What happened
Graphite electrodes specialist GrafTech International (EAF 2.26%) missed on quarterly results and sounded a cautious tone about 2023. Investors were caught off guard by the pessimism, sending GrafTech shares down 13.6% in February, according to data provided by S&P Global Market Intelligence.
So what
GrafTech is a little-known company that plays an important role in the global steelmaking industry. GrafTech is the world's largest supplier of graphite electrodes, a key component in the electric-arc steel furnaces that are capturing share due to their relatively low costs and more environmentally friendly process.
But the company's fourth-quarter earnings came in below what analysts had expected, due in part to internal issues including trouble at GrafTech's Mexican facility. GrafTech is also dealing with macroeconomic headwinds beyond its control. With so many end users of steel uncertain about the economy, demand is down and steelmakers in turn need fewer electrodes.
"Our year-over-year performance for the fourth quarter was impacted by higher costs, softer industry demand, and the impact of the temporary suspension of our operations in Mexico," CEO Marcel Kessler said when earnings were announced.
The macro issues are not going to go away overnight. GrafTech said that it expects "continued soft demand for graphic electrodes due to ongoing economic uncertainty and geopolitical conflict." The issues in Mexico will also continue to impact volumes through the first half of 2023.
Now what
Things could have been worse. GrafTech is fortunate the Mexican facility was not sidelined during a period of high demand, where the lost production could have been quickly turned into profitable business.
GrafTech holds an important spot in the steel supply chain, and should benefit long term as the industry increasingly adopts modern technologies. But it can't escape the fact that steelmaking is a cyclical business. In the near term, there is very little for GrafTech investors to get excited about.
