Weekly Review: Growing Demand for Graphite – even in China?
As the curtains have closed on PDAC 2013, one of the most notable differences with the 2012 edition concerns the graphite sector. Last year, graphite drew unprecedented interest from investors as prices were about to reach a peak and several graphite plays were sprouting to take advantage of this mineral, which has been experiencing a new spring thanks to the discovery of graphene and advancements in battery technology – among other applications. The great bulk of the company was in the spring of 2012, only busy with putting together a portfolio of promising graphite deposits. Since then, many graphite sector companies, along with those in just about every sector, have had to endure a very tough second half of the year, when the markets showed worldwide volatility.
Graphite, moreover, like rare earths, has to contend with a strong China factor, seeing as China controls around 70% of world supply for this commodity. Nevertheless, many new projects have shown promising resources and eventually some will go into production in the next few years; will they compete with Chinese graphite suppliers and be forced into a competitive squeeze or is the market large enough to handle the new resources? Indeed, the same conditions and applications that stimulated interest in graphite in 2011 and 2012 exist; if anything, there is more solid evidence of technologies coming to fruition, even if investors still appear to be in a groggy state, slow to realize opportunities and quick to respond to risk. One of the biggest graphite opportunities involves the nuclear energy sector – which has been building up some market energy of its own in view of a widely expected tightening of the market and growing demand. Graphite’s role in all this concerns pebble bed nuclear reactor technology, which represents a major breakthrough in nuclear power generation and one of the main catalysts for graphite production demand, especially the kind of high-grade flake – or crystalline – graphite at the heart of the majority of the new graphite plays.
Demand for nuclear energy will be highest in China, where there is growing domestic pressure to reduce air pollution, largely caused by the excessive reliance on coal power. Moreover, China’s own demand for graphite has continued to grow and is expected to continue growing in the next decade. Indeed, China’s graphite industry may soon reach a point at which it will no longer be able to support export demand, given that domestic consumption is growing. The world has learned that China is more than willing to suddenly introduce 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.
Reports of lower Chinese graphite exports in 2012 should not necessarily imply that there is lower worldwide demand – aluminum production requires graphite and there have been strong signs of an aluminum demand resurgence; aluminum is increasingly being used in automobiles and continues to be the main material for the aerospace sector; efforts to reduce weight and energy consumption will keep aluminum demand strong for the next few decades according to the latest edition of the Exxon-Mobil Energy 2040 Outlook. That said flake graphite prices are still hovering around the USD$ 1,500/ton range, well over 100% of what they were just a few years ago. Graphite, apart from the new graphene applications, is used in hundreds of applications from steel making refractories and lubricants to space exploration, computing and aerospace; a myriad industrial sectors need graphite. As far as the ProEdgeWire graphite sponsor index, Focus Graphite (TSX-V: FMS | OTCQX: FCSMF) showed the highest gains for the week, rising by 2.9% and 3.4% in the TSX and OTCQX respectively for the week. Its performance was offset by the minor losses such that the index as a whole showed an average change of -4.28%. Focus’s performance was a response to a recent announcement that locked cycle tests confirmed high purity levels of 96.6%.
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