Asking “Will graphite go the way of rare earth?”a May 6 Reuters story states that shares of companies involved in graphite “have soared, probably to unsustainable highs.” The report says graphite prices “rose last year in part on concerns that China, which produces some 70% of global supply, will choke off exports much as it did with the rare earths.”
But as Chris Berry noted at OnPage Media’s Graphite Express-Conference in Toronto on May 2, a pullback in graphite stocks began about a month ago, well before the “unsustainable highs” now reported by Reuters. “Phase One of this graphite boom is completed,” Berry said. “But the trends that put graphite on the map are still intact.” The co-author of Morning Notes and founder of House Mountain Partners states that even without lithium batteries and other next-generation uses, “and assuming global GDP growth of 5% over the next eight or nine years, you’re looking at about a 1.8-million- or 1.9-million-tonne market.”
Reuters quotes Asbury Carbons CEO Stephen Riddle as saying, “In a three-month period we had prices double, just that quickly.” The story states, however, that his company, which manufactures a range of products from graphite, “has had no trouble finding graphite supplies, and prices are even softening.”
Reuters suggests that projected demand for lithium-ion batteries has been overstated and that manufacturers prefer synthetic graphite to the natural flake product. The article acknowledges that “synthetic graphite can cost more than $20,000 a tonne, while unprocessed flake graphite costs $1,500 to $3,000 a tonne. Add in processing and coating, and the price is about $8,000 a tonne, meaning natural graphite represents major cost savings.”
Nevertheless, Jonathan Lee, a battery materials analyst with Byron Capital Markets, says a shift to the natural product “will take time, and I don’t think that it is imminent.”
Reuters concludes with a comparison to the rare-earths bubble, in which stocks rose and fell sharply when China slashed exports in 2010. “You could double your money on a company that has nothing. However, there’s no way to tell when a flavour of the day will become a flavour of yesterday,” says Louis James, a mining investment strategist at Casey Research.
The US Geological Survey pegged 2011 world graphite production at 1.1 million tonnes. That amount is expected to drop in 2012, according to Simon Moores, an authority on graphite and other strategic commodities who writes for Industrial Minerals. Moores has also pointed out that China produces about 80% of world supply, not 70% as reported by Reuters.
Moores, Berry, geologist Mickey Fulp and others have pointed out a number of contrasts between the graphite space and the circumstances leading to the rare-earths bubble. They include the fact that graphite has a wider range of both current and emerging uses; graphite’s 2011 world production was about 10 times that of rare earths; graphite’s exploration and mining is simpler, faster and cheaper; graphite’s metallurgy is much simpler; and graphite expertise exists outside China, as does a graphite supply chain.
While Berry remains bullish on graphite, he cautions investors that a project “shouldn’t be too slanted toward a given end use, say batteries. A balanced footprint is the best bet because it insulates a company from demand shocks. What you need to remember is with a graphite deposit it is not one size fits all. Mesh size and carbon content can vary. It’s great to be able to say we have a certain percentage that is perfect for the battery industry, based on flake and carbon content. But if that’s only 20% of a given deposit, you need to be thinking about what’s going to happen with the other 80%.”
Disclaimer: Focus Metals Inc is a client of OnPage Media and the principals of OnPage Media may hold shares in Focus Metals.