EDITOR: | August 17th, 2013 | 7 Comments

Time to watch China’s graphite plans; Ethanol set-back; Doubts about high oil prices

| August 17, 2013 | 7 Comments
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We’ve watched for every twist and turn in the Chinese rare earths sector, battling to figure out what is going on. Now we are going to have to devote the same time and degree of forensic skills to what is happening in that country’s graphite sector. Sure, China controls more than 90% of REE output, but it’s share of the global graphite market is still at 80%. It will be interesting to watch geopolitical considerations from Beijing come into play. After all, Chinese graphite producers have called for the same type of protection afforded to their rare earth counterparts.

Big changes are under way in the industry, of which we see only occasional glimpses. But there must be — just as with the REE companies —  some real financial strains and stresses taking place. We caught a glimpse of this is the second quarter financial results of China Carbon Graphite Group which was hit by slowing demand and deteriorating steel prices. For the six months to June, the company’s graphite sales decreased by an extraordinary 73.7%. The company noted that demand for its fine grain graphite and high purity graphite products were down 76.1% and 83.7% respectively.

There seems little question that Chinese authorities are attempting to have a more streamlined and efficient graphite sector. And a more environmentally sensitive one, too. Late last year an edict was sent down from the Qingdao (Shandong province) city’s Municipal Environmental Protection Bureau forbidding any new graphite processing plants in the towns of Pingdu and Laixi, both prominent producers of flake graphite. The city’s area is home to two of China’s most important producers, Qingdao Haida Graphite and Qingdao Xinghe Graphite. Nationally, as with the REE industry, there’s been a crackdown on illegal miners. How successful that, and the general environmental monitoring has been, is not clear.

It is worth remembering that China’s graphite dominance was not just a result of the abundance of deposits: when production really kicked in during the 1980s and into the 1990s, there were no environmental controls to speak of; therefore, producers were able to undercut foreign competitors. Many of the non-China mines then closed, giving China another advantage.

The government has set about forcing the consolidation of the 210 existing mines into 20 large operations. With national production falling to 510,000 tonnes a year, the authorities want to maximise the value and profitability of the industry. This reduced output comes at a time, especially in Shandong, where mining companies have to go deeper in what are close to exhausted mines with the resultant cost blow-outs. This new monopolistic structure is being overseen by South Graphite Co.; once that consolidation process is completed, the Chinese expect the company to control and determine the international graphite price (again, shades of REE).

Expect many twists and turns while the China graphite story plays out.

OIL: Ethanol is looking suddenly down and out. The era of growth for biofuels in the U.S. appears to be over. The ANZ Bank in Melbourne summed it up in a nutshell: “For the first time in eight years, mandated volumes for U.S. biofuels are unlikely to increase in 2014”. But The Financial Times makes the point that the strategic defeat for higher blend levels in petrol also has global implications. For one, it could impact on Brazil’s ethanol exports and therefore its sugar industry.

The Environmental Protection Agency has effectively sidelined the 2007 Energy Independence and Security Act which increased sharply the amount of ethanol U.S. oil companies had to blend into petrol and this is due to lift again next year. ANZ Bank says what has happened is that America’s transport market has reached a physical limit as to how much ethanol it can consume.

OIL: The latest jump in prices looks unsustainable, says Julian Jessop, head of commodities research at London-based Capital Economics. He argues that only a small part of the recent run-up in oil prices is due to the turmoil in Egypt. And the fragility of the global economic recovery and of financial market sentiment means prices are unlikely to rise further.

He notes that while there have been supply outages in Libya, Iraq and Nigeria, and a few attacks on the pipeline Egypt uses to export natural gas to Jordan, Syria and Lebanon, at no point since the “Arab Spring” has there been any disruption to the flow of oil and gas through either the Suez Canal or the Suez-Mediterranean pipeline, also known as SuMed, which runs from the Red Sea to the coast near Alexandria and which is an alternative for oil transport to the shipping canal.

Jessop thinks most of the recent oil rally is due to the growing optimism about the state of the world economy. That said, these prices increases are in themselves an important headwind for global growth.

“A swift resolution of the crisis in Egypt is perhaps too much to hope for. But even in the near term, oil prices are vulnerable to any renewed jitters in financial markets over the prospects for U.S. monetary policy or China’s economy, and to concerns about what high oil prices themselves might mean for demand,” he writes.


