EDITOR: | July 24th, 2014 | 5 Comments

Flake Graphite, bubble or not, the risk is greater for those betting against

| July 24, 2014 | 5 Comments

6a0120a6002285970c016769409b3f970b-320wiAustralian graphite stocks have experienced a veritable boost in the past few weeks as many more companies have joined the graphite industry in expectation of much higher demand for Lithium-ion batteries (which, despite their name, use more graphite than lithium). Including China, the graphite sector now includes eight countries and there are promising resources being developed in Canada, the USA, Madagascar, Sri Lanka and Sweden among others. Naturally, there are concerns – and justified ones – that nobody knows where the volume of graphite demand will be heading in the future. Indeed, the graphite market is not all that big now and caution is well, almost always useful. The bets are that those companies that can produce high levels of purity will have a huge competitive advantage and the market will surely weed out the number of graphite companies as the realities of establishing a solid customer base and delivering consistent high quality at low cost take over. The current purity standard for high purity flake graphite is 99.9%, which would allow a company to be in an excellent starting position to open up numerous markets and achieve premium prices. The market is currently based on material ranging from only 94% to 97% purity and several emerging graphite companies have claimed to exceed in their tests.

The critics, who correctly observe that nobody, can tell what shape the future of the graphite market will adopt are absolutely correct and they are right to advise caution and perhaps they are even right to warn of potential ‘bubbles’. Nevertheless, the same might be said for any other commodity, mineral or otherwise, and any other stock. Nobody can predict the future. We can analyze trends and build scenarios but we cannot foresee what author Nicholas Nassim Taleb has called ‘black swan’ events. Nobody, other than the perpetrators of the heinous crime, knew what would happen on the morning of September 11, 2001. Apart from the human tragedy, the financial markets were affected and several bubbles burst. Therefore, based on the market information at our disposal now, investors cannot ignore the prospects for lithium-ion batteries that need high purity flake graphite.

The demand for these batteries is increasing, mainly due to the exploding use of consumer electronics (such as smartphones) as well as hybrid and electric automobiles. Forecasts predict that alone, this market will grow by 2020 to $ 34.3 billion. And the test results of a handful of graphite companies show that they will be able to produce concentrate suitable material for use in lithium ion batteries. Not all will succeed, but then, it will be the market and careful research into the individual companies that will determine which have the better chances. Of course, many emerging graphite producers are young and present considerable risks on the road to the intended objective to become significant producers of graphite, but the completion of metallurgical testing serves as a useful indicator of potential and the extent to which the companies have mastered this crucial hurdle. Those that produce resource estimates further reduce risk and so on.

For a lot of metals, but also for energy, economic growth plays a role in the medium term; in the long run technological progress will be more important in helping to de-risk graphite investments. The higher commodity price, the more incentives arise to both produce – and replace – this raw material in production. The world is now engaged in the search to replace ever more expensive (even if abundant) oil. Graphite is one of the crucial materials to achieve this, because modern batteries and light weight materials require it. Technical progress both creates and destroys demand for commodities. Meanwhile, such industrial giants as BMW and Samsung have announced the expansion of their battery supply contracts. Bloomberg Samsung spoke of a “billion deal.” For the next few years Samsung will provide more lithium-ion cells for the BMW i3, the i8 and the plug-in hybrid vehicles of the Bavarian luxury carmaker. The expansion of the partnership of the two companies aims to secure technology leadership. BMW since 2009 battery concerns already from the South Korean manufacturer. Tesla is still determined to build its battery GigaFactory. BMW and Tesla: just two of the giant automotive groups that have just started to build electric vehicles. Speculative bubble or not, who would pass up the chance to invest in a solid graphite company today, considering Toyota, Hyundai, Nissan, Fiat, GM, Ford and a host of others will also be needing graphite rich batteries? Oh, and notice there was no mention of graphene…


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  • Tracy Weslosky

    Thank you kindly Alessandro – I had the artwork created for a piece I wrote a few years ago on the “Aussie Tall Poppy Syndrome”…for a reason: it’s a real challenge in the business community in Australia. The syndrome is a formula whereby as we say in America — you get too big for your britches, someone is going to take you out. This formula is detrimental in that Australians do not like it when anyone stands out — or moves too fast towards prosperity. This is unfortunate and having read the same articles you are referencing I too believe that this is an excellent example of the tall poppy syndrome hitting again….

    July 24, 2014 - 3:54 PM

  • Tim Ainsworth

    Tracy, perhaps you should interview Stephen Riddle, 4th generation at Asbury Carbons, for his thoughts on what’s “Fair Dinkum”.
    A little time in the real, rather than projected, downstream market might make interesting reading.

    July 25, 2014 - 8:12 AM

    • Tracy Weslosky

      Thanks Tim for commenting, and indeed — Stephen and I spoke a few weeks back, and he will be doing a video interview with me shortly. Well aware of Riddle’s perspective as a 5th generation CEO in graphite production…I have a surprise in that we also have an international caliber graphene PhD that will be writing a monthly column for us. Have a great day.

      July 25, 2014 - 8:20 AM

  • Roger Peritone

    One other factor which can affect the demand for graphite in lithium-ion batteries is: which type of lithium-ion batteries will get produced.

    Ones with graphene-silicon anodes (http://www.cnet.com/news/redesigned-lithium-ion-battery-charges-faster-holds-charge-longer/) or batteries with “stable” lithium anodes (http://www.natureworldnews.com/articles/8276/20140728/stanford-researchers-use-carbon-nanoparticles-create-stable-lithium-anode.htm) which use carbon only as a structural medium to support the lithium rather than making the anode out of mostly carbon.

    July 28, 2014 - 7:23 PM

  • Tracy Weslosky

    Congratulations Alessandro; This article was the #1 most read column on InvestorIntel for the week ending January 25, 2014 — which indicates to me an increasingly strong interest in graphite market coverage.

    July 29, 2014 - 7:07 PM

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