Investing In Graphite Part 1: Supply/Demand Overview

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Includes: BRUZF, FCSMF, GLKIF, LEMIF, MGPHF, NGPHF, NSRCF, SYAAF, TSLA
by: Ben Kramer-Miller
Summary

The graphite market is grossly misunderstood and misrepresented.

There are certainly reasons to be bullish on the sector generally, but there are also bearish factors that the cheerleaders in the space omit.

Generally, there is no compelling reason to invest in the graphite space as a whole.

Properly selected graphite investments will generate substantial returns even if the bearish factors play a significant factor.

I discuss the graphite market here and the specific investment opportunities in part 2.

Overview

Graphite, and in particular flake graphite, began to generate investor interest over the past few years for a variety of reasons discussed below. This has led to the formation of several graphite exploration companies, a handful of which have reached the point at which their projects appear to be viable investments.

But are they? While the corporate literature from any of these companies will tell you about the amazing growth opportunities in certain high/clean-tech products containing graphite, this is a clear mis-representation of the market today. The fact of the matter is that not only do investors seem to know very little about graphite - the product or the industry - but many of these companies are run by people who have never produced or sold graphite - more specifically any number of the 100+ products that fall under the category of "graphite." I would argue that most of them are selling hope wrapped in the cloak of getting exposure to hot new technologies such as LI-batteries, green technologies, and graphene, when, in fact, even the most promising companies haven't reached the point where they can supply these markets. With that being the case, investors need to realize that there is a tremendous gap between a graphite discovery and supplying to these markets - more so than mining investors typically face.

Graphite's potential role in the development of new technologies is certainly enormous and it is the driving force of a graphite investment thesis, but marketing from junior graphite companies arguably skews perceptions regarding this role in the actual current supply/demand fundamentals driving graphite. Graphite right now is actually a fairly boring market with most of the supply going into refractories, metallurgy, and lubricants; and growth in graphite demand for these products is largely in line with global GDP growth. The two end uses that graphite companies like to promote - batteries and graphene - make up about 10% of the entire market, and graphene currently has virtually no industrial market given the prohibitively high cost of producing it on a commercial scale with very few exceptions.

So with the gap between resource discovery and cash flow generally being wider for graphite miners than it is for other mining sub-sectors, and with the potentially misleading image investors have of the graphite market, I have decided to put together a two-part assessment of the graphite market. In part one, I will deal with the market more generally, and in part two, I will discuss some of the major players and compare them on a variety of factors.

As we will see in part one, graphite demand potentially has a bright future but investors have to realize that an investment in graphite today is more an investment in boring and stable industries than it is in the LI-battery or graphene revolutions. Demand for LI-batteries is rising rapidly but making assumptions based on this high growth rate is risky, and making investments based on such assumptions only makes sense on a small scale for most investors given that we don't know the point at which this market will mature. We must further note that this anticipated demand increase may not result in a concomitant price increase in graphite, as several projects are slated to come into production in what is a very small and potentially oversupplied market.

As we will see in part two, the leading graphite companies have an enormous amount of flake graphite. Some companies have enough to supply the entire global market by themselves for decades. So it is counterproductive to think of graphite companies as simply commodity producers with leverage to the graphite price. The companies that succeed going forward will have advanced into the midstream and possibly even the downstream aspects of the business. This means not just having graphite but being able to process it in a variety of ways, market it, and sell it. With that being the case, companies with seasoned management teams that are operating mines that are sufficiently close to commerce centers are going to be winners. More generally, companies with highly economical projects that they can get into production and actually sell graphite profitably on a small enough scale so as to not disrupt the delicate supply/demand balance in the space while at the same time having the scalability to supply the various growth markets are going to be winners. On the other hand, companies that lack the experience to operate a vertically integrated graphite company and companies with remote projects are going to have a tough time regardless of the size and the quality of their deposits.

