China’s Graphite Consolidation could have Global Impact on Demand
Graphite & Graphene Week-in-Review: Graphite investors must have taken a bit of a break, given the sector’s bland performance over the past month, but they should pay more attention. There are important developments in China that will affect the industry as a whole.
The ProEdgeWire Graphite and Graphene sponsor index for the week ending on April 12 saw a 4.67% drop. The highest performers were Zenyatta Ventures (TSXV: ZEN), which gained 6.49% and Focus Graphite (TSXV: FMS | OTCQX: FCSMF), which rose 3.77%. Focus reported the results from last summer’s margin drilling program at its fully owned Lac Knife property in Quebec. The program intended to upgrade the inferred resource at the southeastern boundary of the deposit to Indicated and to secure material for the pilot plant testing that will begin this month. One of the holes in question returned some of the highest graphitic carbon percentages of the entire program to date. Focus is looking forward to starting the 2013 drilling season with the confidence of having identified high and economically viable grades throughout the property. Meanwhile, Zenyatta Ventures was awarded the “Bernie Schnieders, Discovery of the Year” prize for its Albany Graphite Deposit, offering more proof, if any were needed, that the Company is sitting on an outstanding property.
Get our daily investorintel update
Zenyatta has also been inducted into the new TSX Venture 50 (TSXV 50), made up by the best performing companies from five sectors including Mining and evaluated in accordance to such parameters as market capitalization growth and analyst coverage. Apart from the obvious honor, the award and the induction in the TSXV 50 should enable Zenyatta to gain easier access to capital to develop its Albany Graphite project in Ontario. Focus, Zenyatta and the other companies in this list such as Mason Graphite (TSXV: LLG), Flinders Resources (TSXV: FDR), represent the future of graphite. They are focusing on a high grade flake product that will be suitable to meet the high purity required to make the next generation of batteries, pebble bed nuclear reactors and graphene among other applications. Mason is also targeting more basic and applications in the steel industry.
The steel industry is where much of the demand for graphite is generated today and the slow recovery of the steel markets has kept pressure on graphite’s market performance. Another factor is that 70% of the world supply of graphite is still controlled by China. Nevertheless, it is in China that graphite investors should look for hints as to the future demand for flake graphite. Just before the end of 2012, China’s Ministry of Industry and Information Technology (MIIT) released a document entitled, “Graphite Industry Access Conditions”, which essentially outlined the government’s plans to treat graphite in the same way as it has treated rare earths and phosphate: by regulating the market. The plan involves imposing restrictions on production, demands on product quality and environmental regulations ranging from energy to water consumption. The plan sends a signal to the world that graphite is a significant and strategic non-metallic mineral resource, deserving of protection. If China’s consolidation and clean-up of the rare earths industry is an indication, the entire graphite sector will experience greater market competition and, in the longer run, require imports from outside.
China is the world’s largest graphite producer and exporter and forecasts have shown a rising domestic demand for flake graphite production, which should reach 950,000 metric tons with a growth rate of about 7.9 percent by the end of 2015, according to MIIT. Along with an acceleration of the transformation, upgrading and structural adjustment of the graphite sector, China has started to tighten its policy on the graphite industry. Therefore, China’s decision to enforce access standards for its graphite industry will ultimately be good for world’s graphite prices in general. The world has learned that China is more than willing to suddenly introduce shutdowns, drastic quotas and restrictions on the export of critical resources when domestic end users require it. The Chinese government is also facing unprecedented ‘environmentalist’ pressure and some graphite mines, just as in the rare earths sector, will likely be permanently or temporarily shut down for ‘sustainability’ reviews.
As China reigns in the graphite industry, closing and reorganizing mines, graphite production will drop and world demand will increase, especially if the aluminum sector (a large consumer of graphite needed for purification purposes) continues to grow as the material becomes more popular in the automotive sector to help cars meet weight reductions to meet the imposition of tougher fuel economy standards. The Chinese government is expected to impose much tougher environmental standards, which will give graphite companies in the West a considerable edge, as they’ve already adapted their models accordingly. The Chinese producers have to start from the basics including beneficiation, waste water treatment and energy efficiency among other challenges. Essentially, the long and painstaking graphite mining development process that is taking place in Canada – in particular – has helped companies develop the technology and standards to grow in the future, while China will have to catch up, possibly by seeking agreements and alliances with the newly emerging graphite plays outside of its borders.