GRAFTECH INTERNATIONAL LTD. (EAF) Business

GrafTech International Ltd. is a leading manufacturer of high quality graphite electrode products essential to the production of electric arc furnace (or EAF) steel and other ferrous and non‑ferrous metals. We believe that we have the most competitive portfolio of low‑cost graphite electrode manufacturing facilities in the industry, including three of the highest capacity facilities in the world. We are the only large scale graphite electrode producer that is substantially vertically integrated into petroleum needle coke, a key raw material for graphite electrode manufacturing. This unique position provides us with competitive advantages in product quality and cost. Founded in 1886, we have over 130 years of experience in the research and development (or R&D) of graphite- and carbon‑based solutions, and our intellectual property portfolio is extensive. We currently have graphite electrode manufacturing facilities in Calais, France, Pamplona, Spain, Monterrey, Mexico and St. Marys, Pennsylvania. Our customers include major steel producers and other ferrous and non‑ferrous metal producers in Europe, the Middle East and Africa (or EMEA), the Americas and Asia‑Pacific (or APAC), which sell their products into the automotive, construction, appliance, machinery, equipment and transportation industries. Our vision is to provide highly engineered graphite electrode services, solutions and products to EAF operators. Based on the high quality of our graphite electrodes, reliability of our petroleum needle coke supply and our excellent customer service, we believe that we are viewed as a preferred supplier to the global EAF steel producer market.

Graphite electrodes are an industrial consumable product used primarily in EAF steel production, one of the two primary methods of steel production and the steelmaking technology used by all “mini‑mills.” Electrodes act as conductors of electricity in the furnace, generating sufficient heat to melt scrap metal, iron ore or other raw materials used to produce steel or other metals. We estimate that, on average, the cost of graphite electrodes represents only approximately 1% to 5% of the total production cost of steel in a typical EAF, but they are essential to EAF steel production. Graphite electrodes are currently the only known commercially available products that have the high levels of electrical conductivity and the capability to sustain the high levels of heat generated in EAF steel production. As a result, EAF steel manufacturers have been willing to pay a premium for a reliable supply of high quality graphite electrodes. Graphite electrodes are also used in steel refining in ladle furnaces and in other processes, such as the production of titanium dioxide, stainless steel, aluminum, silicon metals and other ferrous and non‑ferrous metals.

Electrode production globally is focused on the manufacture of ultra-high power (or "UHP") electrodes for EAFs. The production of UHP electrodes requires an extensive proprietary manufacturing process and material science knowledge, including the use of higher quality needle coke blends. We primarily compete in the UHP graphite electrode market.

Petroleum needle coke, a crystalline form of carbon derived from decant oil, is a key raw material used in the production of graphite electrodes. We achieved substantial vertical integration with this critical raw material source through our acquisition of Seadrift Coke LP (or Seadrift) in November 2010, significantly reducing our reliance on other suppliers. The petroleum needle coke industry is highly concentrated. We believe Seadrift is one of the largest petroleum needle coke producers in the world. We also believe that the quality of Seadrift’s petroleum needle coke is superior for graphite electrode production compared to most of the petroleum needle coke available to our peers on the open market, allowing us to produce higher quality electrodes in a cost‑efficient manner. Additionally, we believe that this vertical integration provides a significant cost advantage relative to our competitors. We believe this cost advantage will persist as demand for petroleum needle coke increases for use in lithium‑ion batteries in electric vehicles. The demand for petroleum needle coke in lithium‑ion batteries is growing rapidly. This alternative source of demand is a significant development for the petroleum needle coke industry and has disrupted global supply chains for petroleum needle coke.

As a leading producer of graphite electrodes, we believe we are well-positioned to be a key provider to the EAF steel making industry. In 2018, we completed an operational improvement and debottlenecking initiative to increase production capacity at our three primary operating facilities by approximately 20% to a total of 202,000 metric tons ("MT"). We have recently begun a series of projects at our Monterrey and St. Marys facilities that will shift graphitization and machining of additional volume of semi-finished product from Monterrey to St. Marys. We expect these projects will further optimize our manufacturing footprint

by improving environmental performance and production flexibility at both facilities and also leverage cost efficiencies at our St. Marys facility.

Graphite electrodes are an essential consumable in the EAF steel production process and require a long lead time to manufacture and our strategic customers are highly focused on securing certainty of supply of reliable, high quality graphite electrodes. Therefore, beginning in the fourth quarter of 2017, we executed three- to five‑year take‑or‑pay sales contracts for approximately 60% to 65% of our cumulative expected production capacity from 2018 through 2022. We believe we are uniquely capable among graphite electrode producers to pursue our three‑ to five‑year take‑or‑pay contracting strategy due to our substantial vertical integration into petroleum needle coke production.

On August 15, 2015, we became an indirect wholly owned subsidiary of Brookfield Asset Management Inc. (together with its affiliates "Brookfield"). In April 2018, we completed our initial public offering (or IPO) of 38,097,525 shares of our common stock held by Brookfield at a price of $15.00 per share. We did not receive any proceeds related to the IPO. Our common stock is listed on the NYSE under the symbol “EAF.” Brookfield owns approximately 74% of our common stock as of December 31, 2019.

Our executive offices are located at 982 Keynote Circle, Brooklyn Heights, Ohio 44131 and our telephone number is (216) 676‑2000. Our website address is www.graftech.com. Information on, or accessible through, our website is not part of this Annual Report. We have included our website address only as an inactive textual reference and do not intend it to be an active link to our website.

We are one of the largest producers of graphite electrodes in the world, accounting for approximately 24% of global production capacity (excluding China), and we believe our strategically positioned global footprint provides us with competitive advantages

We believe our facilities are among the most strategically located and lowest cost large‑scale graphite electrode manufacturing plants in the world. Of the graphite electrode manufacturing facilities currently operating, we estimate that our three primary operating manufacturing facilities represent approximately 24% of estimated production capacity for graphite electrodes outside of China, making us a critical supplier to global EAF steel manufacturers. Our manufacturing facilities are located in the Americas and EMEA, providing us with access to low‑cost and reliable energy sources, logistical and freight advantages in sourcing raw materials and shipping our graphite electrodes to our customers compared to our competitors, and excellent visibility into the large North American and European EAF steelmaking markets. Our experience in producing graphite electrodes for a varied global customer base positions us to meet customer requirements across a range of product types and quality levels, including support and technical services, further distinguishing us from our competitors.

