EDITOR: | October 13th, 2015 | 4 Comments

Graphite surplus looming? It ain’t necessarily so…

| October 13, 2015 | 4 Comments
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GLK graphiteIt has become something of a concern that we are facing a graphite surplus sometime in the future, what with the growing number of companies taking up the hunt for the material. When you count just the number of companies with advanced graphite projects, there are 16 such already listed in Toronto, Sydney and on London’s AIM exchange. And that does not include those ranging from pre-source exploration to early evaluation: there are 35 graphite plays listed on the Australian Securities Exchange alone.

We have seen reports here on InvestorIntel that Russia is lighting a match under its graphite industry with the intent of being self-sufficient and thus freeing itself from dependence on Chinese mines; in addition, Russia also aspires to be a graphite exporter. There are projects in East Africa with seemingly huge graphite inventories. Where is it all going to go?

But there is one factor that tends to be forgotten: things, especially in the mining business, never very often turn out as the consensus of opinion expects. Think back to 2011: the world saw a proliferation of rare earth companies. Had all these proceeded along the intended lines, the world (as we head into 2016) would be about to be awash with REE supplies from mines in Australia, Africa and North America. And are we in that circumstance? Hardly. A similar expectation once existed for potash: yet few of the exciting ventures announced a few years ago have managed to see the light.

The latest graphite sector analysis comes from Rob Murdoch, a veteran of the Australian mining industry (whose ventures have included chrome in Albania and zinc in Iran) and who now runs Brisbane-based Austex Mining, a firm that analyses listed mining companies.

He sees those 16 companies with advanced projects all targeting first output in 2017. “If all these companies were to meet their feasibility production targets, we would see around 2.2 million tonnes of new graphite supply by 2020,” he writes (my emphasis). Toronto listed ones would account for 1 million of that, Australian companies for the other 1.2 million.

“As far as we can tell, the current global demand for all forms of graphite is around 1.2 million tonnes per annum,” says Murdoch. The demand by 2020 is expected to increase significantly due to the growth in lithium batteries for vehicles and vanadium storage batteries for renewable energy, and for graphene. His calculations are that 2020 demand could be between 2 million and 2.5 million tonnes by that year: that implies, should all the advanced projects get up, a surplus of somewhere between 1.4 million and 900,000 tonnes.

But Murdoch does qualify this. This threatened oversupply could be tempered by a predicted reduction of production of flake graphite out of China. The talk of a surplus might also mean that early stage projects cannot attract the finance they require, and some emergent producers might hesitate or delay rather than risk not being able to generate sufficient revenue.

And, as he points out, four listed companies are currently recommissioning old graphite plants. “They all seem to be struggling with the task, and we are yet to see any serious revenues,” adds Murdoch.

However, he does make a strong point that sometimes gets overlooked as we discuss lithium-ion batteries and graphene: more than 84% of graphite is used in traditional non-battery industries. Much is used in the steel industry, which is struggling.

But that is now. Five, six years down the line, the playing field will be a lot different. Just think Tesla and gigafactory.

And the massive potential of East Africa (especially Mozambique) is very much a two-edge sword. If more than one of these projects gets into production then, yes, we are going to have a supply situation where large tonnages are available to buyers. Warwick Grigor at Sydney-based Far East Capital, in his latest client note, says we could quickly see that profit margins are cut due to oversupply and we will have the same scenario as now applies to the iron ore industry.

But, again, there may be a problem. Grigor adds that all these African projects require substantial capital investments – and are in remote locations. That could be a hurdle.

Look at zinc: in the doghouse one week with vast oversupply, a market star the next with a deficit now predicted for 2016. All it took was for Glencore to announce it was shuttering 4% of global supply of the metal used to galvanise steel.

I am not saying that there will not be a supply surplus. What I am saying is that the old adage applies to some or many of the present graphite projects: that if something can go wrong, it probably will. We will know the supply/demand situation in 2020 when we get closer, but it’s guesswork this far out. In the meantime, management teams really don’t have much alternative but to crack on, hoping someone else will take a dive at the next hurdle.


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Comments

  • Tom

    Robin, your article suggests that from a cost perspective, junior miners with “open pit” graphite mines will have a leg up on those who do not. Is that a reasonable take-away?

    October 13, 2015 - 8:35 AM

  • Chris

    “But, again, there may be a problem. Grigor adds that all these African projects require substantial capital investments – and are in remote locations. That could be a hurdle. ”
    Good to see that Warwick Grigor has correctly analysed the situation. Investors in exploration and prospective mining companies located in African states need to be very aware of the geopolitical risks associated with their investment. Seems more mines are being closed than commissioned in the region at present and little wonder why when you read the horror stories of insurgents and terrorists in the region which only adds to the commercial risks involved with the investment.

    October 13, 2015 - 2:49 PM

  • Robin Bromby

    No, I did not intend for that inference to be taken, and made no reference to mining methods. I think the point is that location (associated with logistics) is probably the more important factor, along with political risk.

    October 13, 2015 - 3:32 PM

  • Bryant Mclarty

    Robin not sure if you have seen this new company just out WA but it might put a bit of a spanner in the works for the graphite miners http://www.hazergroup.com.au
    HAZER enables the effective conversion of natural gas, and similar feedstocks, into hydrogen and high quality graphite, using iron ore as a process catalyst. The aim of the Hazer Process will be to achieve savings for the hydrogen producer, as well as providing ‘clean’ hydrogen (i.e. with significant lower production of carbon dioxide emissions), enabling such hydrogen to be used in a range of developing ‘clean energy’ applications, as well as in large existing chemical processing industries. The graphite produced by the Hazer Process is high purity (>90%wt), highly crystalline ‘synthetic’ graphite. The Hazer Process can be tailored to create a range of graphite morphologies, potentially enabling Hazer to target multiple specialised markets and end user applications.

    October 14, 2015 - 4:49 AM

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