As a final note, any claims that companies are making regarding of their progress in developing spherical graphite - the derivative product that LI-battery producers need to manufacture them - are based on proprietary knowledge, meaning that it is virtually impossible to factor the LI-battery market or the spherical graphite market into our models when assessing a given graphite investment's viability and valuation. Even companies with strong management teams and strategically located projects can therefore have trouble profiting from the rise in demand for the spherical graphite used in LI-batteries. The same can be said regarding graphene and the graphite mine/graphene partnerships that have sprung up. This market is too young and we don't have the necessary knowledge with which to properly identify those graphite junior miners that have partnered with the "right" graphene companies.

Ultimately, graphite is an exciting opportunity for enterprising investors. If the optimistic demand scenario plays out and if you invest in the companies that are positioned to take advantage of this, you are going to make a lot of money. But there is a chance that the optimistic demand scenario doesn't play out, and even if it does this rising tide will not lift all, or even most boats.

1. What Is Flake Graphite?

Graphite is a form of carbon that consists of layered "sheets" of carbon atoms combined in a hexagonal array (aka "graphene").

(Source: Chemguide)

The unique structure gives graphite several attributes that are extremely useful in industries. Specifically, it has strong covalent bonds that give it an excellent strength to weight ratio as well as a very high melting point. As we will see presently it can be shaped and manipulated in order to enhance these qualities. For instance graphene, or the individual sheets of graphite (which don't occur naturally in a way that is useful in industries) has been shown to have unparalleled strength in laboratories that could revolutionize innumerable industries. Spherical graphite, which is essentially flakes that have been bent into a rounded form, can be used in LI-battery anodes, and as those interested in the graphite market are probably aware this is the biggest tentative demand driver that graphite bulls are anticipating.

1A. Flake Size

Graphite flakes come in many sizes. I provide a rough breakdown of these sizes in the following table. Note that different companies may use different classifications, which can have significant implications regarding the values of their respective deposits, as we will see in a moment.

Classification Size In Microns (10-6 Meters)
Super Jumbo Flake (XXL) >500
Jumbo Flake (XL) 300 - 500
Large Flake 180 - 300
Medium Flake 100 - 180
Small/Fine Flake <100

The last three categories are the most common kinds whereas (super) jumbo flakes make up a tiny niche market. Super jumbo flakes are extremely rare.

Generally larger flakes have a higher market value. Small flake graphite goes for ~$1,000/tonne whereas large flake graphite will cost ~50% more than this. (X)XL flake graphites are worth much more - $2,000/tonne or more, although these markets are incredibly small and lack transparency.

Larger flakes are rarer and can be broken down into smaller flakes but smaller flakes cannot be built up into larger flakes. This means that the market for larger flakes is broader as it covers both the niche markets that require larger flakes whereas they can compete with smaller flakes. I should also note that larger flakes are more efficient when it comes to making spherical graphite - the product found in LI-battery anodes. A given amount of graphite yields only about a third as much spherical graphite, but this fraction rises with larger flakes.

A more in depth discussion of flake size is reserved for part 2. However, I just want to briefly point out here that there is a wide range of opinions on the importance of flake size to a graphite project's viability and attractiveness from an investment standpoint. Flake size is undoubtedly important, but a project with a large proportion of larger flakes can be less attractive than another with a small proportion of smaller flakes assuming the latter project is managed well and strategically located.

2. Mining Flake Graphite vs. Mining Other Commodities

Investors in mining companies and commodities markets are conditioned to think of commodities as uniform entities. All copper resembles all other copper, and a given amount of copper produced at any mine is going to have the same value as the same amount of copper produced at any other mine. The same goes for virtually any metal. Flake graphite, on the other hand, is different because there are many different forms that flake graphite can take as determined by its purity and its flake size.

As a result there is no "graphite market" or "graphite price." Rather there are many different graphite markets and many different graphite prices. Typically, larger flakes of higher purity have higher value (they also have smaller markets, but also more compelling supply/demand fundamentals). But because even large flake deposits lack uniformity their value will be determined by the particular products that the mining companies are able to create and sell from these deposits.

