, I mean you have to buy X quantity at a Y price, which is predecided for 5 years. But now that the electrode prices have dropped much below $10,000, so those customers are renegotiating with Graftech to get a cheaper price compared to $10,000, which is probably being discussed between the customer and the supplier, but we would not know what is happening. But -- so obviously, they are looking at maybe $500, $1,000, $2,000, so it is up to Graftech to accept or not accept. So we are not affected by that. We are not in that in any case.

And about your second question about scrappage policy. See, this is running delayed by at least 2, 3 years now. So once it comes, it certainly be helpful to the electric arc furnace production in the country. Because you see -- if you look at Americas, they all use shredded cars and nobody uses DRI in steelmaking. So this is -- when this scrap policy finally comes, there will be a lot of scrap, which will be available in-house because India is still a net importer of scrap. So once they have the EF's way of steel production will be more viable in India once they actually give the go-ahead for this policy.

See, what Manish is trying to say is about 30% of India's total steel is produced through the electric arc furnace where electrodes are used, while the international average is about 50%. If you look at the total steel production of the world minus China, close to 50% of the steel is produced through the electric arc furnace where the electrodes are used. And in India, that number is 30%. One of the reasons is scrap, nonavailability of any scrap.

[Operator Instructions] The next question is from Ajay Mehta, who's an individual investor.

The query is basically on the quarter results, which you have given. In December 2019, we have shown that the cost of [ UPL ] consumed has been about INR 260 crores. The same situationally if we go forward, March 2020, it is showing cost of material consumed is INR 458 crores. Can you please...

Yes. Because -- Gulshan, can you take that?

Yes. This is on account of NRV hit that we have taken in the last financial year.

Sorry? Once again please.

This is on account of inventory recognition at net realizable value that we did...

Okay. The one you were talking about that INR 400 crores, which you have taken as the hit. So that is reflecting in this particular...

Yes.

Okay, okay. That's good. Fair enough.

If you see our results, it is clearly mentioned in the Note #7 of the results. It clearly means -- solve your query.

That answers my queries in a big way. Coming back, the second query is about what is the breakeven sales? As a shareholder, you would like to know that you have been performing very well and you have rewarded the shareholders for the last 2 years, and we are thankful for that. But going forward, we just would like to know what is the breakeven sales which you would achieve so that there is no loss in the company. For example, in the December 2020, probably because of the NRV, we are showing a INR 400 crores loss. But going forward, can you please quantify what would be the breakeven sales, which will let us know that there will be no loss in the company going forward?

So if you see breakeven is the factor where my contribution and fixed costs, both are equal, our contribution is, again, the factor of my selling price and my coke price. Now due to this COVID situation that is going on, it is very difficult to comment and that where this selling price would go in future. So right now, it's not possible to give you this breakeven point as on date because it is a factor of only 2 things, my contribution and fixed cost. And my contribution is a factor of my selling price and that coke price. So currently, it's not that feasible to provide this number to you.

Sir, maybe if you could highlight on your fixed cost, we could walk backwards and check on what...

It's a very silly question to answer because it's purely a matter of cost of needle coke. Needle coke accounts for more than 50% of our total costs, including fixed costs and everything. And needle coke went up by 5 to 6x in the last 3 years so did the electrode prices go up. So that spread as the electrode prices went up by 5, 6x, and needle coke prices went up by 5 to 6x, so the differential margin was much larger in case of graphite because in the worst case, the electrode prices have dropped to something like [ $2,000 ] and the needle coke prices had dropped to something like $500. So that spread, the [Technical Difficulty]

Please continue.

We seem to have lost the line for Mr. Jhunjhunwala.

It's not audible. I think it's disconnected.

Yes. Please stay connected while we reconnect, sir. We have the line from Mr. Jhunjhunwala reconnected. Over to you, sir.

