Graphite Investors Beware - Prices Are About To Collapse

Summary

• Graphite is a major component of lithium-ion batteries. Growth in the li-ion battery market, driven by the move towards electric cars, should lead to significant extra demand for graphite.
• However, the new demand will not necessarily raise prices for graphite miners. Li-ion batteries is one of the few areas where natural and synthetic graphite compete.
• The small cost savings in moving to natural graphite will not necessarily be attractive to auto makers which are looking for a consistent product.
• A huge new mine under construction in Africa will flood the market with cheap graphite and drive down prices.

Since 2010, on the Toronto Venture exchange, the number of junior mining companies exploring and developing graphite projects has grown from two to more than eighty. Worldwide, there are now over two hundred proposed graphite mining projects being promoted by junior mining companies.

All of this activity has been driven by an assumed increase in demand for natural flake graphite, a result of an expected move towards electric vehicles. Graphite is the primary component of the anodes of lithium-ion batteries. In fact, a typical lithium-ion battery contains about 10 to 15 times more graphite than lithium.

With all of the expected growth in li-ion battery use, it is easy to conclude that a significant increase in graphite prices is imminent, as happened with spot prices for lithium over the past year. In this article, I explain why I think graphite prices are going to go down, and why almost all of the junior mining companies in the graphite space are destined to fail.

Articles like this one from Benchmark Minerals have helped to fuel speculative demand for graphite company shares:

"taking the most conservative case, Benchmark estimates that over 360,000 tonnes of medium flake graphite will be needed as a feedstock source for the spherical (battery anode) material by 2020"

Interest in North American graphite miners has been generated by articles like this one, again from Benchmark Minerals. The article deals with the expected demand from the Tesla (TSLA) gigafactory and was repeated extensively by various sources soon after it appeared. A quote from the article:

Conservative case for Tesla plant running at capacity:

Spherical graphite demand = 28,000 tpa

Flake graphite demand = 93,000 tpa

New graphite mines needed (equivalent) = 6

Bullish case for Tesla plant at running capacity:

Spherical graphite demand = 42,000 tpa

Flake graphite demand = 140,000

Analyst’s Disclosure: I am/we are long URNXF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.