We’ve watched for every twist and turn in the Chinese rare earths sector, battling to figure out what is going on. Now we are going to have to devote the same time and degree of forensic skills to what is happening in that country’s graphite sector. Sure, China controls more than 90% of REE output, but it’s share of the global graphite market is still at 80%. It will be interesting to watch geopolitical considerations from Beijing come into play. After all, Chinese graphite producers have called for the same type of protection afforded to their rare earth counterparts.
Big changes are under way in the industry, of which we see only occasional glimpses. But there must be — just as with the REE companies — some real financial strains and stresses taking place. We caught a glimpse of this is the second quarter financial results of China Carbon Graphite Group which was hit by slowing demand and deteriorating steel prices. For the six months to June, the company’s graphite sales decreased by an extraordinary 73.7%. The company noted that demand for its fine grain graphite and high purity graphite products were down 76.1% and 83.7% respectively.
There seems little question that Chinese authorities are attempting to have a more streamlined and efficient graphite sector. And a more environmentally sensitive one, too. Late last year an edict was sent down from the Qingdao (Shandong province) city’s Municipal Environmental Protection Bureau forbidding any new graphite processing plants in the towns of Pingdu and Laixi, both prominent producers of flake graphite. The city’s area is home to two of China’s most important producers, Qingdao Haida Graphite and Qingdao Xinghe Graphite. Nationally, as with the REE industry, there’s been a crackdown on illegal miners. How successful that, and the general environmental monitoring has been, is not clear.
It is worth remembering that China’s graphite dominance was not just a result of the abundance of deposits: when production really kicked in during the 1980s and into the 1990s, there were no environmental controls to speak of; therefore, producers were able to undercut foreign competitors. Many of the non-China mines then closed, giving China another advantage.
The government has set about forcing the consolidation of the 210 existing mines into 20 large operations. With national production falling to 510,000 tonnes a year, the authorities want to maximise the value and profitability of the industry. This reduced output comes at a time, especially in Shandong, where mining companies have to go deeper in what are close to exhausted mines with the resultant cost blow-outs. This new monopolistic structure is being overseen by South Graphite Co.; once that consolidation process is completed, the Chinese expect the company to control and determine the international graphite price (again, shades of REE).
Expect many twists and turns while the China graphite story plays out.
OIL: Ethanol is looking suddenly down and out. The era of growth for biofuels in the U.S. appears to be over. The ANZ Bank in Melbourne summed it up in a nutshell: “For the first time in eight years, mandated volumes for U.S. biofuels are unlikely to increase in 2014”. But The Financial Times makes the point that the strategic defeat for higher blend levels in petrol also has global implications. For one, it could impact on Brazil’s ethanol exports and therefore its sugar industry.
The Environmental Protection Agency has effectively sidelined the 2007 Energy Independence and Security Act which increased sharply the amount of ethanol U.S. oil companies had to blend into petrol and this is due to lift again next year. ANZ Bank says what has happened is that America’s transport market has reached a physical limit as to how much ethanol it can consume.
OIL: The latest jump in prices looks unsustainable, says Julian Jessop, head of commodities research at London-based Capital Economics. He argues that only a small part of the recent run-up in oil prices is due to the turmoil in Egypt. And the fragility of the global economic recovery and of financial market sentiment means prices are unlikely to rise further.
He notes that while there have been supply outages in Libya, Iraq and Nigeria, and a few attacks on the pipeline Egypt uses to export natural gas to Jordan, Syria and Lebanon, at no point since the “Arab Spring” has there been any disruption to the flow of oil and gas through either the Suez Canal or the Suez-Mediterranean pipeline, also known as SuMed, which runs from the Red Sea to the coast near Alexandria and which is an alternative for oil transport to the shipping canal.
Jessop thinks most of the recent oil rally is due to the growing optimism about the state of the world economy. That said, these prices increases are in themselves an important headwind for global growth.
“A swift resolution of the crisis in Egypt is perhaps too much to hope for. But even in the near term, oil prices are vulnerable to any renewed jitters in financial markets over the prospects for U.S. monetary policy or China’s economy, and to concerns about what high oil prices themselves might mean for demand,” he writes.