Yes. So the needle coke -- I was talking about the spread that in the electrode, rather than talking about the margins at what price and this and that, it's more important to understand the differential between the electrode selling price and needle coke price. So in the worst scenario -- in the worst case, about 3, 4 years ago, the needle coke prices were about $500 and electrode prices were like $2,000, so giving a spread of $1,500. And in the best case scenario, 2 years later, the electrode prices went up to $14,000, $15,000, and the needle coke prices went up to like $4,000, $4,500. So that spread of $1,500 suddenly went up to about $10,000 to $11,000. So -- and needle coke is, let's say, practically 50%, 55% of our total cost. So given in terms a number that X price, we are breaking even, it's not very easy. And probably you missed -- you probably joined the discussion later. Here is an industry where the process time is very, very long. Once we put the needle coke into operation, it takes anywhere between 2 months to 5 to 6 months to process those electrodes. So given a very long production cycle, whatever coke we purchased at $500 and maybe sold at $10,000, we'll carry it for like 4 to 6 months. So that huge inventory profit came to us 2, 3 years ago, and now we have to pay for that. I mean, our inventory is all very high-priced coke, whereas the electrode prices have dropped.

Fair enough. Fine. I get the broad idea of total thing. Coming back, last 2 years, we've been doing very well, why is still loan figure coming in our balance sheet, is there any particular reason? Or do we have reduced our loan, but why have we not totally loan-free, sir?

No, no. Actually, there is no -- no, there is actually no loan. The loan is because we still do get a cheaper interest loan because of exports. We export 2/3 of our production. So there's an arbitrage on that loan.

Okay. So the interest cost, which is there, is basically the arbitrage cost of probably the...

Right.

[Operator Instructions] Next question is from Anuj Sharma from M3 Investment.

Yes. Sir, just wanted your thoughts on this industry. Now for a very long time before 2016, approximately 10 to 12 years ago, for a duration of 10 to 12 years, this industry was pretty much flat, ranging from flat profits in a bit cyclical. We had 3 exceptional years 2016, '17, '18. Just when you think out, you think the industry will go back to the decade of slight volatility? Or you think the exceptional years of the last 2, 3 years can be repeated? How do you think through this scenario going forward?

Shall I answer this?

Yes, I'm listening.

Hello?

Hello? Yes, yes, I'm listening to you, sir.

Yes, these are the 2 years you were referring to are the very exceptional years, once in a lifetime event, which happened suddenly. Of course, we don't expect that we will go back to those kind of levels. But if you look at historical data, this is an industry which has had healthy EBITDA from most of the years, for majority of the years, except that there were like 4, 5 bps in between, if you consider the last 30-year history of this industry. So what happened in the last 2 years is very difficult to replicate, but the industry should return to healthy EBITDA levels.

Okay. Do you think anything has changed in the last few years, which can have very different dynamics or economics than the past decade of 2006 to '16, any fundamental change in the business, competitors or the way the economy or the -- sorry, the business has evolved?

Not really. I mean it's...

I'll answer this question, Manish.

Yes, yes.

See, 2 things I'll tell you. What happened about 3 years ago, which increased the prices from maybe $2,000 to $10,000, $12,000, $14,000 was very simple that China decided that they will close down about 130 million tonnes of steelmaking, which was all through the blast furnace. As you know, 50% of the steel in the world is produced with the blast furnace and the other 50% is through the electric arc furnace where electrodes are used. And it's a very well-documented information that for every tonne of steel that we produce through the blast furnace, you are polluting the atmosphere about 3x compared to electric arc furnace. So China decided 3, 4 years ago that they need to take care of the environment, and China was producing 95% of their steel through the blast furnace, whereas the rest of the world was only producing 50% through the blast furnace. So they decided to stop 150 million tonnes. And that suddenly meant that China, which was exporting about 120 million tonnes of steel all over the world. So having stopped 150 million tonnes of capacity, their capacity to dump steel all over the world went down substantially. So from 120 million tonnes in the last 3, 4 years, China has now settled at about 60 million tonnes. So that 60 million tons of dumping of steel, which stopped from China 3, 4 years ago, meant that the other part of the world, which was everybody minus China, had to produce about 60 million tonnes of additional steel, which was coming from China up till that time. And that changed the picture of this industry because suddenly, 30, 35 million tonnes of additional electric arc furnace steel started getting produced, which needed electrodes. And going back from 10,010 to 10,015, 10,016 because the market was not improving for the steel industry all over the world, at least 200,000 tonnes of electrode capacity were shut down, mostly in Europe and U.S. So somebody had to close down the capacity to bring some sanity in the business in terms of demand and supply. So while at one -- on the one side, 200,000 tonnes of capacity went down by closure of 6 to 7 plants, and suddenly, this thing, which I just explained about China, added [Technical Difficulty]. So there was suddenly a mismatch between demand and supply, which changed the total dynamics. And in the last 6 months -- I mean, I'm only talking from public information, if you read the scripts of conference call and the public presentations that some other companies have made, they have already closed down 2 plants: one plant has been closed down in Germany, another plant has been closed down in Austria in the last 6 to 9 months. So that has also brought down the capacity in the last 6 months or so. Now it only depends upon how the world is going to change over the next 12 months, whether it will take 6 months for the normal world economy to come back to the normal levels in [ 9 ] months or 12 months, that is anybody's guess. But some capacities have shut down in the last 6 months. To that extent, the electrode capacity have come down. So once we get back to the normal situation that we saw about the year or 2 years ago, probably things should look up.