We are a pure‑play provider of an essential consumable for EAF steel producers, the fastest‑growing sector of the steel industry

According to the World Steel Association ("WSA"), EAF steelmaking grew at an annual pace of approximately 10% in 2018, compared with 5% for steelmaking overall. As a result of the increasing global availability of steel scrap and the more resilient, high‑variable cost and environmentally friendly EAF model, we expect EAF steel producers to continue to grow at a faster rate than blast oxygen furnace ("BOF") producers globally. Additionally, EAF steel producers are increasingly able to utilize higher quality scrap and iron units, their two primary raw materials, to produce higher quality steel grades and capture market share from BOF producers, while maintaining a favorable cost structure. The EAF method produces approximately 25% of the carbon dioxide (or CO2) emissions of a BOF facility and does not require the smelting of virgin iron ore or the burning of coal. Additionally, as a result of significantly increased steel production in China since 2000, the supply of Chinese scrap is expected to increase substantially, which may result in lower scrap prices and provide the Chinese steel manufacturing industry with local scrap feedstock that was not historically available. We believe these trends will allow EAF steel producers to increase their market share and grow at a faster rate than BOF steel producers resulting in increasing demand for graphite electrodes.

The graphite electrode industry responded to oversupplied markets from 2011 to 2015 with production capacity rationalization and consolidation. Only one new greenfield graphite electrode facility outside of China has been built since the 1980s and only one significant brownfield expansion has occurred, reflecting the historical difficulty of adding further graphite electrode production capacity. We believe the lead time from initial permitting to full production of a greenfield graphite electrode manufacturing facility would be approximately three to five years and cost approximately $10,000 per MT in developed countries. Similarly, brownfield development is complicated by significant capital costs and space and process constraints.

Our current facilities are modern, strategically located and well‑maintained, providing us with ample operational optimization capabilities. In 2018, we completed the expansion of our production capacity by approximately 20%, to 202,000 MT, through strategic capital investments and operational improvements. As a result of our prior operational improvement activities, we were able to achieve this large capacity increase with specific, highly targeted capital investments. These expansions provided an additional fixed cost absorption and drive further efficiencies of scale across our manufacturing base.

We believe we have the industry’s most efficient production platform of high production capacity assets with substantial vertical integration

Based on our experience, high capacity manufacturing facilities can have an operating cost advantage of more than $1,000 per MT as compared to low capacity manufacturing facilities. Over the the past decade, we have rationalized inefficient plants during the downturn and more recently completed a manufacturing footprint optimization program, which resulted in our ability to produce a greater quantity of graphite electrodes from our three primary operating facilities than we did from the six operating facilities we had in 2012. We believe that the optimization of our graphite electrode plant network will continue to drive improved fixed cost absorption. Moreover, our Calais, Pamplona, Monterrey and St. Marys facilities each provide unique cost advantages given their scale and access to low cost, reliable energy sources.

Seadrift provides a substantial portion of our petroleum needle coke supply needs internally at a competitive cost and allows us to maximize capacity utilization more efficiently than competitors, who may be more constrained by a limited or costly petroleum needle coke supply. Seadrift is one of only five petroleum needle coke facilities in the world outside of China, and we believe it is one of the largest petroleum needle coke producers in the world.

We are the only petroleum needle coke producer in the world specifically focused on the production of graphite electrodes

Our production of petroleum needle coke specifically for graphite electrodes provides us the opportunity to produce super premium petroleum needle coke of the highest quality and allows us to tailor graphite electrodes for customer requirements. Seadrift has 140,000 MT of petroleum needle coke production capacity, which we believe makes it one of the largest petroleum needle coke producers in the world. The growing petroleum needle coke demand from manufacturers of lithium‑ion batteries for electric vehicles has increased demand for petroleum needle coke otherwise available to graphite electrode manufacturers. Sourcing the majority of our petroleum needle coke internally allows us to offer our customers certainty of supply, further enhancing our competitive position and supporting our three‑ to five‑year, take‑or‑pay contracts strategy. To align with our three‑ to five‑year contract profile, we have hedged the decant oil required to produce all of the graphite electrodes sold under these contracts, providing us with substantial visibility into our future raw material costs. We believe our use of petroleum needle coke is a further competitive advantage, as the use of pitch needle coke, an alternative raw material, results in longer bake times during graphite electrode production.

Since the completion of the divestiture of our non‑core legacy Engineered Solutions businesses in 2017, we have focused on our core competency of graphite electrode production. Our restructured and simplified business model has reduced our annual overhead expenses significantly since 2012, allowing us to redeploy the savings into our graphite electrode business. We identified and implemented mechanical and chemical improvements to our electrodes, invested in our capability to produce super premium petroleum needle coke needed for high‑margin UHP graphite electrodes, and optimized our production of pins at our Monterrey plant, which are a critical component used to connect and fasten graphite electrodes together in a furnace. As a result, our quality over the last three years has improved to its highest level in ten years. We believe the quality and the consistency of our electrodes is among the highest in North America and EMEA and on par with that of any producer globally. We believe the durability and infrequent breakage of our graphite electrodes create operating efficiencies and value opportunities for our customers. We also believe we have a competitive advantage in offering customers our ArchiTech Furnace Productivity System (or ArchiTech), which we believe is the most advanced support and technical service platform in the graphite electrode industry. ArchiTech, which has been installed in customer furnaces around the world, enables our engineers to work with our customers seamlessly to maximize the performance of their furnaces and provide real‑time diagnostics and troubleshooting. We believe our customers value our high quality products and customer service, and have provided us with opportunities to expand our business with them as a result.

Our experienced executive leadership and general managers and flexible workforce have positioned us for future earnings growth

Our seasoned leadership is committed to earnings growth. Our executive and manufacturing leadership have led manufacturing companies through many cycles and are focused on positioning us for profitable growth in any environment. We

have undertaken strategic investments to increase our production capacity in a capital‑efficient manner while reducing our cost position.

