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