Okay. And sir, my last question is, is this net reduction in capacity? Or there were new plants which also came up, so net-net, there is no capacity reduction? There's a net capacity reduction?

No, no. So this is net because there has been no new greenfield graphite plant which was established. I mean we started production in 1977 and [Technical Difficulty] was only 1 small plant which started -- a new plant started in Malaysia about 15 years ago. In the last 10 to 15 years, there has been no new plant at all.

Okay. Okay. And what is the net capacity reduction in terms of percentage or if it is in terms of tonnes also, that will be helpful, that 2 shutdowns?

No. As I said between 2013 and 2016 about 200,000 tonnes of capacity went out of circulation. And in the last 6 months, about 50,000 to 55,000 tonnes of further closures have happened.

The next question is from the line of [ Ritwik Sheth from [indiscernible] Financial. ]

Just one clarification from an earlier question. You mentioned that peak spread 2 years ago was around $10,000 to $11,000 per tonne at EBITDA level for us, which is usually $1,000 to $1,500 per tonne. Did I get this figure right?

Yes. See, those -- you're comparing the spread. What Chairman said was one of the worst years that is the lowest it had gone. And this is the best it went 2 years back. So this is just a range which he was mentioning. Of course, that $1,500 spread is not good enough at all because those were one of the bad years for the company. So -- but since the earlier question was asking was what was the lowest it went? So that is what Chairman answered, actually.

Okay. That was a lowest, but not...

Yes. But that is not the sustainable level of EBITDA. $1,500 was not sustainable anyway. That is what made so many plants in the world close down, actually.

Right, right. So what would be the current spread if I take spot price for graphite electrodes and spot price for needle coke currently? If you can highlight that?

It's much -- all we can -- I mean, without giving any numbers, it is much higher than $1,500.

Much higher than $1,500. Hello?

Yes, yes. Much higher than $1,500. If we were to compare it with our today's cost of purchase versus today's cost of sales.

Right. Right. Okay. Okay. Fine. And sir, just one, what would be the peak prices for needle coke and graphite electrodes? And what would be the prices today, if you could just highlight that?

See, I would not like to give any numbers for today because, obviously, we don't want to let others know about it. But the older numbers we have been speaking for last 1 hour. I mean the highest electrode price was about $14,000, $15,000, $16,000, and the highest needle coke price was in the range of $4,000 to $4,500.

The next question is from the line of [ Chandramouli Srinivasan ], who's an individual analyst.

Yes. Sir, you very beautifully gave us the example of the comparison between the electrode price and needle coke price, say, $2,500 and in the peak, $16,000 and $4,500 or $5,000. So I wanted to know what is that difference today, roughly that you -- I think you -- probably the same question was asked before me, but you didn't give an exact number. You said it is substantially better. But -- and I know that you said that you are not buying needle coke at today's price because we have inventory, but since you have probably brought got all that inventory down to today's buying price of needle coke, so going forward, in your cost, you should be able to see the lower cost. Therefore, what's that difference in between the electrode price and the needle coke price that was my question?

Yes, you're right. You're absolutely right. I mean that is what I said. I mean going forward, that's exactly what I said that probably the worst is over as we have taken a fairly large hit on the stocks.

That was the last question in queue.

Thank you. Mr. Manish will you take up -- hello, Manish?

Yes. Yes, sir.

Just make a closing remark.

Yes. Yes. Yes. So thank you very much for listening to our Q4 con call, and we hope to speak to you again with our quarter 1 results and hopefully, with a better set of numbers. Thank you so much.

Thank you.

Thank you.

Thank you very much. On behalf of SKP Securities Limited, that concludes the conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.

Thank you.