GrafTech International Ltd. (EAF)

Executive Summary / Key Takeaways

• GrafTech is the only large-scale graphite electrode producer substantially vertically integrated into petroleum needle coke, creating a structural cost advantage that competitors cannot replicate, with cash cost per metric ton declining 10% year-over-year in Q3 2025 and a projected 30% cumulative reduction since 2023.
• The company is executing a disciplined market share recovery, with U.S. sales volume surging 53% year-over-year in Q3 2025 while deliberately foregoing low-margin volume, demonstrating that pricing discipline and growth can coexist even in an oversupplied market.
• A comprehensive debt restructuring in December 2024 extended substantially all debt maturities to December 2029, transforming a liquidity concern into a strategic advantage with $384 million in total liquidity as of September 2025.
• Management's cost rationalization plan is delivering results beyond guidance, with the company now expecting a 10% decline in cash COGS per metric ton for 2025, up from prior guidance of 7-9%, while simultaneously launching an 800-millimeter product platform for future growth.
• The battery materials market represents a compelling long-term call option, as GrafTech's vertical integration positions it as a strategic partner for Western synthetic graphite supply chains, though timing remains dependent on trade policy resolution expected in Q1 2026.

Setting the Scene: The Electrode Industry's Structural Crisis and GrafTech's Unique Position

GrafTech International, founded in 1886 and headquartered in Brooklyn Heights, Ohio, manufactures graphite electrodes essential for electric arc furnace (EAF) steel production. Over 90% of revenues derive from these electrodes, making the company a pure-play on the global steel industry's decarbonization trajectory. The graphite electrode market operates as an oligopoly dominated by four major producers: GrafTech, two Japanese competitors (Tokai Carbon (4043.T) and Resonac (4004.T)), and Indian manufacturers (HEG (HEG.NS) and Graphite India (GRAPHITE.NS)). This concentrated structure would normally support pricing discipline, but the industry faces a severe overcapacity crisis driven by aggressive expansion in China and India.

The core problem is arithmetic: Chinese and Indian producers have built capacity multiples greater than their domestic EAF consumption, exporting over 300,000 tons annually into global markets. This flood of low-priced electrodes has created what management calls an "unsustainable" pricing environment, with Chinese export prices serving as a floor that drags down global pricing. For GrafTech, this means competing not on quality alone but against subsidized imports in regions like the Middle East, Turkey, and South America, while maintaining premium positioning in protected Western markets.

What makes this crisis different from previous cycles is the duration and the strategic response. GrafTech's management has explicitly stated that current pricing levels "remain unsustainable," signaling that industry economics must eventually force capacity rationalization. The company is not waiting for this inflection passively. Instead, it is leveraging its unique vertical integration—being the only large-scale producer that manufactures its own petroleum needle coke—to execute a deliberate strategy: gain market share in high-value regions while driving costs below competitors' breakeven levels, forcing the rationalization it anticipates.

History with Purpose: From Debt Burden to Strategic Flexibility

GrafTech's current position stems directly from its 2018 IPO and the financial structure that accompanied it. The April 2018 offering coincided with a $2.25 billion senior secured term facility and a $330 million revolving credit facility, creating a debt load that would constrain the company through the next cycle. This leverage proved debilitating when operational challenges emerged, most notably the September 2022 temporary suspension of the Monterrey, Mexico facility, which caused GrafTech to "take a step back" in market share and profitability.

The Monterrey suspension reveals a critical lesson about GrafTech's vulnerability: even brief operational disruptions have lasting commercial consequences in a relationship-driven industry where steel producers value supply reliability above all. The facility's subsequent restart required not just physical repairs but commercial rebuilding, a process that continues today through the company's renewed focus on U.S. market share.

By early 2024, management recognized that the existing cost structure could not compete in the new pricing environment. The cost rationalization and footprint optimization plan announced that year included idling the St. Mary's, Pennsylvania facility and reducing capacity elsewhere, accompanied by significant overhead cuts. This was not a retreat but a strategic repositioning: by lowering fixed costs and focusing production on the most efficient assets, GrafTech aimed to reduce its breakeven point below that of integrated competitors who lack vertical integration.

The December 2024 debt restructuring completed this financial transformation. By issuing new notes and securing term loans, GrafTech extended substantially all debt maturities to December 2029, pushing the next major refinancing event four years beyond the expected industry recovery. This matters because it eliminates balance sheet risk as a constraint on strategy, allowing management to invest in market share gains and new product development without liquidity concerns. The $384 million in total liquidity as of September 2025—comprising $177.6 million in cash, $106.7 million in revolver availability, and $100 million in delayed draw commitments—provides the firepower to execute this strategy through the cycle trough.

