Value of High Grade Flake Graphite…beyond Graphene
Last week Gary Economo, the CEO and President of Focus Graphite (TSXV: FMS | OTCQX: FCSMF) wrote an article for ProEdgeWire, highlighting graphene as the material that will spark the next industrial revolution: “Graphene is to technology as the steam engine was to the Industrial Revolution….Today’s graphene race to lead a new industrial revolution is fueled by economic necessity, national security and the desire to lever graphene’s myriad advantages.” Graphene is one of the factors motivating interest in high grade flake graphite, but its development and technology still appear distant in the myopic view of the markets. Indeed, there is more to graphite than graphene, which is but one of its applications.
Graphite is essential in the steel and aluminum industries; it is used to make refractory materials for furnaces and carbon enhancers in steel alloys and while the new ‘high-tech’ applications come on stream, graphite still has commercial relevance. High-tech applications represent a future and additional source of revenue. Graphite is a key ingredient in composite materials – increasingly used by the aerospace and automobile industry to reduce weight in all structural and mechanical components. Graphite, used as a component in composite materials, has already allowed airframe and engine manufacturers like Boeing, Airbus, General Electric, Rolls Royce and Pratt & Whitney to offer a wider range of more fuel efficient, quieter and less polluting products. Efficient airlines are then better able to attract and retain investors and environmental performance factors now win or lose contracts in the industry.
Get our daily investorintel update
More energy efficient engines, even marginally so, will be needed to meet future regulations. Environmental design factors have now become as important as thrust performance, reliability and maintenance ease. Nevertheless, the graphite mining juniors at the forefront of the search for new and high grade sources of graphite have taken a hit hard in the recent market. The market has been off on its own thing, pulled by a bullish train that appears to have deliberately ignored commodity destinations even as the Dow has reached a new record high, topping 15,000 last Friday. That number takes for granted the fact that industrial success and especially the development of future technologies, from energy to communications and ultra lightweight high strength composites and alloys need graphite.
One problem is that fund managers and institutions have been shifting away from riskier ventures and more into proven territory. Some of the mining majors have also lost ground as iron prices have been falling from their highs in response to reports of slower growth in China. The rollercoaster trend in gold prices has not helped either. Evidently, banks and financing institutions have grown more reluctant to release capital needed to get ventures off the ground even when it comes to resources that will see increased demand in the future. Flake Graphite (as opposed to synthetic graphite) is just such a commodity; its value is proven by the fact that its price is still at the higher end of the historical scale, remaining at some USD$ 1,500 (or more) a ton, whereas it used to cost less than half of that a few years ago. Yet, the graphite space remains much undervalued in the market. But graphite is one of the key strategic minerals of the future (don’t take my word for it, the US government and the EU have officially designated it as such) and eventually the markets will catch up with better informed investors who will consider this important commodity now that graphite company shares are so overlooked.
A factor suggesting higher demand for flake graphite is that 70% of the world supply of graphite is still controlled by China. If China’s consolidation and clean-up of the rare earths industry is an indication, the entire graphite sector is slated for a similar ‘clean-up’, generating greater market competition and in the longer run requiring 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. China has already started to tighten its policy on the graphite industry and this should help lift graphite prices in the medium term. 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 West should not rely on draconian trade controls or prolonged international spats; rather, it should encourage and enable mining rather than make it easier to “send out for Chinese” (graphite not food).
The natural graphite space is now increasingly populated by junior players. Synthetic graphite, the most expensive by far (up to ten times as much at current rates) is derived from high temperature processes involving calcined petroleum coke and coal tar pitch. Synthetic graphite varieties are used in applications where purity is essential and until recently only this ‘man made’ variety was able to achieve 99% purity or higher. However, advancing graphite purification methods, and above all, a literal burst of interest in flake graphite has vastly contributed boosting the availability of highly pure natural graphite.
The current market seems to think that airplanes will still be made mostly of aluminum, cellular phones do not exist and the electric car still an experiment for a few consumers in California. The demand for graphite over the rest of the decade might be best described as being acute, and the alarm of higher prices will be sounding soon enough, especially in view of the time needed to bring the new mining prospects to production. Even then, the mines that will truly make it are those able to extract high purity or flake graphite, such as the ‘Sri Lankan’ or the jumbo flake types. Ultimately, mines need time to proceed from exploration to production and the fastest to reach production will be able to best capture the wave.