EAF steel producers are the primary consumers of graphite electrodes. The size of the electrodes varies depending on the size of the furnace, the size of the furnace’s electric transformer and the planned productivity of the furnace. In a typical furnace using alternating electric current and operating at a typical number of production cycles per day, three electrodes are fully consumed (requiring the addition of new electrodes), on average, every 8 to 10 operating hours. UHP graphite electrodes are consumed at a rate of approximately 1.7 kilograms per MT of steel production in EAF facilities.

The actual rate of consumption and addition of electrodes for a particular furnace depends primarily on the efficiency and productivity of the furnace. Therefore, demand for graphite electrodes is directly related to the amount and efficiency of EAF steel production. EAF steel production requires significant heat (as high as 5,000° F) to melt the raw materials, primarily scrap metal, in the furnace. Heat is generated as electricity (as much as 150,000 amps) passes through the electrodes and creates an electric arc between the electrodes and the raw materials.

The industry is fairly consolidated, particularly outside of China. The five largest global producers in the industry are Showa Denko K.K., GrafTech, Fangda Carbon New Material Technology Co. LTD, Tokai Carbon Co., Ltd. and Graphite India Limited.

We estimate that from 2014-2016, the industry closed or repurposed approximately 20% of global production capacity outside of China, consisting of smaller, higher cost facilities. Based on our experience, high capacity manufacturing facilities can have an operating cost advantage of more than $1,000 per MT as compared to low capacity manufacturing facilities, encouraging producers to consolidate facilities in order to reduce costs. We believe the majority of the production capacity reduction was permanent due to the demolition, long‑term environmental remediation and repurposing of most of these lower capacity facilities. Notwithstanding the current market challenges, the consolidation and production capacity reductions in the graphite electrode industry, along with the EAF steel industry’s recovery since 2016, lead us to believe that the graphite electrode industry has recovered from the downturn and resumed its long‑term growth trajectory. We believe worldwide graphite electrode supply will increase in 2020 driven by Chinese capacity additions.

Our graphite electrodes are primarily used in the EAF steelmaking process, and long-term global growth in that market has driven increased demand for graphite electrodes. EAF steelmaking has historically been the fastest‑growing segment of the global steel market. According to the WSA, global EAF steel production grew at a 3.5% compound annual growth rate from 1984 to 2011, while taking market share from other methods of steelmaking in most regions of the world, outside of China. EAF steel producers benefit from their flexibility in sourcing iron units, being able to make steel from either scrap or alternative sources of iron like direct reduced iron and hot briquetted iron, both made directly from iron ore. Most of the growth in EAF steelmaking has taken place in Western Europe and North America, two regions with substantial amounts of scrap available for use in EAFs.

Source: World Steel Association

Industry Disruption 2011 to 2015

According to the WSA, EAF steel production declined approximately 10% from 2011 to 2015, reversing the trend of annual growth from 1984 to 2011, largely due to substantial increases in Chinese steel production. In 1984, China produced 21 million MT of BOF steel, which by 2016 had grown to 757 million MT, representing approximately 94% of its total steel production. Growth in production capacity surpassed growth in demand, resulting in significant excess capacity within China and increased exports into global markets. China's net steel exports peaked at 112 million MT in 2015. These exports negatively affected steel prices and led EAF steel producers to reduce production. In 2011, global EAF steel production was 454 million MT, representing 30% of global steel production, but by 2015, EAF steel production had declined to 407 million MT, representing 25% of global steel production. Declining EAF steel production significantly impacted demand for our graphite electrode products.

EAF Steel Production's Recovery and Outlook

The EAF steel industry has recovered since the downturn from 2011 to 2015. EAF steel production started to recover in 2016 with growth of 2.8%, according to the WSA. The WSA reported 14% growth in EAF steel production in 2017 followed by 10% growth in 2018. This recovery has taken place since China began in 2015 to restructure its steel industry by encouraging consolidation and shutting down excess capacity. China has also begun to implement increased environmental regulations to improve air quality, which has been impacted by CO2 emissions associated with the burning of coal in BOF steelmaking. Additionally, developed economies such as North America and Western Europe have implemented trade decisions against BOF steel‑producing countries to protect their domestic steel industries against imports. These actions have resulted in a significant decrease in Chinese steel exports. According to China Customs and Baiinfo, Chinese steel exports have declined from 112 million MT in 2015 to 64 million MT in 2019. This reduction in exports has resulted in increased steel production outside of China, especially EAF steel production. However, recent steel production and graphite electrode consumption has slowed in some regions, notably Europe and South America and the WSA estimated that total steel production declined approximately 2% outside of China in 2019.

We believe there is a particular opportunity for EAF steelmaking to take further market share in China as well. China’s Ministry of Industry and Information Technology's current draft guidelines call for EAF steelmaking to constitute 20% of overall steel production by 2025, more than doubling its current share of output. According to the WSA, in 2018, Chinese EAF steel production increased to 108 million MT, or 12%, of China’s total steel production, up from 2017 levels of 81 million MT, or 9%, of China's total steel production. If Chinese EAF steelmaking production capacity were to reach 20%, based on 2018 production levels, that would add 78 million MT of additional EAF steel production for a total of 186 million MT, compared to 2018 EAF steel production in the next largest regions of 70 million MT in the EU, 60 million MT in India and 59 million MT in the United States, according to WSA.

While China’s 13th Five‑Year Plan, released in March 2016, did not explicitly address the EAF steel production target, it did emphasize the importance of environmental efforts, and 10 of 25 targets in the plan were related to the environment. The current draft guidelines further support these efforts. The Chinese government’s increasing focus on the environment may

eventually incentivize steelmakers to convert from BOFs to EAFs in order to continue operating. Significant BOF capacity in the country has been shuttered since 2016 due to increasing government‑mandated environmental efforts. China’s rapid increase in BOF steel production between 2000 and 2016 has also created a significant new source of scrap. As a result of these factors, we believe that total UHP graphite electrode demand in China will increase going forward.