Technology, Products, and Strategic Differentiation: The Needle Coke Moat

GrafTech's vertical integration into petroleum needle coke is not merely a supply chain detail; it is the foundation of its competitive moat. Needle coke represents approximately 40% of graphite electrode production costs, and GrafTech's ability to produce this critical raw material internally provides two distinct advantages. First, it ensures supply security during periods of shortage, when non-integrated competitors face input constraints or price spikes. Second, and more importantly in the current environment, it yields a structural cost advantage estimated at 20-30% compared to external sourcing.

This cost advantage manifests in the company's cash cost of goods sold per metric ton, which declined 10% year-over-year in Q3 2025 to $3,795 and is on track for a 30% cumulative reduction since 2023. For context, Indian competitor HEG reported EBITDA margins of 28% in its latest quarter, but its profitability is vulnerable to needle coke price volatility since it must source externally. GrafTech's integration insulates it from this volatility while allowing it to drive costs lower through operational improvements.

The 800-millimeter product offering, launched in 2024 and completing qualification trials, represents GrafTech's next technological evolution. Larger diameter electrodes enable higher productivity in modern EAFs, reducing consumption rates and downtime for steel producers. This product platform is expected to be an "important growth platform" in coming years, targeting the most advanced steel operations that value performance over price. While competitors can produce similar sizes, GrafTech's vertical integration allows it to offer these premium products at competitive prices while maintaining margins, a combination that should accelerate adoption.

Beyond steel, GrafTech is developing capabilities for the battery materials market, leveraging its needle coke production and graphitization expertise for synthetic graphite used in lithium-ion batteries. Management views this as a "raw material supplier or interim bridge supplier" opportunity rather than a direct anode production play. This strategy is significant as it represents a capital-efficient entry into a market expected to grow exponentially with electric vehicle and energy storage adoption. The U.S. Department of Commerce's preliminary 93.5% anti-dumping tariffs on Chinese anode material, expected to be finalized in Q1 2026, could unlock this opportunity by forcing Western battery manufacturers to seek domestic synthetic graphite sources. GrafTech's existing needle coke capacity positions it as a strategic partner without requiring massive capital investment in anode production.

Financial Performance: Cost Discipline Offsetting Pricing Pressure

GrafTech's Q3 2025 results demonstrate the effectiveness of its strategy in a challenging environment. Net sales increased 10% year-over-year to $144 million, driven by a 9% volume increase to 28,800 metric tons. This implies a weighted-average realized price of approximately $5,000 per metric ton, a slight increase from the prior year, even as the market faces persistent pricing pressure from low-cost imports. The fact that sales increased, driven by volume growth, suggests that GrafTech's value proposition is resonating with customers who prioritize supply reliability and technical support.

The geographic mix shift amplifies this point. U.S. sales volume surged 53% year-over-year in Q3 2025, building on 38% growth in Q2 and 25% growth in Q1. This matters because the U.S. market commands the highest pricing globally, and GrafTech's ability to grow share here while competitors face tariff headwinds demonstrates the commercial effectiveness of its integrated supply chain. For the first nine months of 2025, U.S. volume grew 32% despite domestic steel production increasing only 1%, indicating pure market share gains rather than end-market beta.

Profitability metrics reveal the cost discipline story. Adjusted EBITDA turned positive at $13 million in Q3 2025 compared to a $6 million loss in the prior year period, a significant improvement driven by the 10% reduction in cash COGS per metric ton and broader cost rationalization efforts. While gross profit declined modestly from $12.1 million to $10.3 million due to pricing pressure, the overall cost discipline was effective in improving operating profitability. For the first nine months, the net loss widened to $154.7 million from $81.7 million, primarily due to a $43 million non-cash tax valuation allowance recorded in Q2 2025. This accounting charge does not affect cash flow or operations, but it reflects management's conservative assessment of future U.S. and Swiss profitability.

Working capital management has become a source of cash generation. The company reduced working capital by $108 million in 2023 and an additional $40 million in 2024, with further improvements expected in 2025. This demonstrates operational discipline and provides incremental liquidity to fund the market share recovery strategy. In Q2 2025, management intentionally built inventory as a "cost savings initiative" to level-load production and avoid premium costs, a tactical decision that temporarily increased working capital but should reverse in the second half.

