Competitive Advantage will Determine Tomorrow’s Winners in the Global Graphite Industry
The following is the text of a speech delivered to Industrial Minerals 3rd Graphite and Graphene conference in New York, November 25, 2013, by Focus Graphite CEO Gary Economo.
This is the third Industrial Minerals conference Focus has had the privilege of participating in as lead sponsor and I’d like to thank Industrial Minerals Events again for their efforts in organizing this important gathering of industry stakeholders.
I’m going to frame the tone of my presentation today with a quote from Jack Welch, the former chairman of General Electric.
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He said: “If you don’t have a competitive advantage, don’t compete.”
This is the challenge that faces all of us in the graphite sector, and it’s a challenge that’s going to get tougher and tougher in the coming years.
Competitive advantage will determine who wins and who survives in the graphite sector. It’s a challenge imposed on us by the global currents of change.
The reality of globalization is that it invites the best among us to compete in any market – including China. And that is precisely how we are trying to position Focus Graphite in the world today.
We’re executing a strategy that enables us to react to market conditions and develop the partner and customer relationships to meet demand. It’s a strategy that allows us to scale up.
Ultimately, we continue to de-risk our enterprise by using conservative estimates that can handle market fluctuations, and, in the event of price spikes, widen our projected margins that add to our cash position.
Our mine-to-market-to-technology strategy, we believe, creates a business model for success.
Success is anchored in our 16% grade and translates through our low cost of production and value-added products to our equity interest in Grafoid.
We are now moving out of the exploration phase into the development phase.
In case any of you were confused – I’m going to confess today that I’m not a miner.
It has always been my intention to bring the right person in to take us through the development phase. Several months ago we did just that with the appointment of Don Baxter as President and Chief Operating Officer.
Don brings many years of experience, much expertise and peer respect to our team. I’ll remain as CEO and focus on the non-mining side of things: strategic partnering, technology sales, financing and acquisitions.
What I’m hoping we do over the next two days – as a group and in one-on-ones – is to look outward at the challenges we face in developing our businesses, from financing to market trends and factors that will impact the graphite sector.
I firmly believe, as I’ve said before, it’s not what’s happening today, but what will happen tomorrow – in innovation, green-technology advancement, and national government agendas – that will determine our corporate futures.
So let me turn now to the graphite market.
During the last two years we’ve witnessed the erosion of demand and investor sentiment has shied away from the commodities sector. Graphite prices have declined by 50% from early 2012 levels.
During the last two quarters we’ve seen some price stabilization but no signal that investment pools are even interested in looking at new graphite projects.
Knowing the market, finding the right offtake partners and securing financing are the keys to survival in today’s depressed market.
China, the world’s largest exporter since 2009, is morphing – transforming to a consuming nation. And its appetite is huge.
According to Industrial Minerals Data, China’s flake graphite exports will likely decline to 250,000 tpa this year compared to 380,000 tpa in 2011.
While some of that decline is due to softening of global demand, some of that decline is due also to a rise in China’s domestic industrial demand.
During this period we’ve witnessed the stirrings of change in China, the mass shutdown of independent graphite mining operations and, more recently, according to IM Data, the prospect of China’s imposition of export quotas on flake graphite.
The consolidation of China’s flake graphite industry has broad and far-reaching implications for emerging Western producers, and, for industrialized economies.
A recent Price Waterhouse Coppers study cited a 2011 survey of U.S. manufacturers that indicated a majority believed supply risks would escalate over the coming decade.
In some industries, renewable energy, automotive and energy, for example, the study said respondents suggested they were already experiencing supply instability.
There is an urgent need to meet and sustain current and future U.S. needs. The United States is 100% reliant upon graphite imports. In 2012, it imported about 80,000 tons to meet its domestic manufacturing requirements.
With some 70 to 80 new projects underway outside of China, about half of those new projects in Canada alone – we estimate that Canada has the potential to begin adding to global capacity by 2016.
A year ago, China’s Ministry of Industry introduced policy guidelines – blanket regulations that would impose restrictions on production scale, mining techniques and equipment, product quality, energy and water consumption and imposed environmental standards for producers.
Earlier this month, the ministry acted.
It published entry rules for flake graphite producers amid calls by China’s Foreign Reserve Department to impose controls on flake graphite exports.
Consolidation of the flake graphite industry would form part of the national government’s policy to reshape China’s resource sector by stripping out marginal companies in favor of more efficient, large-scale miners.
In policy terms, the closure of inefficient and polluting mining operations is laudable as it forces Chinese producers to comply with similar government standards imposed on Western producers, not to mention the benefits to the Chinese and their environment.
China produces approximately 650,000 tons per year of flake graphite. Expectations are that level will rise to 950,000 tons per year by 2015 with the bulk of that increase due exclusively to domestic demand.
So what does this mean for western producers, or more pointedly, what does this mean for the emerging graphite producing sector?
Based on first hand observations and meetings with Chinese producers earlier this year, it re-affirmed Focus management’s decision four years ago to take a leading position in the global graphite market on two fronts.
The first: develop a graphite company that could compete in any market – China included.
The second: build a value-added, technology-oriented enterprise that leads in the world, and challenges China.
We are doing just so. The value of our decision-making and planning has become clear to our potential customers. We anticipate the market catching up to us shortly.