Pricing for graphite electrodes is determined through contract negotiations and spot transactions between producers and consumers. Pricing has historically been cyclical, reflecting the demand trends of the global EAF steelmaking industry and supply of graphite electrodes. Moreover, as petroleum needle coke represents a significant percentage of the raw material cost of graphite electrodes, graphite electrodes have typically been priced at a spread to petroleum needle coke. Over the period from 2008 to 2017, the average graphite electrode spread over petroleum needle coke was approximately $3,000 per MT, on an inflation‑adjusted basis using constant 2018 dollars. In tight demand markets, this spread has increased, resulting in higher graphite electrode prices. We believe that the new source of demand for petroleum needle coke presented by lithium‑ion battery producers for electric vehicles will place upward pressure on petroleum needle coke pricing compared to historical levels.

There is no widely accepted graphite electrode reference price. Historically, between 2008 and 2017, our weighted average realized price of graphite electrodes was approximately $4,500 per MT (on an inflation‑adjusted basis using constant 2018 dollars). During the last demand trough in 2016, our weighted average realized price of graphite electrodes fell to approximately $2,500 per MT in 2016. Following the significant rationalization of graphite electrode production globally, the resumption of growth in EAF steel production, falling scrap prices, reductions in Chinese steel exports, and constrained supply of needle coke, graphite electrode spot prices began to increase in late 2017 and reached record high prices in 2018. These record high spot prices began to retreat in 2019, falling 25% during the year. We expect additional decreases in 2020.

Needle coke is the primary raw material for the production of graphite electrodes used by EAF steelmakers and producers of aluminum, stainless steel, silicon metals and other ferrous and non‑ferrous metals, and is also a key raw material in the production of lithium‑ion batteries used to power electric vehicles. Needle coke is derived from two carbon sources. Petroleum needle coke is produced through a manufacturing process very similar to a refinery. The production process converts decant oil, a byproduct of the gasoline refining process, into petroleum needle coke and generally takes two to three months to produce. Pitch needle coke, used principally by Asian graphite electrode manufacturers, is made from coal tar pitch, a byproduct of coking metallurgical coal used in BOF steelmaking.

Graphite electrode producers combine petroleum needle coke and pitch needle coke with binders and other ingredients to form graphite electrodes. Petroleum needle coke and pitch needle coke, relative to other varieties of coke, are distinguished by their needle‑like structure and their quality, which is measured by the presence of impurities, principally sulfur, nitrogen and ash. Petroleum needle coke and pitch needle coke are typically low in these impurities. Additionally, the needle‑like structure of petroleum and pitch needle coke creates expansion along the length of the electrode, rather than the width, which reduces the likelihood of fractures. In order to minimize fractures caused by disproportionate expansion over the width of an electrode, and minimize the effect of impurities, large‑diameter graphite electrodes (18 inches to 32 inches) employed in high‑intensity EAF applications are comprised almost exclusively of petroleum needle coke and pitch needle coke.

The process map below shows the raw materials required to make graphite electrodes, the various consumers of these raw materials, as well as the consumers of graphite electrodes.

(1) Graphite electrode sales represent sales outside of China

Source: Management estimates

Previously, producers of petroleum needle coke typically agreed to supply petroleum needle coke in twelve‑month contracts; however, since 2017, producers of petroleum needle coke have typically used six‑month contracts. As a result, our competitors must continually renegotiate supply agreements in response to changing market conditions. We are substantially vertically integrated through our ownership of our Seadrift facility, which provides the majority of our needle coke requirements and insulates us from rapid changes in the needle coke market.

The needle coke industry is highly concentrated with approximately twelve major producers of needle coke and only five major producers of petroleum needle coke. These firms include Phillips 66 (U.S.), Seadrift (GrafTech), Petrocokes Japan Limited (Japan), JX Nippon Oil & Energy Co., Ltd. (Japan) and Petrochina International Jinzhou Co., Ltd. (China), which produce petroleum needle coke, and Mitsubishi Chemical Company (Japan), Baosteel Group (China), C‑Chem Co., Ltd. (Japan), Indian Oil Company Limited (India), JX Holdings Inc. (Japan), Petrochina International Jinzhou Co., Ltd. (China) and Anshan Kaitan Thermo‑Energy New Materials Co. Ltd (China), which produce pitch needle coke. We estimate that Seadrift has approximately 19% of the petroleum needle coke production capacity outside China.

Graphite electrode manufacturers prefer petroleum needle coke because of the meaningfully longer bake and graphitizing time required for pitch needle coke. Electric vehicle manufacturers prefer artificial graphite such as petroleum needle coke in lithium‑ion batteries because of its greater energy density, providing batteries with longer driving ranges and longevity.

Source: Management estimates

Petroleum needle coke production capacity outside of China has remained unchanged for at least the last 10 years due to the capital intensity, technical know‑how and long lead times required to build greenfield needle coke production facilities and the stringent regulatory process associated with building new needle coke production capacity. Furthermore, we believe that brownfield expansion opportunities in developed countries are generally not available as petroleum needle coke manufacturing is a continuous process with significant costs associated with shutting down and restarting facilities for maintenance or capital investment.

Demand for petroleum needle coke is increasing due to the use of needle coke in lithium‑ion batteries used in electric vehicles. According to the International Energy Agency ("IEA"), the global electric car fleet exceeded 5 million in 2018, up 2 million from the previous year and almost doubling the number of new electric car sales. The IEA projects that global annual sales of electric cars may range between 5 million and 8 million in 2020, and between 12 million and 24 million in 2025. Most electric vehicles rely on lithium‑ion batteries as their key performance component. Many manufacturers of lithium‑ion batteries for electric vehicles use needle coke as a raw material for carbon anodes in their batteries due to advantages in terms of charging rate and capacity. According to IEA, battery pack capacity has been increasing in recent years. In the future, the observed trend towards larger battery pack sizes is expected to continue. Based on IEA’s estimates for electric vehicle sales and battery pack size, and management estimates for needle coke used in anodes, demand for needle coke from electric vehicles could grow significantly from approximately 58,000 MT in 2018 to over 200,000 MT in 2020.

