The reporters and the investor chat-rooms focused on the two-day wonder part of the story. Instead, let us look at the considerable implications for graphite in the (much) longer term.
First, the facts. Australian listed company Syrah Resources called a trading halt Thursday pending an announcement. Picking up Friday’s newspaper, we saw what that announcement would be: China’s state-owned Chinalco was talking to Syrah about an off-take agreement from the latter’s Balama graphite project in Mozambique. Chinalco is the world’s third largest producer of aluminium. (Set aside for the moment the indication in the report that this will be a memorandum-of-understanding; the binding off-take agreement would be expected to follow. Given what follows, that agreement should, indeed, follow; but few things are certain in this life, and any MoU with Chinese companies definitely are not one of the few certainties. You can walk away from a MoU.)
Then came the official confirmation: Chinalco has signed an MoU to take between 80,000 and 100,000 tonnes of graphite (and some vanadium). A legally binding agreement would, the company said, be negotiated within three months.
The market liked the news, given that it covered more than a third of Syrah’s planned annual production of 220,000 tonnes, and the stock closed 13.75% up on the day —but it was interesting that stock in its neighbour in Mozambique (and on the Australian Securities Exchange), Triton Minerals, did even better, was up 15.3%. With Syrah stock at A$3.30 and Triton’s at A$0.105, the huge disparity remains.
That was the market reaction. But the most significant aspect of this development is Chinalco itself (its formal name is Aluminium Corporation of China). At present, it uses petroleum coke and anthracite to make the carbon building block, the anode blocks that conduct electricity in the aluminium smelting process. As the newspaper report said, “it is presumed that Chinalco is looking to use graphite as a substitute for petroleum coke and other forms of carbon”.
That is huge news. Not just for the proposed technology change in itself that will give graphite a huge boost, but if it is a success then you can imagine it will spread through other aluminium companies. (It also has implications for aluminium itself, one of the worst performing of the base metals. All smelter owners are looking to reduce costs, especially of electricity.)
Thanks to Alcoa’s website concerning its smelter in Portland, Australia, we have a clear, concise explanation of these anodes used in aluminium smelting:
“Anodes are large carbon blocks which act as electrical conductors, allowing the smelting process to take place. Portland Aluminium produces around 15,000 anodes per month which weigh approximately one tonne each. Anodes are produced in an area of the smelter called the Green Mill and are made from petroleum coke, pitch and recycled anode butts returned from the smelting process. These materials are mixed together in heated containers and poured into moulds. Once formed, the anodes are transferred to the carbon bake. In the carbon bake, the anodes are placed in furnace and ‘baked’ up to a temperature of 1120C over a period of two weeks. The baking process bakes the pitch in the mix forming a solid block of carbon so they can withstand the extreme conditions inside the smelting pots”.
But molded carbon anodes are already being made using artificial graphite, which is derived from coke with a binder. This process is used in plants making chlorine, aluminium and silicon.
Chinalco’s move is also significant in that Chinese flake production has been hit by environmental problems. As reported here in December, at Pingdu, Shandong province, 55 companies (mine operators and processors) were closed. Pingdu can produce 100,000 tonnes a year of flake graphite.
Syrah itself was well aware of the overall Chinese problem more than a year ago after sending a team to China. Their conclusion: Chinese producers do not have enough flake graphite in low-cost, accessible areas to meet the expected growth in global demand. Environmental rule-tightening had already led to some 200 mines closing.
Syrah concluded that China’s domination resulted from its relatively low costs, labour particularly, which have enabled the country’s miners to undercut non-China producers.
Environmental rules are cutting back production of graphite in China, negating in those cases the advantage of low labour costs. Companies like Chinalco clearly now have no option but to look elsewhere.