Outlook and Execution: The Path to Pricing Power

Management's guidance for 2025 reflects a disciplined approach to balancing growth and profitability. The company now expects 8-10% volume growth for the full year, a modest reduction from prior guidance of 10% that reflects a "disciplined approach of foregoing volume opportunities where margins are unacceptably low." This signals that GrafTech is not chasing market share at any cost, but rather focusing on profitable growth that can sustain the business through the cycle.

The cost outlook has improved meaningfully. Management now anticipates a 10% decline in cash COGS per metric ton for 2025, exceeding prior guidance of 7-9% and translating to approximately $3,860 per metric ton for the full year. This would represent a 30% two-year cumulative decline compared to 2023, demonstrating that the cost rationalization efforts are structural rather than one-time. The ability to sustain these cost reductions while competitors face input cost inflation creates a widening competitive moat.

Pricing remains the critical variable. Management has informed customers of its intention to increase prices by 15% on uncommitted 2025 volume, describing this as a "first necessary step on the path to restoring pricing and therefore, profitability." The rationale is straightforward: current pricing is "unsustainable" for industry economics, and GrafTech's value proposition—including technical support, supply reliability, and the ArchiTech productivity system—justifies a premium. While competitors like HEG and Graphite India can undercut on price in commoditized markets, they cannot replicate GrafTech's integrated cost structure and technical support in premium applications.

The battery materials opportunity provides longer-term upside asymmetry. Management expects the U.S. Department of Commerce's finalization of anti-dumping tariffs on Chinese anode material in Q1 2026 to be an "important milestone to unlock the battery materials market." GrafTech is positioning as a "raw material supplier or interim bridge supplier" rather than a direct anode producer, a capital-efficient strategy that leverages existing needle coke capacity. This opportunity represents a call option on the EV and energy storage megatrend without requiring the massive capital investment that standalone anode production would entail.

Competitive Dynamics: Forcing Rationalization Through Cost Leadership

GrafTech's strategy directly targets the structural overcapacity created by Chinese and Indian producers. Management estimates that Chinese exports exceed 300,000 tons annually, while Indian producers have expanded capacity to multiples of domestic demand. This oversupply has driven Chinese export prices down more than 30% from 2022 levels, with Indian producers cutting prices by 40% to maintain volume. The result is an industry where many producers operate below cash costs, an unsustainable condition that must eventually trigger capacity closures.

GrafTech's response is to accelerate this rationalization by driving its own costs below competitors' breakeven levels. The 30% cumulative cost reduction since 2023, combined with vertical integration, creates a cost structure that non-integrated competitors cannot match. Indian producers like HEG and Graphite India, despite their low labor costs, remain vulnerable to needle coke price volatility and must import raw materials. Japanese competitors Tokai Carbon and Resonac face higher operating costs from domestic production and currency headwinds.

The U.S. market provides a protected arena where GrafTech can execute this strategy. With 50% tariffs on Indian material and existing trade protections against Chinese imports, domestic producers enjoy a more rational competitive environment. GrafTech's 53% U.S. volume growth in Q3 2025 demonstrates its ability to capitalize on this advantage, capturing share from tariff-disadvantaged competitors. European trade measures, including a 47% cut in steel import quotas and the Carbon Border Adjustment Mechanism (CBAM) effective 2026, should similarly support domestic steel production and electrode demand.

The 800-millimeter product offering targets the most advanced EAF operations that prioritize productivity over price. While competitors can produce large-diameter electrodes, GrafTech's vertical integration allows it to offer these premium products at competitive prices while maintaining margins. This technological edge, combined with the ArchiTech furnace productivity system, creates switching costs that protect market share gains once established.

Risks and Asymmetries: What Could Derail the Thesis

The primary risk remains competitive pressure from Chinese and Indian overcapacity. If these producers continue exporting at below-cost prices to maintain employment and market share, the pricing recovery GrafTech anticipates may be delayed indefinitely. Management acknowledges this risk, noting that "challenging pricing dynamics persist in nearly all of our regions" and that Chinese export pricing serves as a floor in commoditized markets. The company's strategy assumes that cost pressure will eventually force rationalization, but government subsidies or strategic imperatives could prolong the current unsustainable conditions.

Customer concentration in the steel industry amplifies cyclical risk. GrafTech's revenues are tied to global steel production, which remains below historical levels in Europe and faces uncertainty from macroeconomic slowdowns. While EAF steelmaking is gaining share—accounting for 51% of production outside China in 2024—overall steel demand growth remains modest. A severe recession could reduce steel output faster than GrafTech can gain market share, undermining volume growth targets.

