Use Of Graphite Electrodes In EAF

　　Graphite electrodes are consumed primarily in electric arc furnace steelproduction, the steel making technology used by all “mini-mills.” Graphiteelectrodes are also consumed in the refining of steel in ladle furnaces and inother smelting processes such as production of titanium dioxide.

　　Electrodes act asconductors of electricity in the furnace, generating sufficient heat to meltscrap metal, iron ore or other raw materials used to produce steel or othermetals. The electrodes are consumed in the course of that production.

　　Electric arc furnacesoperate using either alternating electric current (A/C) or direct electriccurrent (D/C). The vast majority of electric arc furnaces use alternatingcurrent. Each of these furnaces typically uses nine electrodes (in threecolumns of three electrodes each) at one time. The other electric arc furnaces,which use direct current, typically use one column of three electrodes. Thesize of the electrodes varies depending on the size of the furnace, the size ofthe furnace’s electric transformer and the planned productivity of the furnace.In a typical furnace using alternating current and operating at a typicalnumber of production cycles per day, one of the nine electrodes is fullyconsumed (requiring the addition of a new electrode), on average, every eightto ten operating hours. The actual rate of consumption and addition ofelectrodes for a particular furnace depends primarily on the efficiency andproductivity of the furnace. Therefore, demand for graphite electrodes isdirectly related to the amount and efficiency of electric arc furnace steelproduction.

　　Electric arc furnace steelproduction requires significant heat (as high as 5,000 degrees Fahrenheit) tomelt the raw materials in the furnace, primarily scrap metal. Heat is generatedas electricity (as much as 150,000 amps) passes through the electrodes andcreates an electric arc between the electrodes and the raw materials.

　　Graphite electrodes are currently the only knowncommercially available products that have the high levels of electricalconductivity and the capability of sustaining the high levels of heat generatedin an electric arc furnace producing steel. Therefore, graphite electrodes areessential to the production of steel in electric arc furnaces. We believe thereis currently no commercially viable substitute for graphite electrodes inelectric arc furnace steel making. We estimate that, on average, the cost ofgraphite electrodes represents about 2% of the cost of producing steel in atypical electric arc furnace.

　　Electricarc furnace steel production for the last five years has grown at an estimatedaverage annual growth rate of about 5%. We believe that EAF steel productionwill continue to grow at an average annual long term growth rate of about 3% to4%. Electric arc furnace steel production was approximately 365 millionmetric tons in 2006, representing approximately a third of the world’s steelproduction. We estimate that steel makers worldwide added 17.1 millionmetric tons of new EAF capacity in 2006, not all of which was fully operationalin 2006. We are aware of about 29.7 million metric tons of announced newelectric arc furnace steel production capacity that is scheduled to be added inthe 2007 through 2009 time period, approximately 10% of which is replacementcapacity. Additionally, not all of such capacity is expected to be fullyoperational during this time period.