In 2017, we reoriented our commercial strategy around a three‑ to five‑year take‑or‑pay contract framework and restructured our sales force incentives. As graphite electrodes are an essential consumable in the EAF steel production process and require a long lead time to manufacture, we believe our strategic customers are highly focused on securing certainty of supply of reliable, high quality graphite electrodes. Prior to our three‑ to five‑year take‑or‑pay contract initiative, our sales of graphite electrodes were generally negotiated annually through purchase orders on an uncontracted, nonbinding basis. The majority of our customers sought to secure orders for a supply of their anticipated volume requirements each upcoming year. The remaining, small balance of our graphite electrode customers purchased their electrodes as needed throughout the year at industry spot prices.

We believe we are uniquely capable among graphite electrode producers to pursue our three‑ to five‑year take‑or‑pay contracting strategy due to our substantial vertical integration into petroleum needle coke production. All of our petroleum needle coke production is used internally and is not sold to external customers. Demand for petroleum needle coke increased due to the use of needle coke in lithium‑ion batteries for electric vehicles, as well as increased demand for graphite electrodes. Consequently, we expect this limited availability of petroleum needle coke will restrict new graphite electrode production. Seadrift, our wholly owned subsidiary acquired in 2010, provides the majority of our petroleum needle coke requirements and produces sufficient needle coke to supply substantially all of the graphite electrode production that we have contracted under our take‑or‑pay contracts. We have also hedged the decant oil required to produce all of the graphite electrodes sold under these contracts, providing us substantial visibility into our future raw material costs.

Because the market price of graphite electrodes may be based, in part, on the current or forecasted costs of key raw materials, periods of raw material price volatility may have an impact on the market price. In particular, as petroleum needle coke represents a significant percentage of the raw material cost of graphite electrodes, the price of graphite electrodes has historically been influenced by the price of petroleum needle coke. See “Risk Factors-Risks Related to Our Business and Industry-pricing for graphite electrodes has historically been cyclical and current prices are relatively high, however, the price of graphite electrodes may decline in the future.” The fixed prices under our contracts prevent us from passing along changes related to our costs of raw materials to our customers. See “Risk Factors-Risks Related to Our Business and Industry-We are dependent on the supply of petroleum needle coke. Our results of operations could deteriorate if recent disruptions in the supply of petroleum needle coke continue or worsen for an extended period.” However, as described above, we believe our ability to source all of our petroleum needle coke requirements for these contracts from our Seadrift facility and our hedging of our purchases of decant oil mitigates the impact of periodic shortages and price fluctuations of raw materials.

Beginning in the fourth quarter of 2017, we executed three‑ to five‑year take‑or‑pay contracts for approximately 60% to 65% of our cumulative expected production capacity from 2018 through 2022. In 2018, we shipped approximately 133,000 MT under these contracts at prices averaging approximately $10,100 per MT. In 2019, we shipped approximately 145,000 MT under these contracts at pricing averaging approximately $9,900 per MT. We have contracted to sell approximately 142,000, 125,000 and 117,000 MT in 2020, 2021 and 2022, respectively. Approximately 83% of these volumes are under pre‑determined fixed annual volume contracts, while approximately 17% of the volumes are under contracts with a specified volume range. The aggregate difference between the midpoints above and the minimum or maximum volumes across our cumulative portfolio of take‑or‑pay contracts with specified volume ranges is approximately 5,000 MT per year in 2020, 2021 and 2022. Contracted volumes may vary in timing and total due to the credit risk associated with certain customers facing financial challenges as well as customer demand related to contracted volume ranges. In 2020, we expect to ship approximately 130,000 MT at prices averaging approximately $9,600 per MT.

All of our take‑or‑pay contracts have fixed prices. Within this contract framework, our customers agree to purchase a specified volume of product at the price under the contract. Contract customers are unable to renegotiate or adjust the price under the contract. These fixed prices under the contracts also prevent us from passing along any changes related to the costs of raw materials to contract customers. As a result of the take‑or‑pay obligation of the contracts, the customer must purchase the annual contracted volume (or annual volume within the specified range). In the event the customer does not take delivery of the annual volume specified in the contract, our contracts provide for a capacity payment equal to the product of the number of MTs short of the annual volume specified in the contract multiplied by the price under the contract for that contract year. The weighted average contract price for the contracted volumes over the next three years is approximately $9,600 per MT, with the weighted average contract prices for contracts with a specified volume range computed using the volume midpoint.

In addition to defining annual volumes and prices, these three‑ to five‑year take‑or‑pay contracts include significant termination payments (typically, 50% to 70% of remaining contracted revenue) and, in certain cases, parent guarantees and collateral arrangements to manage our customer credit risk. In most cases, the customer can only terminate the contract unilaterally: (i) upon certain bankruptcy events; (ii) if we materially breach certain anti‑corruption legislation; (iii) if we are affected by a force majeure event that precludes the delivery of the agreed‑to graphite electrodes for more than a six‑month period; or (iv) if we fail to ship certain minimum levels during a specified period of time. The customer will also be able to temporarily suspend obligations under the contract due to a force majeure event, as will we, with the contract term being extended by a period equal to the duration of such suspension.

Our contracts provide our customers with certain remedies in the event that we are unable to deliver the contracted volumes of graphite electrodes on a quarterly basis. Our substantially vertically integrated Seadrift plant is particularly important to our ability to provide our customers with a reliable supply of graphite electrodes. Therefore, the likelihood that we will fail to deliver the contracted volume is significantly reduced due to our substantial vertical integration. For a discussion of certain risks related to our take‑or‑pay contracting initiative, see “Risk Factors-Risks related to our business and industry-We may be unable to implement our business strategies, including our initiative to secure and maintain three‑ to five‑year take‑or‑pay customer contracts, in an effective manner.”

Approximately 90% of our graphite electrodes were purchased by EAF steel producers in 2019. The remaining portion is primarily used in various other ferrous and non‑ferrous melting applications, BOF production, fused materials, chemical processing, and alloy metals. In 2019, one customer accounted for 10% of our net sales. We believe this customer does not pose a significant concentration of risk, as sales to this customer could be replaced by demand from other customers. We sell our products in every major geographic region globally. Sales of our products to buyers outside the United States accounted for approximately 81% of net sales in 2017, and approximately 77% of net sales in each of 2018 and 2019. Overall, in 2019, we generated more than 90% of our net sales from EMEA and the Americas.