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Comments

  • Dr.Copper

    Robin did you see that Chinese steel production for FH 2013 was up 13pct y-o-y ?
    and revisions to annual production estimates yet again revised upwards by most
    of the so called western analysts in their glamour models !

    how do you explain that graphite prices and production has at all declined since
    2011 when steel production has increased y-o-y ?

    that is counter productive and more so as China is rebuilding their steel scrap
    industry in particular where graphite is a huge user.

    value is created by the highest purity obtainable in a consistent supply source
    and my guess is China Carbon is falling on both fronts – perhaps there is clay
    in their graphite ?

    August 18, 2013 - 11:56 PM

  • Robin Bromby

    Mate, I was quoting the company statement, which reads: “The decrease in sales was mainly due to industry-wide demand weakness for our products as a result of continued struggles of steel manufacturers.” My post did not refer to volumes, but PRICES.

    I suggest rather than confront me (the reporter) you take it up with the company at

    Tina Xiao
    Weitian Group LLC
    Tel: +1-917-609-0333
    Email: tina.xiao@weitian-ir.com,

    August 19, 2013 - 12:11 AM

    • Tim Ainsworth

      Thnx for the update Robin, interesting to note that graphite lags RE export controls yet most commentary suggests China will exhaust graphite reserves well before RE.
      Must admit Dr Copper’s point did come straight to mind as IO prices certainly don’t support slowing steel demand ATM. However a quick search picked up this recent header from Industrial minerals:

      “China’s natural graphite exports fell to their lowest point in over a decade in H1 2013, down over 35% in 24 months.

      A collapse in global demand for graphite since the start…”

      http://www.indmin.com/Graphite/Article/3242231/Graphite/Chinas-graphite-exports-nose-dive-Chart.html

      Parallels to RE??? Certainly at an interesting point in the cycle.

      August 19, 2013 - 8:39 AM

    • Dr. Copper

      Thanks Robin, but that link is to an investor relations consulting firm ??? You should check direct SEC
      fillings if you have time.

      From SEC filling you will note that I am not far off
      with regards to slack and unproductive operations,
      indeed China Carbon makes a reference to electrodes too. However to say they are the largest
      Chinese Graphite wholesaler with 11 million sales in
      2012 is probably an overstatement of significant proportions.

      China Carbon is a wholesaler sourcing their graphite
      from the mines which is being closed. Their high purity resources sources was near ZERO. If they do not have the inventory they cannot manufacture nor sell their production lines. Furthermore they carry an obsolete inventory of 5.3 mill and has accounted for an increase of on-going production facilities of 15.4 million. Do you think its low grade inventory ? a clear
      write-off coming ? Chinese accounting excellence.

      If you look at AMG’s latest quarterly report graphite prices has a complete different sound namely here an abstract:

      ====
      The decrease was partially offset by a 3% increase in revenue from graphite, a result of improved product mix, compared to the second quarter 2012.
      ====

      Remember the graphite prices in Q2 of 2012 ?

      Their whole quarterly report here, but watch the EADS
      set-up.

      http://www.amg-nv.com/Investors/Press-Releases/Press-Release-Details/2013/AMG-Advanced-Metallurgical-Group-NV-Reports-Second-Quarter-2013-Results/default.aspx

      Keep those excellent articles coming.

      August 19, 2013 - 2:37 PM

  • JOHN

    maybe china’s exports have been falling because they are using more graphite internally as a result of the increase in steel production

    August 21, 2013 - 1:47 AM

    • Robin Bromby

      Yes, possibly. Wouldn’t it be great if the China market was transparent? No more guessing! Thanks for making the point.

      August 21, 2013 - 1:58 AM

    • Dr.Copper

      thats entirely and exactly the point, and its clear China Carbon
      is not producing or selling products, perhaps AMG’s product
      mix and price increases is indicative that purity is the all
      important point of interest which if I see it correctly is starting
      to creep into journalists and God forbide… financial analysts
      after some 2 years of ‘my vacuum cleaner is larger than yours’
      and I have the support of Mr. David Copperfield.

      August 21, 2013 - 2:47 PM

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