GrafTech's Resilient Rebalancing: Forging a Path to Profitability Amidst Industry Headwinds (NYSE:EAF) - EAF Stock Research Report

## Executive Summary / Key Takeaways * GrafTech International Ltd. (NYSE:EAF) is strategically rebalancing its operations and commercial approach to overcome persistent industry overcapacity and challenging pricing dynamics, focusing on market share gains in high-value regions and aggressive cost reductions. * The company has demonstrated significant operational improvements, achieving a 9% year-over-year increase in sales volume in Q3 2025 and a 10% year-over-year decline in cash cost of goods sold per metric ton, with full-year 2025 guidance projecting further gains. * A robust liquidity position of $384.3 million as of September 30, 2025, and extended debt maturities to December 2029 provide a crucial financial buffer, enabling GrafTech to weather near-term market volatility and invest in its future. * GrafTech's vertical integration into petroleum needle coke and its advanced ArchiTech Furnace Productivity System offer distinct technological advantages, positioning it to capitalize on the long-term structural tailwinds of EAF steelmaking decarbonization and the burgeoning electric vehicle battery market. * Despite ongoing competitive pressures and an "unsustainable" pricing environment, management's proactive stance, including a 15% price increase initiative on uncommitted volumes, signals a determined effort to restore profitability and ensure the health of its indispensable role in the steel industry. ## Forging Ahead: GrafTech's Strategic Pivot in a Transforming Industry GrafTech International Ltd., with a rich history dating back to 1886, stands as a foundational player in the global industrial landscape, specializing in high-quality graphite electrode products essential for electric arc furnace (EAF) steel production and other ferrous and non-ferrous metals. The company's core business is deeply intertwined with the steel industry, a sector currently undergoing significant transformation driven by decarbonization efforts. GrafTech's overarching strategy is to leverage its long-standing expertise, vertically integrated supply chain, and technological prowess to navigate a challenging market characterized by overcapacity and intense pricing pressure, ultimately aiming to restore profitability and capture long-term growth. The competitive landscape for graphite electrodes is dynamic and fiercely contested. Key direct competitors include SGL Carbon, Tokai Carbon, and Showa Denko, all vying for market share in a global environment marked by excess capacity. GrafTech's management has explicitly highlighted the impact of low-priced graphite electrode exports from China and India, noting that Chinese exports exceed 300,000 tons annually, and Indian exports have surged by 60% since 2022, with both countries lowering prices by 30-40%. This influx of material has created an "unsustainable level of excess electrode capacity in the rest of the world," putting immense pressure on pricing across all regions. GrafTech's strategic response has been to adopt a disciplined, value-focused growth approach, even if it means "foregoing volume opportunities where margins are unacceptably low." At the heart of GrafTech's competitive differentiation lies its unique vertical integration into petroleum needle coke, its primary raw material, produced at its Seadrift facility in Texas. This integration provides a reliable supply chain, a critical advantage in a volatile market. Furthermore, GrafTech's technological edge is embodied in its ArchiTech Furnace Productivity System, which, coupled with its world-class customer technical service team, offers unparalleled technical expertise to EAF operators. This system is designed to enhance furnace productivity, a tangible benefit for steelmakers seeking operational efficiencies. The company also makes substantial investments in research and development, reinforcing its leadership in graphite electrode and petroleum needle coke technology. A notable recent innovation is the introduction of its 800-millimeter electrode product, which successfully completed qualification trials in 2024 and is expected to be a significant growth platform, particularly as demand for super-size electrodes is projected to outpace the overall market. These technological differentiators contribute directly to GrafTech's competitive moat by enabling it to offer high-quality, high-performance products that can reduce customers' overall operating costs, thereby supporting a higher price point and fostering stronger, long-term customer relationships. ## Strategic Execution and Operational Momentum GrafTech's strategic initiatives are yielding tangible results, particularly in market share recovery and cost optimization. Despite a relatively flat global graphite electrode demand over the past two years, the company achieved a 9% year-over-year increase in sales volume in the third quarter of 2025, reaching nearly 29,000 metric tons. This performance contributes to a projected cumulative sales volume growth of over 20% since the end of 2023, indicating that GrafTech is "outperforming the broader market." A key component of this growth is a strategic shift in geographic sales mix, with U.S. sales volume surging by 53% year-over-year in Q3 2025. The U.S. remains the strongest region for graphite electrode pricing, and GrafTech's increased focus here is a direct result of efforts to capture more favorable pricing dynamics. Operational discipline has been a cornerstone of GrafTech's strategy to combat market headwinds. The company reported a 10% year-over-year reduction in its cash cost of goods sold (COGS) per metric ton for Q3 2025. This impressive performance is expected to translate into an approximate 10% year-over-year decline in cash COGS per metric ton for the full year 2025, surpassing earlier guidance and representing a "30% cumulative reduction in our cash COGS per metric ton since the end of 2023." These cost savings are driven by a multi-faceted approach, including leveraging R&D to reduce raw material consumption, utilizing recent technology investments to lower energy usage, optimizing production schedules for off-peak electricity rates, and broadening supplier networks through procurement initiatives. These efforts enhance efficiency and control production costs across varying demand levels. ## Financial Performance and Bolstered Liquidity GrafTech's recent financial performance reflects the early successes of its strategic rebalancing. For the third quarter of 2025, the company reported net sales of $143.998 million, a 10% increase compared to Q3 2024. This figure notably included the recognition of $11.2 million of previously deferred revenue following the resolution of a long-standing commercial matter. Gross profit for the quarter stood at $10.307 million, and adjusted EBITDA reached $13.013 million, marking a significant improvement and the first positive adjusted EBITDA since Q2 2024.