We believe our three‑ to five‑year take‑or‑pay contracting strategy provides cash flow visibility and stability to our customers and, as a result, has secured a high quality customer base. We perform financial and credit reviews of all eligible potential customers prior to entering into these contracts. Less creditworthy customers are required to post a bank guarantee, letter of credit or significant cash prepayment. Based on total revenues over the life of the contracts, our ten largest customers represent 38% of total revenue, while the next ten customers and all other customers represent 17% and 45% of total revenue, respectively. During 2019, approximately 80% of our sales came from our three- to five-year take-or-pay contracts.

We differentiate and sell the value of our graphite electrodes primarily based on price, product quality and performance, delivery reliability and customer technical service.

We have a large customer technical service organization, with supporting application engineering and scientific groups and more than 30 engineers and specialists around the world serving in this area. We believe that we are one of the industry leaders in providing value added technical services to our customers.

Our direct sales force currently operates from 10 sales offices located around the world. We sell our graphite electrodes primarily through our direct sales force, independent sales representatives and distributors, all of whom are trained and experienced with our products.

We have customer technical service personnel based around the world to assist customers to maximize their production and minimize their costs. A portion of our engineers and technicians provide technical service and advice to key steel and other metals customers. These services relate to furnace applications and operation, as well as furnace upgrades to reduce energy consumption, improve raw material costs and increase output.

We believe we have a competitive advantage in offering customers ArchiTech, which we believe is the most advanced support and technical service platform in the graphite electrode industry. ArchiTech, which has been installed in customer furnaces worldwide, enables our engineers to work with our customers seamlessly to maximize the performance of their furnaces and provide real‑time diagnostics and troubleshooting.

We deploy various demand management and inventory management techniques to seek to ensure that we can meet our customers’ delivery requirements while still maximizing the capacity utilization of our production capacity. We can experience significant variation in our customers’ delivery requirements as their specific needs vary and change through the year. We generally seek to maintain appropriate inventory levels, taking into account these factors as well as the significant differences in manufacturing cycle times for graphite electrode products and our customers’ products.

Finished products are usually stored at our manufacturing facilities. Limited quantities of some finished products are also stored at local warehouses around the world to meet customer needs.

We currently manufacture our graphite electrodes in three primary manufacturing facilities strategically located in the Americas and EMEA, two of the largest EAF steelmaking markets. Our locations allow us to serve our customers in the Americas and EMEA efficiently. In addition to these three facilities, we have a fourth graphite electrode manufacturing site in St. Marys, Pennsylvania. We have recently begun a series of projects at our Monterrey and St. Marys facilities that will shift graphitization and machining of additional volume of semi-finished product from Monterrey to St. Marys. We expect these projects will further optimize our manufacturing footprint by improving environmental performance and production flexibility at both facilities and also leverage cost efficiencies at our St. Marys facility. We believe that we have approximately 202,000 MT of graphite electrode production capacity at our operating sites. We believe our business has the lowest manufacturing cost structure of all of our major competitors, primarily due to the large scale of our manufacturing facilities.

Our manufacturing facilities significantly benefit from their size and scale, work force flexibility, access to attractively‑priced sources of power and other key raw materials, and our substantial vertical integration with Seadrift. Our Calais, Pamplona, Monterrey and St Marys facilities have access to low‑cost sources of electricity with essential logistical infrastructure in place, which is a significant element of our manufacturing costs. Our Seadrift facility currently produces the majority of our petroleum needle coke requirements for our graphite electrode production, allowing us to source our primary raw material internally and at cost, a significant advantage relative to our peers. Seadrift also produces sufficient needle coke to supply substantially all of the graphite electrode production that we have contracted under our take‑or‑pay contracts.

We manufacture graphite electrodes ranging in size up to 30 inches in diameter, over 11 feet in length, and weighing as much as 5,900 pounds (2.6 MT). The manufacturing process includes six main processes: screening of raw materials (needle coke) and blending with coal tar pitch followed by forming, or extrusion, of the electrode, baking the electrode, impregnating the electrode with a special pitch that improves strength, re‑baking the electrode, graphitizing the electrode using electric resistance furnaces, and machining. The first baking process converts the pitch into hard coke. During the baking process, the electrode pitch volatiles are removed, leaving porosities inside. To improve graphite electrode quality, the electrode is then impregnated with additional coal tar pitch to fill the porosities and baked a second time. After impregnation and re‑baking, the manufacturing process continues with graphitization as the electrodes are heated at 5000°F in a special longitudinal furnace to convert the carbon into graphite. The graphitization cycle removes additional impurities and improves the electrodes’ key qualities: thermal and electrical conductivity, thermal shock resistance performance, lubricity, and abrasion resistance.

High quality graphite electrodes have low electrical resistivity and strong durability. Resistivity is enhanced by removing impurities during the production process, while durability is determined by the coefficient of thermal expansion (or CTE) of the raw material used to produce the graphite electrode. Lower CTE needle coke produces higher quality electrodes. UHP electrodes used in harsh EAF melter applications have low resistivity and low CTE to maximize efficient use of electricity in the EAF and minimize electrode consumption. The total manufacturing time of a graphite electrode and its associated connecting pin is on average approximately six months from needle coke production to customer delivery. We believe that the period of time required to produce a graphite electrode meaningfully constrains the ability of graphite electrode producers to react to real‑time changes in steel market environments and acts as a barrier to entry.

Production of a graphite electrode begins with the production of either petroleum needle coke, our primary raw material, or pitch needle coke. Petroleum needle coke is produced through a manufacturing process very similar to a refinery. The production process converts decant oil, a byproduct of the gasoline refining process, into petroleum needle coke and generally takes two to three months to produce. Needle coke takes its name from the needle‑like shape of the coke particles. We produce calcined petroleum needle coke at Seadrift. Seadrift is not dependent on any single refinery for decant oil. While Seadrift has purchased a substantial majority of its raw material inventory from a limited number of suppliers in recent years, we believe that there is a large supply of suitable decant oil in the United States available from a variety of sources. In addition, we use derivatives to hedge the decant oil required to produce all of the graphite electrodes sold under our three‑ to five‑year take-or-pay contracts, providing us with substantial visibility into our future raw material costs.

