Graphite Being Squeezed by Commodity Prices
Graphite and Graphene Week in Review: The ProEdgeWire Graphite and Graphene index dropped 8.11% for the week ending on May 10. Flinders Resources (‘Flinders’, TSXV: FDR) and Lomiko Metals (TSXV: LMR | OTCQX: LMRMF) were the sole gainers at 3.33% and 2.94% respectively. Flinders is slated to be one of the first of the new flake graphite companies in the Index to move from exploration to production, expecting to complete its Preliminary Economic Assessment for the Woxna graphite project in Q3 2013 in Sweden with full consideration of metallurgical and engineering details. Flinders also owns the Kringel graphite mine in Sweden, which it expects to bring back to production.
Lomiko, meanwhile, has embarked on a new graphene testing phase, sending high grade samples from its Quatre Milles graphite project in Quebec to Graphene Laboratories Inc. with which it has signed a strategic alliance. Nevertheless, graphite stocks are still under the effect of lower industrial metals prices, which fell last week at the London Metal Exchange. There was also a stronger U.S. dollar and lower than expected Chinese industrial production in April – China’s industrial production grew by 9.3 percent in April, an increase of 9.5 percent was expected and in these very fickle markets any excuse is good for the ‘bears’ – also may have played a role in keeping several commodities down, even though there are signs that a ‘bottom’ has been reached. In this regard, the Chinese Central Bank may intervene by lowering interest rates or reserve policies in order to stimulate demand and bring growth statistics more in line with the world’s excessive expectations.
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The falling price of crude oil also dropped because of a perception of lower Chinese demand. Indeed, oil, even more than gold, can account for lower commodity values. Oil went from USD$ 118/barrel to USD$ 100/barrel last February; coal and copper also fell. Rather than this being the end of the so-called commodities supercycle, Asian growth is not all about China. India, the Philippines, Indonesia, Thailand and South Korea, among others, are putting pressure on commodity prices, having the most to gain when values are low. Is this bad for the world economy? Should we create barriers to stop these countries from growing at faster rates than even China? Not really. First of all it would not be fair under ethical or WTO conduct; secondly and most importantly it would be myopic.
In the medium to long run, countries such as India, Indonesia and indeed China, will witness the rise of the largest ‘middle class’ in history; as the populations become more prosperous, they will generate a natural demand for consumer goods and for more materialistic lifestyles. This will ultimately drive a major rise in commodity prices, including graphite – especially in view of its growing list of applications in consumer goods, renewable and nuclear energy applications. Moreover, copper demand, which had been growing in April, started to slow down also fueling concerns about Chinese growth and forcing industrial mineral prices down. Industrial minerals, which are non-metallic but used in a number of metallurgical and non-metallurgical applications tend to suffer first. Graphite is one such mineral, the demand of which (about 75%) is still being driven by traditional applications like steelmaking, refractories, auto parts, and lubricants. As such, graphite prices are highly susceptible to such parameters as Chinese growth and industrial mineral demand.
There is no question that future demand will be driven by batteries. New technologies that have led to the development of improved lithium-ion, iron-phosphate and vanadium batteries will all require graphite of the highest possible grade and purity. Synthetic graphite derived from petroleum can achieve high purity but mineral flake graphite costs much less (there’s far more graphite than lithium in lithium batteries). For the time being batteries account for about 5% of graphite use and that share of the graphite ‘pie’ is slated to grow and possibly exceed all other sources of demand, which will have to be met by new supply. Graphite is a critical mineral for the development of future technology and it cannot remain undervalued and in the shadows for much longer.
Graphite, especially of the quality needed to meet the requirements of the emerging technologies, has only been identified in a handful of regions and when the current market trepidation gives way to more rational behavior graphite will regain vitality. Many graphite stocks are still based on exploration rather than production; however, the lower trading volumes and prices of the past months are also a reflection of retail and institutional investors switching to the big-caps and perhaps a perception that the projects will not be able to attract sufficient capital to ferry their projects from exploration to production. Savvy investors will realize that the time to invest in such critical commodities is now before we start running out of supplies and prices burst. If it’s any indication, Tesla Motors, a company that makes vehicles exclusively powered by lithium-ion batteries was the hottest stock on Wall Street last week. Somebody is bound to realize that graphite is important.