If you read between the lines, our recently updated Preliminary Economic Assessment says Focus Graphite is well positioned to meet a new wave of demand coming first from electric vehicle makers by 2015-2016.
China’s policy moves, in my view, beckon western consuming nations to gird themselves against a temporary supply shortage as China satisfies its own needs first.
My view is that China has a ‘graphite problem’ – and knows it.
Its “problem” is that it cannot impose a national green technology strategy until it rationalizes its natural graphite sector – and that could take a minimum of 24-months.
China is currently testing the rationalization model with its amorphous graphite sector. And when it does get it right – watch out, because a comprehensive green technology strategy will consume all the flake graphite they can produce and a large amount of what we could supply.
For the dozens of emerging western producers, the anticipated upward pressure on prices caused by China’s policy changes, coupled with the timing of the next cycle of global economic recovery could encourage markets to return to pre-recession levels.
We see a new reality on the horizon, and that is: the end of cheap graphite prices for consuming nations.
The costs of consolidation of China’s amorphous graphite sector, the looming consolidation of its flake producing sector, and, a spike in demand from its lithum-ion battery sector will undoubtedly cause a rise in export prices.
The possible assignment of quotas to alleviate short-term problems could only serve to limit exports and add more upward pressure on global prices.
The Technology Factor
So how do we as an industry rally to meet those challenges and secure the benefits?
My view is that emerging graphite companies – if they intend to compete for a slice of the future market pie – need to focus on technologies and the high-tech sector.
During my presentation to this gathering last year, I said: Technology is the element that differentiates Focus Graphite in our sector.
Technology provides us with a competitive advantage.
Our business, our long-term sustainability and profitability are staked to the technologies we employ; the technologies we invent, and; the technology markets we compete in to secure contracts and investment.
As a technology-oriented enterprise, the results from our Lac Knife pilot plant were like manna from heaven. Those results were reflected in our updated PEA earlier this month.
Small, 200 mesh flake graphite has always been considered by our industry as a low-value commodity.
That we achieved 98% purity using standard flotation and polishing methods from Lac Knife’s small flake distribution was a revelation.
For those unfamiliar with the changing demands of the battery manufacturing sector, a low-cost, high-purity small flake purified to battery grade translates into expanded profit margins for li-ion battery producers.
As more hybrid and fully-electric vehicles come to market between now and 2016, demand for graphite anodes is anticipated to rise by 10% per year as the major auto makers shift to capture growing consumer demand in tandem with government mandated fuel consumption guidelines.
Toyota, for example, plans to launch its zero emission hydrogen fuel cell cars in 2015, and has licensed its fuel cell technology to Germany’s BMW AG.
BMW will use the technology to build a prototype vehicle by 2015, with plans for a market release around 2020.
By 2020, market penetration could rise as high as 1.2 million fuel cell vehicles, which would represent 7.6% of the total U.S. automotive market. Given that each automotive fuel cell requires about 30 kilograms of purified graphite, the potential market remains strong.
Earlier this month, Tesla Chairman Elon Musk said he plans to boost production of his Model S to 500,000 units per year. He said that in order to meet those production targets, the company will require billions of battery cells.
But, he said, security of supply had become an issue. The company’s chief battery supplier, Panasonic, is already producing at capacity.
Where Tesla goes, others will follow, in China, India, Europe and North and South America.
The renewable energy and clean technologies sectors have the potential to sustain demand for purified graphite for the foreseeable future. For Focus, it became an operational imperative for us to include a value-added secondary processing unit to our long-term planning.
As a graphite company with ambitions of leading our sector, cost-mitigation, product quality, and; control of our value chain are the key ingredients for a successful and profitable business.
Our technology vision is capped by our joint venture relationship with Grafoid Inc., a private sector graphene investment and industrial application development company.
Grafoid, in less than two years of R&D has emerged as a leading player on the global graphene stage.
It is involved in dozens of industrial joint venture application development partnerships and, it has established the global standard for graphene.
This is no small achievement when you consider the scope and scale of the global race among giants – the United States, China, Korea and Europe – for graphene supremacy.
Just last month, Research and Markets, the leading source for international market research and market data forecast the global graphene market will have a cumulative average growth rate of 60% over the period 2012-2016.
They positioned Grafoid as a key vendor dominating the market space along with BASF, IBM and Samsung.
I expect Grafoid to have a breakthrough year in 2014.
Allow me to conclude with the following observations:
On the home front, the business model we’ve created and the lessons we’ve learned from Lac Knife bode well for Focus Graphite over the longer term.
We are very fortunate to have assembled a world-class team of geologists, mining engineers and scientists and a board of directors with a broad, long-term business vision for sustainable growth.
On the broader front, I remain very optimistic about the graphite sector. Today, we need to position ourselves for tomorrow’s opportunities.
The graphite sector itself and the contributions it has made – and will make to the global economy and to national security – have long been overlooked by markets and the investment community.
We need to continue to tell the story to investors – be they retail investors or institutional investors – about the graphite sector’s prominence, importance and its impact on the green energy revolution.
This speech has been reviewed by Don Baxter, P. Eng., President and COO of Focus Graphite and a Qualified Person under National Instrument (NI) 43-101 guidelines.
Copyright © 2013 Focus Graphite Inc., All rights reserved
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