Here’s why Graphite India and HEG shares surged in the final session of 2025

Shares of graphite electrode manufacturers Graphite India and HEG rose sharply (≈+10% and +4% on the NSE respectively) as investors priced in the EU’s Carbon Border Adjustment Mechanism (CBAM) starting 2026, which will tax carbon-intensive steel imports and boost competitiveness of EAF-based low-carbon steel. Emkay notes Indian electrode makers are entering a capex cycle to capture structurally higher demand, estimating a 5–7% rise in global EAF share could add 35–50mt of EAF steel output, supporting sustained demand for graphite electrodes and potentially improving margins for producers aligned with cleaner steelmaking.

Analysis

Market structure: CBAM (rollout 2026) structurally favors EAF steel and therefore graphite electrode makers (HEG.NS, GRAPHITE.NS) because EAFs reduce embedded CO2 and raise landed costs for BF-BOF producers. Winners: electrode manufacturers, EAF-focused steelmakers (JSWSTEEL.NS has larger EAF mix), needle/petroleum coke suppliers; losers: high-emission exporters to EU (large BF-centric names such as TATASTEEL.NS and ArcelorMittal (MT) exposure). Expect 12–24 month demand growth of 35–50 Mt EAF steel per Emkay, implying electrode demand up materially vs current capacity and upward price pressure for 6–18 months if capex lags demand.

Risk assessment: Tail risks include CBAM legal challenges or phased/soft implementation delaying impact >12–36 months, a global steel demand shock (-10% GDP-linked), or a rapid Chinese capacity re-expansion that floods electrode supply compressing prices by >30%. Near-term (days-weeks) sentiment swings around EU guidance; short-term (3–6 months) depends on Chinese policy statements and capex announcements; long-term (12–36 months) driven by actual EAF adoption and needle coke supply constraints. Hidden dependency: needle/PC coke supply and Chinese pricing/policy dominate margins — track coke spreads and Chinese export quotas closely.

Trade implications: Tactical: establish measured longs in HEG.NS and GRAPHITE.NS for 6–24 month horizon, size 2–3% portfolio each, with 20% stop-loss and scale-up on confirmed CBAM final rules or China curbs. Pair: long GRAPHITE.NS vs short TATASTEEL.NS (1:1 notional) to isolate electrode vs BF exposure. Options: buy 6–9 month call spreads (ATM+5% to ATM+30%) on HEG.NS to limit downside while capturing upside; sell short-dated puts only if willing to accumulate below 20% discount.

Contrarian angles: Consensus ignores speed/scale risk of electrode capex — market may be underestimating supply response (Chinese restart) which could cap upside in 12–18 months. Reaction could be overdone in small-cap electrode stocks; watch order-book transparency and capex timelines — if announced global new capacity >20% of current within 12 months, de-risk longs. Historical parallel: past commodity cycles where policy shocks drove temporary super-normal margins followed by rapid capex-led mean reversion; plan to take profits into that signal.

Key Decisions for Investors

• Establish a 2–3% portfolio long position in HEG.NS with a 6–24 month horizon; use a 20% stop-loss and scale additional 1–2% on confirmation of firm CBAM technical rules or Chinese production curbs.
• Establish a 2–3% portfolio long position in GRAPHITE.NS and pair it by shorting TATASTEEL.NS (equal notional) to express EAF benefit vs BF exposure; rebalance if the pair spreads move >15% in 3 months.
• Buy 6–9 month call spreads on HEG.NS (buy ATM+5% call, sell ATM+30% call) sized to 0.5–1% portfolio to capture upside while capping premium; roll or close if electrode spot prices drop >30% from recent highs.
• Reduce European BF-heavy steel exposure (e.g., ArcelorMittal/MT) by 50% over next 30 days if CBAM implementing text is unchanged after 60 days; redeploy proceeds into EAF-linked names or commodity hedges.
• Monitor three triggers over next 60–120 days and act: (1) EU CBAM final guidance/publication (accelerate longs if unchanged = supportive), (2) Chinese policy on electrode capacity/exports (tightening = add), (3) needle/petroleum coke spot-price move >+25% or -25% (manage exposure if extremes occur).