Generally, graphite companies have to be prepared to sell their graphite to end users that demand one or another particular form of graphite, which means that unlike most mining companies there is inherently a downstream element to their business models. This has implications regarding divergences in what managers and investors believe constitutes a viable business model in the graphite space. Some companies (e.g. Mason Graphite (OTCQX:MGPHF) and Focus Graphite (OTCQX:FCSMF)) have teamed up with technology companies that are developing graphene and have hired scientists to develop spherical graphite in-house even prior to bringing their flagship projects into production. Great Lakes Graphite (OTCPK:GLKIF) has begun its marketing campaign prior to releasing a maiden resource estimate for its Lochaber Project. Others (e.g. Flinders Resources (OTCPK:FLNXF)) has avoided this believing that preliminary vertical integration is a diversion that takes energy away from developing a viable graphite mine. Flinders has opted to get its Woxna Project into production before perfecting its metallurgy and working on producing end products (it should also be noted that Woxna is a past producing mine that had very low start-up costs, and so the project lends itself to this sort of strategy).

Either way any viable graphite investment is going to have some level of vertical integration, and this complicates things a great deal, especially given the fact that many people in the mining space aren't used to this sort of strategy. As a result when we get to the point of analyzing individual companies it will be critical to look at their respective management teams. Investors in mining companies generally won't mind if a team with experience developing a copper mine is developing a gold project, but we cannot say the same thing about graphite given what has already been said. A team with gold mining experience will be able to get the graphite out of the ground, but a team with graphite experience will have the midstream/downstream advantage that will be advantageous in developing a cash-flowing business.

3. Graphite Supply

Annual graphite supply is just over 1 million tonnes, and this predominantly comes from China, with just 2% coming from North America.

(Source: HDR Salva)

Flake graphite, which is of interest here comprises ~55% of the market while most of the rest consists of amorphous graphite. The remainder - <1% - is lump graphite, which is a niche market.

A. Synthetic Graphite and Natural Graphite

Natural graphite - what is represented in this chart - only accounts for ~40% of graphite supply. The rest comes from synthetic graphite, or more specifically "secondary" or isotropic graphite, which is graphite that is made from petroleum coke - a by-product from refining oil. It is calcined and then put in a furnace at 2800 degrees Celsius for about 11 weeks (primary synthetic graphite will not concern us; you can read about the difference here). This makes Synthetic graphite production energy intensive, expensive, and bad for the environment.
Secondary synthetic graphite had been the product of choice for LI-batteries given the relative difficulty in producing a consistent enough natural graphite-based spherical graphite product that can function in LI-battery anodes. However, the cost of spherical synthetic graphite (~$20,000/tonne) is more than twice the price of spherical natural graphite ($6,000 - $10,000/tonne, figures from Canada Carbon (OTC:BRUZF) - a graphite exploration company), and batteries made from secondary synthetic graphite have a lower capacity. This has generated a demand for natural graphite alternatives, as the following chart courtesy of Chris Berry illustrates:

We can see here that demand for both natural graphite and secondary synthetic graphite are growing rapidly, although demand for natural graphite is growing at a much faster rate. As we will see below, this "demand" chart underestimates the necessary amount of graphite needed to supply this demand given that graphite is lost when it is manufactured into spherical graphite.

B. China as the Dominant Producer

In the 1990s, the Chinese kept prices depressed and in effect they destroyed the market in the West. The aforementioned Woxna Project, for instance, was a past-producing mine that was shut down in 2001 due to low prices. So by oversupplying the market and putting the competition out of business the Chinese came to dominate the graphite market, and as the above chart shows there are virtually no supply sources in the West. Given high shipping costs (see below) and given the fear that we will see a resource-based trade war with the Chinese, this lack of Western supply is a problem, and one that is spawning Western exploration and development.