We purchase the electric power used in our manufacturing processes from local suppliers under contracts with pricing based on rate schedules or price indices. Our electricity costs can vary significantly depending on these rates and usage. Natural gas used in the baking and re‑baking processes is purchased from local suppliers primarily under annual volume contracts with pricing based on various natural gas price indices.

We have over 130 years of experience in the R&D of graphite‑ and carbon‑based solutions. By focusing our management’s attention and R&D spending exclusively on the graphite electrode business, we have been able to meaningfully improve the quality

of our graphite electrodes, repositioning ourselves as an industry quality leader and improving our relationships with strategic customers. Our focus on improving the quality of petroleum needle coke through R&D has led to our petroleum needle coke production at Seadrift being best‑in‑class for use in the manufacturing of highly durable UHP electrodes. We believe that our technological and manufacturing strengths and capabilities provide us with a competitive advantage.

We believe that our intellectual property, consisting primarily of patents and proprietary know‑how, provides us with competitive advantages and is important to our growth opportunities. Our intellectual property portfolio is extensive, with approximately 200 carbon and graphite U.S. and foreign patents and published patent applications, which we believe is more than any of our major competitors in the businesses in which we operate.

We own or have obtained licenses for various trade names and trademarks used in our businesses. For example, the trade name and trademark UCAR are owned by Union Carbide Corporation (which was acquired by Dow Chemical Company) and are licensed to us on a worldwide, exclusive and royalty‑free basis until 2025. This particular license automatically renews for successive ten‑year periods. It permits non‑renewal by Union Carbide at the end of any renewal period upon five years’ notice of non‑renewal.

We rely on patent, trademark, copyright and trade secret laws, as well as appropriate agreements to protect our intellectual property. Among other things, we seek to protect our proprietary know‑how and information, by requiring employees, consultants, strategic partners and others who have access to such proprietary information and know‑how to enter into confidentiality or restricted use agreements.

We maintain insurance against civil liabilities relating to personal injuries to third parties, for loss of or damage to property, for business interruptions and for certain environmental matters, that provides coverage, subject to the applicable coverage limits, deductibles and retentions, and exclusions, that we believe are appropriate upon terms and conditions and for premiums that we consider fair and reasonable in the circumstances. There can be no assurance that we will not incur losses beyond the limits of or outside the coverage of our insurance.

Our facilities and operations are subject to a wide variety of federal, state, local and foreign environmental laws and regulations. These laws and regulations relate to air emissions, water discharges and solid and hazardous waste generation, treatment, storage, handling, transportation and disposal; the presence of wastes and other substances; the reporting of, responses to and liability for, releases of hazardous substances into the environment; and the import, production, packaging, labeling and transportation of products that are defined as hazardous or toxic or otherwise believed to have potential to harm the environment or human health. These laws and regulations (and the enforcement thereof) are periodically updated and are becoming increasingly stringent. We have incurred substantial costs in the past, and will continue to incur additional costs in the future, to comply with these legal requirements.

We believe that we are currently in compliance in all material respects with the federal, state, local and foreign environmental laws and regulations to which we are subject. We have experienced some level of regulatory scrutiny at most of our current and former facilities and, in some cases, have been required to take or are continuing to take corrective or remedial actions and incur related costs, and may experience further regulatory scrutiny, and may be required to take further corrective or remedial actions and incur additional costs, in the future. Although it has not been the case in the past, these costs could have a material adverse effect on us in the future.

Further, laws and regulations in various jurisdictions impose or may impose, as the case may be, environmental monitoring, reporting and/or remediation requirements if operations cease or property is transferred or sold. We have sold or closed a number of facilities that had operated solid waste management units (landfills) on‑site. In most cases where we divested the properties, we have retained ownership of on‑site landfills. When our landfills were or are to be sold, we negotiate for contractual provisions providing for financial assurance to be maintained, which we believe will be adequate to protect us from any potential future liability associated with these landfills. When we have closed landfills, we believe that we have done so in material compliance with applicable laws and regulations. We continue to monitor these landfills and observe any reporting obligations we may have with respect to them pursuant to applicable laws and regulations. To date, the costs associated with the retained landfills have not had, and we do not anticipate that future costs will have, a material adverse effect on us.

We have received and may in the future receive notices from the U.S. Environmental Protection Agency (or U.S. EPA) or state environmental protection agencies, as well as claims from other parties, alleging that we are a potentially responsible party

(or PRP) under the Superfund Act and similar state laws for past and future remediation costs at waste disposal sites and other contaminated properties. Although Superfund Act liability is joint and several, in general, final allocation of responsibility at sites where there are multiple PRPs is made based on each PRP’s relative contribution of hazardous substances to the site. Based on information currently available to us, we believe that any potential liability we may have as a PRP will not have a material adverse effect on us.

Certain of our U.S. facilities have been or will be required to comply with reporting requirements under the Federal Clean Air Act and standards for air emissions that have been or may be adopted by the U.S. EPA and state environmental protection agencies pursuant to new and revised regulations, including the possible promulgation of future maximum achievable control technology standards that apply specifically to our manufacturing sector(s), or more generally to our operation(s) or equipment. Achieving compliance with the regulations that have been promulgated to date has resulted in the need for additional administrative and engineered controls, changes to certain manufacturing processes, and increased monitoring and reporting obligations. Similar foreign laws and regulations have been or may also be adopted to establish new standards for air emissions, which may also require best available control technology on our manufacturing operations outside the United States. Based on information currently available to us, we believe that compliance with these regulations will not have a material adverse effect on us.