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However, the nine months ended September 30, 2025, still reflect the challenging market conditions, with net sales decreasing by 4% to $387.677 million compared to the same period in 2024, primarily due to lower weighted-average realized prices. The company reported a net loss of $154.719 million for the first nine months of 2025.

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Interest expense saw a substantial increase, rising to $24.517 million in Q3 2025 from $16.503 million in Q3 2024, and to $79.776 million for the first nine months of 2025 from $47.738 million in the prior year period, largely due to new debt financing. In Q2 2025, GrafTech recorded a $43 million non-cash income tax charge to establish a valuation allowance against certain deferred tax assets, though management remains confident in achieving normalized profitability in the future.

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Liquidity remains a key strength. As of September 30, 2025, GrafTech commanded $384.3 million in total liquidity, comprising $177.6 million in cash and cash equivalents, $106.7 million of availability under its 2018 Revolving Credit Facility, and $100 million under its Delayed Draw First Lien Term Loan Facility. The company plans to draw the remaining $100 million from the Delayed Draw facility by its July 2026 expiration. This robust liquidity, coupled with substantially extended debt maturities to December 2029, provides a critical financial buffer against near-term industry challenges. Capital expenditures totaled $20.5 million for the first nine months of 2025, with a full-year expectation of approximately $40 million. Management anticipates working capital will be favorable to full-year cash flow performance in 2025, despite a planned inventory build in the first half of the year to level-load production and optimize costs.

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## Competitive Positioning and Outlook GrafTech's competitive positioning is defined by its integrated global production network, which includes facilities in Monterrey (Mexico), Calais (France), and Pamplona (Spain), supported by its Seadrift needle coke plant in Texas. This network provides manufacturing flexibility, allowing the company to serve end markets efficiently and reliably, and strategically manage the impact of evolving trade policies. For instance, materials shipped from its Mexico facility to the U.S. are USMCA compliant and not subject to current tariffs. Furthermore, for European-produced electrodes, the value of U.S.-produced needle coke and U.S. value-added activities significantly reduce tariff impacts. The company's outlook for 2025 includes an expected 8-10% year-over-year increase in sales volume and an approximate 10% year-over-year decline in cash COGS per metric ton, translating to roughly $3,860 per metric ton for the full year. Management projects a "breakeven or slightly above" adjusted EBITDA for the full year 2025. Interest expense for 2025 is guided to be around $90 million. Longer term, GrafTech remains optimistic about structural tailwinds. Decarbonization efforts are expected to drive increased adoption of EAF steelmaking, which already accounted for 51% of global steel production outside China in 2024. The U.S. is seeing over 20 million tons of new EAF capacity coming online or planned, and the EU steel industry shows signs of recovery, with analysts projecting 3.2% demand growth in 2026, bolstered by new trade protection measures that could boost capacity utilization from ~60% to nearly 70%. The demand for petroleum needle coke is also anticipated to accelerate, driven by its use in synthetic graphite for lithium-ion batteries in electric vehicles and energy storage. The U.S. Department of Commerce's preliminary anti-dumping tariffs of 93.5% on graphite active anode material imports from China (resulting in a combined 160% tariff) are seen as a strategic move to foster an ex-China supply chain for critical minerals, which could tighten the needle coke market and improve pricing. GrafTech, with its vertical integration and technical expertise, is actively building out its capabilities to be a valuable strategic partner in this emerging market. ## Conclusion GrafTech International Ltd. is executing a disciplined and multi-faceted strategy to navigate a challenging, oversupplied graphite electrode market. By prioritizing market share gains in strategic regions like the U.S., relentlessly driving down costs, and prudently managing its capital structure, GrafTech is laying a solid foundation for future profitability. The company's unique vertical integration and advanced technological offerings, particularly its ArchiTech system and 800-millimeter electrodes, provide a distinct competitive edge that supports its value proposition to customers. Despite the near-term headwinds of unsustainable pricing and intense competition, GrafTech's strong liquidity and extended debt maturities offer crucial resilience. The long-term outlook remains compelling, with significant tailwinds from the global steel industry's decarbonization shift towards EAFs and the burgeoning demand for synthetic graphite in the electric vehicle and energy storage sectors. GrafTech's proactive stance on pricing and its strategic positioning in critical mineral supply chains underscore its commitment to long-term value creation. Investors should closely monitor the company's continued progress in market share expansion, cost efficiency, and the evolving dynamics of global trade policy, as these factors will be pivotal in realizing GrafTech's full potential as the industry rebalances.