As a result, there is a lack of graphite supply in the West and prices have started to rise in order to incentivize Westerners to invest in graphite.

Prices have roughly doubled in the past 10 years, although at one point in 2011, prices had been more than twice where they are now. The following chart courtesy of Industrial Minerals illustrates this for large flake graphite, although the data is slightly outdated given the difficulty with which current data is compiled in the space.

(Source: Industrial Minerals)

About 2/3rds of China's graphite production is low grade amorphous graphite that is used in "lead" pencils, brake pads, and other products that are generally uninteresting for those who want to capitalize on the growth markets such as LI-batteries, green technologies, and graphene.

But it gets more interesting for the bulls: some of China's high-grade flake graphite production has recently been shut down as the Chinese government tries to clean up its environment. The cited article suggests that flake graphite production was shut down in Shandong at the end of 2013, and Shandong supplied ~20% of China's flake graphite output. The impact has been mitigated, as demand from steel refractories is tepid given weakness in the steel market and the global economy more generally. Longer term, however, this will likely put pressure on global flake graphite supply and force prices higher as other producing nations don't yet have the capacity to make up for lost Chinese production.

Furthermore, like with many strategic commodities whose production comes predominantly from China (e.g. rare earth elements, tungsten, etc.), China has a tariff in place on graphite exports in order to encourage Chinese companies to add value to the commodity within the country.

Finally, Chinese mines have been in production for a long time. They have focused on producing high-grade ore over the past couple of decades in order to reduce production costs and to undercut Western production, which again is virtually non-existent. With this being the case, we can see further pressure on Chinese supply-which in turn can put upward pressure on prices.

C. New Graphite Supply

The primary risk to the flake graphite thesis as I see it is the fact that a rise in graphite prices has generated a substantial amount of exploration and development, and the onslaught of new supply can put pressure on prices.

With the flake graphite market at 55% of the total 1.1 million tpa. graphite market there is ~600,000 tpa worth of flake graphite coming onto the market every year. Even with the estimated 20% lost production from Shandong (~90,000 tpa) new graphite supply sources have the potential to drown the market and force prices lower. Here are just a few examples of new projects that have this potential:

  • Syrah Resources' (OTCPK:SYAAF) (ASX: SYR) Balama: 200,000 tpa.
  • Energizer Resources' (OTCQX:ENZR) Molo: 85,000 tpa.
  • Mason Graphite's Lac Gueret: 48,000 tpa.
  • Focus Graphite's Lac Knife: 40,000 tpa.
  • Northern Graphite's (OTCQX:NGPHF) Bisset Creek: 20,000 - 40,000 tpa.

The sum total of this comes to 383,000 tpa - 403,000 tpa. Even if we subtract out the 90,000 tpa. that will be lost from Shandong the range is still 293,000 tpa. - 313,000 tpa. This doesn't include every project - just the larger, most advanced and better-known ones (and even among these only Lac Knife and Bisset Creek have feasibility studies). Not only that, but we will see shortly that the weak economic environment reduced 2013 demand estimates meaning that there was (and likely continues to be) a market surplus. This will create substantial headwinds for those companies with higher production costs and which are not positioned to generate tailor-made end products.

Some of these projects won't make it into production for various reasons such as a lack of financing or poor economics/location, but even a few of them (not to mention others that are generally at earlier stages of development) can put pressure on prices going forward.

As a side note, I should point out that Syrah's Balama Project has vanadium exposure as well as graphite exposure and so that market can push Balama forward.

D. Graphite As A Local Market

So far, we have looked at graphite supply in the aggregate, but this is an oversimplification. Graphite isn't exactly a local market but as a lightweight material that can be expensive to ship by boat (tankers charge by volume) it makes sense to look at the graphite market at the local level. According to an industry source it will cost ~$5,000 to ship a 20-foot container, which can hold 13-15 tonnes of graphite. At current market prices that means it will cost $5,000 in order to ship ~$13,000 - $18,000 worth of graphite, which is clearly significant. On a per-tonne basis this comes down to ~$400, which is what the most efficient companies are estimating their operating costs will be.