Execution risk on cost reduction is modest but present. The 10% COGS per metric ton guidance improvement suggests management is confident in its operational initiatives, but these savings depend on maintaining production efficiency and raw material cost control. Any disruption to the Seadrift needle coke facility or unexpected maintenance could reverse these gains. Similarly, the planned $40 million in 2025 capital expenditures must be executed efficiently to support the 800-millimeter product rollout without constraining cash flow.

The battery materials opportunity, while attractive, remains speculative. The market is waiting for trade policy resolution, and GrafTech's role as a supplier rather than a direct anode producer may limit value capture. If the anti-dumping tariffs are not finalized as expected, or if battery manufacturers develop alternative synthetic graphite sources, this growth avenue could fail to materialize.

Valuation Context: Pricing in Turnaround Execution

At $17.80 per share, GrafTech trades at an enterprise value of $1.37 billion, representing 2.54 times trailing revenue of $538.8 million. This multiple sits below typical industrial turnaround valuations, reflecting the market's skepticism about pricing recovery in an oversupplied market. The negative profit margin of -39.13% and operating margin of -3.55% appear alarming, but these metrics are distorted by non-cash charges including the Q2 2025 tax valuation allowance.

More relevant for a company in turnaround mode are cash flow metrics and balance sheet strength. Quarterly operating cash flow turned positive at $24.7 million in Q3 2025, with free cash flow of $18.4 million demonstrating that the core business is generating cash despite accounting losses. The current ratio of 4.22 and quick ratio of 1.97 indicate robust liquidity, while the $384 million in total liquidity provides substantial financial flexibility.

Comparing GrafTech to competitors highlights its relative positioning. Japanese peer Tokai Carbon trades at an enterprise value of approximately $1.36 billion (based on a yen conversion of 211.26 billion JPY) with 9.27% operating margins but faces revenue decline and currency headwinds. Indian competitor HEG commands an enterprise value of approximately $1.23 billion (based on a rupee conversion of 103.02 billion INR) with 9.24% operating margins and 28% EBITDA margins, but its profitability is vulnerable to raw material volatility and it lacks vertical integration. Graphite India, with an enterprise value of approximately $1.26 billion (based on 105.78 billion INR), has seen margins collapse to 2.61% operating and 5.9% EBITDA, reflecting the intense pricing pressure GrafTech is navigating.

The key valuation question is whether GrafTech's cost structure and market share gains justify a higher multiple. If management achieves its 10% COGS reduction target and successfully implements 15% price increases on uncommitted volume, EBITDA margins could expand into the mid-teens, justifying a 4-5x EV/revenue multiple typical of specialty materials companies. The battery materials optionality provides additional upside not captured in current electrode-focused valuations.

Conclusion: Integration Advantage in a Market Forced to Rationalize

GrafTech International is executing a classic cyclical turnaround strategy with a structural twist. While the graphite electrode industry suffers from severe overcapacity and unsustainable pricing, GrafTech's vertical integration into needle coke provides a cost advantage that competitors cannot replicate. The company's deliberate focus on market share recovery in protected Western markets, combined with aggressive cost reduction exceeding guidance, positions it to force industry rationalization rather than fall victim to it.

The debt restructuring completed in December 2024 transformed a potential existential risk into a strategic asset, providing the liquidity and time needed to execute this strategy. Management's disciplined approach—foregoing low-margin volume while driving 30% cumulative cost reductions—demonstrates a clear-eyed assessment of the competitive landscape and GrafTech's unique advantages.

The investment thesis hinges on two critical variables: the timing of pricing recovery and the development of the battery materials market. Pricing recovery depends on competitors' ability to sustain below-cost production, a condition management correctly identifies as unsustainable. The battery materials opportunity provides asymmetric upside, as GrafTech's existing needle coke capacity positions it as a strategic supplier to Western battery supply chains without requiring massive capital investment.

For investors, GrafTech offers a compelling risk-reward profile at $17.80 per share. Downside is mitigated by the company's cost leadership, liquidity position, and the inevitability of industry rationalization. Upside is driven by pricing power restoration, continued market share gains in high-value regions, and the battery materials call option. The market's skepticism is evident in the 2.54x EV/revenue multiple, but this skepticism ignores the structural moat that vertical integration provides in a commodity industry approaching its breaking point.