International accords, foreign laws and regulations, and U.S. federal, state and local laws and regulations have been enacted to address concerns about the effects that CO2 emissions and other identified greenhouse gases ("GHGs") may have on the environment and climate worldwide. These effects are widely referred to as climate change. The international community has taken actions to address climate change issues on a global basis. In particular, in December 2015, the 21st Conference of Parties for the United Nations Framework Convention on Climate Change ("UNFCC") concluded with more than 190 countries adopting the Paris Agreement, which then came into force and was legally binding on the parties in November 2016. The Paris Agreement sets a goal of limiting the increase in global average temperature and consists of two elements: a legally binding commitment by each participating country to set an emissions reduction target, referred to as “nationally determined contributions” (or NDCs), with a review of the NDCs that could lead to updates and enhancements every five years beginning in 2023, and a transparency commitment requiring participating countries to disclose in full their progress. Our activities in the European Union ("EU") are subject to the EU Emissions Trading Scheme (or ETS), and it is likely that requirements relating to GHG emissions will become more stringent and will continue to expand to other jurisdictions in the future as NDCs under the Paris Agreement are implemented. Although, in November 2019, the United States began the process of formally withdrawing from the Paris Agreement, the EPA currently requires reporting of GHG emissions from certain sources and, in the future, the EPA or states may impose permitting obligations on new sources or existing sources that seek to modify their operations that would otherwise result in an increase in certain GHG emissions.

In the EU, the ETS, which was initially enacted under the provisions of the 1997 Kyoto Protocol, requires certain listed energy‑intensive industries to participate in an international “cap and trade” system of GHG emission allowances. A third phase of the EU ETS under Directive 2009/29/EC, covers the period 2013 to 2020 and instituted a number of program changes. EU Member States brought into force the necessary laws, regulations and administrative provisions to comply with this EU Directive. Carbon and graphite manufacturing is still not a covered industry sector in the revised Annex 1 of directive 2009/29/EC. However, one of our European manufacturing operations was required to comply with these provisions under a more general fuel combustion category, because its combustion units met the applicability levels. The operations subject to these provisions were eligible to receive free CO2 emission allowances under the member state allocation program. On November 9, 2017, to implement the EU’s NDC under the Paris Agreement and other GHG commitments, the European Parliament and Council announced a provisional agreement to revise and make more stringent the ETS during the Phase 4 period of 2021 to 2030. Among other changes, the Phase 4 provisions would further accelerate reduction in the current oversupply of allowances in the ETS market and establish further protections against the risks of carbon leakage. After extensive negotiations, the European Parliament and the Council formally supported the revision in February 2018. The revised EU ETS Directive (Directive (EU) 2018/410) entered into force on April 8, 2018. The EU’s current target for 2030 is to achieve a GHG reduction of at least 40% compared to 1990 levels. In addition, in December 2019, the European Commission presented the Communication on The European Green Deal announcing several upcoming legislative proposals for the EU 2050 climate neutrality objective and for increasing the EU 2030 GHG emissions reduction target to at least 50% and towards 55% compared to 1990 levels. Implementation of Phase 4 could increase the cost of our current GHG allowances and require us to obtain additional allowances. Based on information currently available to us, we believe that compliance with international accords, U.S. and foreign laws and regulations concerning climate change which have been promulgated, or that could be promulgated in the future, including Phase 4 and any further GHG initiatives of the ETS, will not have a material adverse effect on us.

Some of our products (including our raw materials) are subject to extensive environmental and industrial hygiene regulations governing the registration and safety analysis of their component substances. For example, in connecting with the EU's Registration, Evaluation, Authorization and Restriction of Chemicals Regulation ("REACH") or the EU’s Classification, Labelling and Packaging Regulation, any key raw material, chemical or substance, including our products, could be classified as having a

toxicological or health‑related impact on the environment, users of our products, or our employees. Coal tar pitch, which is classified as a substance of very high concern under REACH, is used in certain of our processes, but in a manner that we believe does not require us to obtain a specific authorization under the REACH guidelines.

Estimates of future costs for compliance with U.S. and foreign environmental protection laws and regulations, and for environmental liabilities, are necessarily imprecise due to numerous uncertainties, including the impact of potential new laws and regulations, the availability and application of new and diverse technologies, the extent of insurance coverage, the potential discovery of contaminated properties, or the identification of new hazardous substance disposal sites at which we may be a PRP and, in the case of sites subject to the Superfund Act and similar state and foreign laws, the final determination of remedial requirements and the ultimate allocation of costs among the PRPs. Subject to the inherent imprecision in estimating such future costs, but taking into consideration our experience to date regarding environmental matters of a similar nature and facts currently known, we estimate that our costs and capital expenditures (in each case, before adjustment for inflation) for environmental protection regulatory compliance programs and for remedial response actions will not be material over the next several years. Furthermore, we establish accruals for environmental liabilities when it is probable that a liability has been or will be incurred, and the amount of the liability can be reasonably estimated. We adjust the accrual as new remedial actions or other commitments are made, as well as when new information becomes available that changes the prior estimates previously made and we believe our existing accruals are reasonable.

As of December 31, 2019, we had 1,346 employees (excluding contractors). A total of 439 employees were in Europe (including Russia), 666 were in Mexico and Brazil, 3 were in South Africa, 231 were in the United States and 7 were in the Asia Pacific region. As of December 31, 2019, 877 of our employees were hourly employees.

As of December 31, 2019, approximately 774 employees, or 58%, of our worldwide employees, are covered by collective bargaining or similar agreements. As of December 31, 2019, approximately 627 employees, or 47%, of our worldwide employees, were covered by agreements that expire, or are subject to renegotiation, at various times through December 31, 2020. We believe that, in general, our relationships with our employees' unions are satisfactory and that we will be able to renew or extend our collective bargaining or similar agreements on reasonable terms as they expire. We cannot assure, however, that renewed or extended agreements will be reached without a work stoppage or strike or will be reached on terms satisfactory to us. As of December 31, 2019, none of the employees in our Seadrift plant or St. Marys facility were covered by collective bargaining or similar agreements.

We have not had any material work stoppages or strikes during the past decade.

We make available, free of charge, on or through our web site, our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file them with, or furnish them to, the U.S. Securities and Exchange Commission (“SEC”). We maintain our website at http://www.graftech.com. The information contained on our web site is not part of this Report. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically. Please see http://www.sec.gov for more information.