In short, shipping will destroy profit margins for companies that are forced to do so.

This is good news for some companies and bad news for others regardless of what the aggregate supply picture looks like. Companies with graphite deposits that are remotely located are going to face margin pressures. Companies that have deposits located near competitors' deposits could also be at a disadvantage since the greater local supply could push prices lower as long-range shipping isn't necessarily viable. On the other hand, companies with no local competition that are located near commerce/industry centers are going to have pricing power and limited shipping expenses, meaning that they will be better positioned to succeed.

E. Final Thoughts On Graphite Supply

The flake graphite supply picture is actually not a pretty one for the bulls right now. Again, as we will see in a moment, supply outweighs demand even as several new projects are progressing towards production. There are, however, bullish factors such as the potential for a decline in the Chinese supply, but again the Chinese supply is predominantly amorphous graphite-which is uninteresting from a demand perspective.

With this being the case, the investment thesis is contingent upon three things. The first is a rise in demand from new technology sources such as those mentioned above. The second is a recovery in the refractory market, which is highly dependent on steel demand. The third company specific, and it is investing in companies that have the flexibility to operate in bullish and bearish scenarios, meaning that they have robust operating margins and the ability to market their respective products - be they concentrates or value-added end products - in a variegated market.

4. Graphite Demand

While investors are enthusiastic about the flake graphite market because they anticipate demand for spherical graphite for LI-battery anodes and graphene, the current flake graphite market comes from what they would consider boring markets dominated by steel. Not only that but the flake graphite market is currently oversupplied. As the following chart from Focus Graphite's presentation shows us, the demand for flake graphite is mostly in refractories, foundries and crucibles, and it is over 200,000 tonnes below global flake graphite supply.

A. Refractories

Junior graphite miners love to talk about soaring LI-battery demand and the amazing miracle that is graphene but refractory demand is hardly mentioned. There is a reason for this: nearly half of the world's refractory utilization is in the steel industry (see the following visual), and the steel industry is a boring market that is highly correlated to global GDP with no secular trend to get excited about.

As you can see on the following chart courtesy of the World Steel Association growth spiked as we came out of the global financial crisis only to level off to ~2% per year.

We can similarly look at a chart of the Market Vectors Steel ETF (NYSEARCA:SLX), which shows that over the past 8 years the steel industry has essentially generated no shareholder returns.

(Source: Vaneck)

Now it stands to reason that if the steel industry is growing at a very slow rate and if steel investments have generated no returns that an industry that gets a large amount of its customers from the steel industry - especially one that is oversupplied - makes for a poor investment. Nevertheless, if you recall the "graphite is a local market" discussion above this isn't necessarily a deterrent to graphite investing considering that local supply - once it exists - stands to replace Chinese supply. Again, this stands to benefit certain companies but there may not be an increase in prices as a result of Chinese supply being displaced.

B. LI-Batteries

With that being said there are aspects of the demand picture that make the graphite market extremely compelling. The most visible driver of graphite demand growth going forward is the LI-battery market.

LI-battery demand is growing rapidly, and it is fairly common knowledge among investors that demand for electric vehicles will drive LI-battery demand dramatically going forward. But I think many investors miss the graphite angle of this given that Tesla's (NASDAQ:TSLA) soaring share price is omnipresent in the mainstream financial media and given that the name of the battery highlights another commodity - lithium - that will also see rising demand. In fact, when Tesla announced its gigafactory last year, junior lithium mining stocks spiked (e.g. Western Lithium USA (OTCQX:WLCDF), Nemaska Lithium (OTCQX:NMKEF)). But according to Northern Graphite, LI-batteries contain 10-15 times more graphite than lithium and require 30-40 times more graphite than lithium in order to produce them. Another one of my sources told me that the former number is an over-estimate, but regardless there is plenty of graphite in LI-batteries. It should also be noted that it takes ~3 tonnes of graphite to produce 1 tonne of spherical graphite, which puts even more upward pressure on demand. Again, this ratio is smaller for larger flakes, and so an increase in demand for spherical graphite can generate a faster increase in demand for larger flakes than for smaller flakes.

