Seeking Alpha

Latest Thoughts From Graphite Guru Simon Moores

Includes: DBB, SYAAF, TSLA
by: Peter Epstein
Peter Epstein
Deep Value, long only, contrarian

Graphite prices are indicated higher with list prices up as much as 30%.

China's crackdown on small inefficient and/or larger polluting graphite mines likely to have a meaningful impact on supply.

Syrah Resources's two off-take agreements are BIG news, not necessarily appreciated by the market.

Tesla giga-factory news important, but China's move to restrict supply more important.

The following exclusive interview of Simon Moores of Industrial Minerals was conducted on May 9th via phone and email. Mr. Moores is a leading expert in global graphite markets. He is a highly sought out commentator and over the past several months has been saying that graphite prices are poised to move higher in 2h 2014.

Simon, you've been spot on regarding graphite prices potentially moving higher in the later part of 2014. Please describe the pricing mechanism in the graphite market?

Flake graphite is purchased one-to-one, privately between buyer and seller. It's a much slower market than bulk commodities like coal and exchange traded, specialty metals. Spot buying has increased in prevalence since 2010 mainly due to the reluctance of end users to stockpile amid uncertain demand for their products. Spot buying however isn't the same as for the metals markets, the time scales are different - a quarterly basis for graphite versus weekly or monthly for metals. Annual contracts are also still in play.

You mentioned in a recent article that list prices are indicated higher. How long before we get a sense if the higher list prices are sticking?

We should know by July. At present, producers in China are seeking to take advantage of the bad news that the government is getting involved in cleaning up graphite mining in Shandong and Heilongjiang. They are doing this by increasing list prices by as much as 30%. Buyers will probably not stand for this and will certainly try to push the price back down. It has also resulted in a scramble for graphite in smaller producing provinces in an attempt to bypass this development. But, it certainly looks like that after a 3-year downward trend, higher prices are on the way.

You recently made a week long trip to China, what are your key takeaways?

First, China is willing and able to work with the international community to be a producer of higher quality graphite products. Second, China is a very fragmented producer of graphite. It is not dominated by one unified company or strategy, rather by smaller to medium sized private companies. It's each to their own. Third, China is a very mixed bag of graphite companies from rudimentary producers of flake to some impressive added-value products like battery-grade spherical graphite.

There's been a great deal written by you and other sources about China clamping down on supply. Please reiterate what China is doing and what the motivations are.

China wants to clean up its graphite industry. Some areas have had a dust, waste water and acid disposal problem for many years. The governments in the leading two provinces, Heilongjiang and Shandong, are now clamping down on this by introducing stricter environmental standards for manufacturing. The sanctions include the closure of the more polluting operations.

To what extent are the higher list prices due to events unfolding in China?

I think higher list prices are 100% due to the events we have seen in China. Demand isn't what it was and while there is the expectation of a pickup in activity at some point, it's not yet justifiable to increase prices solely on the basis of demand.

Some market pundits believe the two off-take agreements signed by Syrah Resources (OTCPK:SYAAF) are a game-changer, but the market doesn't seem to care. What's your view of the Syrah news?

The two MOUs signed by Syrah is very significant news because it's new markets for graphite to be used in. Should the deals come to fruition, it will be the first time serious volumes of graphite are consumed in the aluminum industry. The more recent deal, with a trader of iron and steel raw materials, sees significant volumes agreed for a more traditional use as a recarburizer. Key to the story is that both deals are displacing existing carbon raw materials and for me that is the most significant point. It is growing the market.

To what extent are the higher list prices due to the two major off-take agreements signed by Syrah Resources?

The Syrah deals are longer term. The price changes are due to today's supply and demand dynamics. So they are not connected.

Taken together then, the market has benefited from three major events this year alone- China supply concerns, Syrah's off-takes agreements and of course Tesla Motor's (NASDAQ:TSLA) intention to build a giga-battery factory. Please rank these three events from most to least important and comment share your latest views on the giga-factory.

1. China's potential closures:

This is the most significant news in years for the supply side of the industry

2. Syrah's MOUs:

This shows flake graphite can be used in new markets and the industry can be grown

3. Tesla's Gigafactory:

Huge news for the junior market today, less so for the active industry which must wait to see how much graphite the battery plant will actually consume in 2017-2020.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.