Each hybrid car contains up to 10 kgs. of graphite - which requires ~30 kg. of graphite to produce, while each EV contains up to 70 kgs. of graphite, which requires over 200 kgs. of graphite to produce. That means if Tesla meets its 500,000 unit goal it will require ~100,000 tonnes of flake graphite, or more than 15% of the current supply.

That is just the tip of the iceberg, especially since there are several other players in the space (e.g. General Motors (NYSE:GM), BMW (OTCPK:BAMXY)). In fact, according to EV World, Total EV and hybrid (PHEV) sales are expected to reach 7.5 million units assuming national targets are met.

Even if only 20% of these are EVs with the rest being PHEVs, and even if only 75% of the total is met, 375,000 tonnes of graphite would be needed on an annual basis by 2020 just for electric and hybrid vehicles. As we've seen this figure is in-line with 2013 demand. If EV demand represents half of the total with all other metrics remaining the same then this figure spikes to 675,000 tonnes, or 112% of the current global flake graphite supply.

Demand for LI-batteries goes beyond the EV/PHEV market although that does appear to be the primary driver going forward as you can see below. The following visual projects LI-battery demand generally out to 2025.

Note that while there are other sources of LI-battery demand that the dominant source comes from electric vehicles.

Despite this exciting opportunity investors should note that we have to project a substantial amount of growth in the EV/PHEV space in order for us to cite this as a factor that will drive overall graphite demand significantly higher. If we couple this skepticism with the potential for supply increases, the idea that LI-battery demand is going to drive graphite prices higher is not a sure thing, and investors who wish to profit from this demand growth need to take into consideration whether their particular investments are positioned to profit from spherical graphite production. Since the information needed in order to make a decision on this point is largely proprietary basing a graphite investment on growing LI-battery demand is a risky proposition, but also a potentially lucrative one.

As a side note to this, investors should consider the potential for fuel cell demand. Fuel-cell powered vehicles aren't making headlines the way that hybrid and electric cars are but there are large automakers such as Toyota (NYSE:TM) that are commercializing fuel-cell powered cars. While a smaller market that is less predictable than LI-battery growth this market is potentially even more lucrative for graphite companies considering that fuel cells use more graphite than LI-battery anodes, and given the astronomical growth projections.

Nevertheless, the current market is small and like with any rapid growth prediction it should be viewed with healthy skepticism.

C. Graphene

Arguably, the most exciting potential demand source for graphite in the future is also the most theoretical - graphene. We saw earlier that flake graphite is essentially layered sheets of hexagonally arrayed carbon atoms. The individual sheets themselves are graphene.

The graphene market is currently limited given the difficulty of producing it economically and in mass, but laboratory test-work by companies such as BASF (OTCQX:BASFY), NanoXplore (partnered with Mason Graphite), Grafoid (partnered with Focus graphite), and even the new publicly traded Graphene 3D Lab Inc. ((OTCQB:GPHBF), (TSX.V: GGG)) demonstrates that this is, for lack of a better term, a miracle material. According to Grafoid, graphene is:

  • The strongest material ever measured
  • The stiffest material in the world
  • The thinnest material known to science
  • Highly flexible and incredibly light
  • The most impermeable material on earth
  • Energy efficient
  • Has record thermal and electrical conductivity

BASF believes that this could be a $7.5 billion market in 10 years with applications across all industries.

Assuming that this is the case there will be a significant amount of graphite demand for graphene production, and this can put upward pressure on prices. But at this point in time it is too difficult to actually model this into a graphite demand scenario. Furthermore, graphene's appeal will be in part the fact that such a small amount of it will have an enormous amount of utility (e.g. one tonne of graphene has the area of New York City) which means that a graphene revolution may not have a significant impact on actual graphite demand and prices. Those companies that are able to take graphite and commercially produce graphene are going to be the winners going forward. So Mason and Focus, which own part of NanoXplore and Grafoid, respectively, can potentially benefit from the development of this technology. But graphene companies are impossible to evaluate without insider information considering that their technologies are proprietary, and knowing which companies have the best chances of succeeding is just as impossible. Upon speaking with executives at both NanoXplore and Grafoid I was essentially told that "we have the best technology but we can't say why without revealing proprietary information." With that being said note that this isn't necessarily an either/or world, and any or all of these companies can succeed or fail at creating a commercially viable graphene production method.

Given the incredible number of qualifiers and unknowns in the graphene market it makes the most sense (from an investment standpoint) to simply ascribe 0 value to it until we get a clearer picture.

D. Two Demand Scenarios

Given the rapid growth projections that are put forth in the EV/PHEV market such growth needs to be viewed with a healthy level of skepticism. With that in mind it makes sense to look at two demand scenarios going forward. The first takes into consideration these lofty growth expectations that make the graphite market so promising. The second realizes that it is possible for a different technology to replace the current LI-battery technology in the coming years, which would undoubtedly kill the demand for graphite by battery producers. These are illustrated in the following chart, courtesy of Byron Capital via Mason Graphite.

As you can gather from information provided above these are arguably both optimistic estimates in today's market, which still seems to be stuck at just over 1 million tpa. Further, we saw the 2013 demand data from Industrial Minerals (courtesy of Focus Graphite), which shows that flake graphite demand is much lower than the estimated 600,000 tpa. supply, meaning that actual graphite demand is probably closer to 900,000 tpa. - 1 million tpa. With that in mind I have recreated the chart to reflect the same growth rates but starting at 1 million tpa. for 2015.

In either case, we can conclude that the bull case hinges on LI-battery demand.

5. Concluding Remarks

From what we've seen the bulletproof bull case for flake graphite is a myth, and we have the following evidence demonstrating this:

  1. The flake graphite market is currently oversupplied in the aggregate.
  2. The recent rise in flake graphite prices has generated a substantial amount of exploration, which can lead to a large supply increase over the next few years.
  3. Most of the world's flake graphite demand comes from refractories - a market highly correlated to the sluggish steel industry.
  4. The rapidly growing LI-battery demand is there, but it currently makes up a small amount of the market. In order for this to change, we need to see several years of strong, sustained growth. While many analysts are estimating this, the world can change rapidly in the next few years, which makes basing an investment thesis on this growth projection risky, or even speculative.

But this hardly means that we should expect a bear market. We have also seen that there are several bullish drivers:

  1. Several companies with pre-production stage graphite projects don't have the knowledge or the access to capital required to bring their projects into production or to put graphite on the market. They may also not be able to deliver graphite to certain markets if they can access any markets at all. This means that some of the anticipated supply simply won't be there. This is bullish longer-term.
  2. Supply out of China is at risk given the potential for mine shutdowns due to environmental concerns. More generally, Western end-users want secure supply sources outside of China.
  3. Graphite is taxed as it leaves China, which puts upward pressure on global prices.
  4. LI-battery demand is growing extremely rapidly. Fuel cell growth can drive demand as well.
  5. Graphene can be an incredible growth story that can change the face of the industry and generate graphite demand.

Given these observations, I would argue that the graphite market as a whole isn't exactly a compelling investment opportunity. If there were an ETF comprised of all of the junior graphite miners it wouldn't be a long-term buy. However, individual companies that are prepared to maximize their profits from the bullish factors while being the best prepared for the bear case are companies that offer compelling risk/reward propositions.

Disclosure: The author is long FCSMF, FLNXF. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Disclosure: The author is long FCSMF, FLNXF. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

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