Graphite Outlook 2016

Tesla and lithium-ion batteries continue to play a significant role in the graphite space.

outlook 2016

Since 2014, Tesla Motors (NASDAQ:TSLA) has been a contributing factor to the graphite industry despite a rocky 2015 for the critical metal due to low demand and high supply. 

Still, interest in the metal has taken off due to the role it plays in lithium-ion batteries. According to a recent market report published by Persistence Market Research called “Global Market Study On Graphite: Battery Segment to Witness Highest Growth by 2020,” the global graphite market is expected to reach $17.56 billion by 2020.

With the usage of graphite increasing thanks to lithium-ion batteries, which can be used in laptops, electronic devices and electric cars among many other things, some analysts see the graphite space continuing to hold strong.

Graphite supply and demand

In terms of production, China is the world’s largest graphite producer, with an output of 780,000 MT in 2015, according to the US Geological Survey. Overall, China produced 65 percent of the global supply of graphite, but it also consumed 35 percent. The US Geological Survey also reports that worldwide demand for graphite has steadily increased since 2012.

That being said, Benchmark Intelligence reported in May 2016 that demand for the critical metal used as anode material in lithium-ion batteries will increase by at least 200 percent in the next four years.

By 2020, Benchmark estimates that at least 360,000 tonnes of medium flake graphite will be needed for the spherical material, which is almost double the flake concentrate market in 2015.

Chris Berry of House Mountain Partners and the Disruptive Discoveries Journal spoke with the Investing News Network (INN) at Zimtu Capital’s (TSXV:ZC) Vancouver Commodities Forum (VCF) earlier this year about rising graphite demand. In the interview, he said that while 70 percent of graphite demand comes from the steel business and suffering due to over capacity, he does see higher graphite demand in the future once steel’s overcapacity levels out.

However, in July the European Union filed its third lawsuit against China, claiming the country’s restrictions on exports of raw materials favoured the Chinese industry. Of course, graphite was among one of the resources, but the claim also included cobalt, copperlead, and so on. If a satisfactory agreement is not reached within 60 days, the EU can request a dispute settlement panel through the World Trade Organization.

It will be interesting to see how the outcome will impact China’s exports of raw materials, including graphite.

Going forward with graphite

INN also had a chance to speak with Jon Hykawy of Stormcrow Capital at VCF wherein he commented that the graphite market remains “very strong on the battery side.”

“It remains robust in terms of demand in some of the technical aspects,” he said in the interview. “Obviously, it’s weak still on the steel side and on the anode side because of the weakness in metals, like aluminum metals, like steel.”

Looking to the future and the potential for graphite taking over lithium-ion batteries, Hykawy said  the synthetic gtraphite that’s used in automative batteries is starting to make its way to natural for cost-saving purposes.

“I don’t think there’s any reason for it to go the other way. In fact, there’s good research that tends to suggest that natural graphite in a lithium-ion battery actually increases the energy density of the cell, makes the battery better,” he said.

Similarly, Berry said what companies plan to do “in terms of spherical graphite is a much more interesting story going forward.”

 Stocks to watch

  • Focus Graphite (TSXV:FMS); The company is focused on producing products for the lithium-ion battery market from its 100 percent owned Lac Knife Graphite Project, which has high grade natural flake graphite deposits. Year-to-date, Focus Graphite’s shares have risen 84.62 percent to $0.12;
  • Northern Graphite (TSXV:NGC); Year-to-date, Northern Graphite’s shares have increased 77.27 percent to $0.39;
  • Alabama Graphite (TSXV:ALP); While Alabama Graphite’s shares are down 14.71 percent to $0.145 year-to-date, Berry said they were one graphite stock on his watchlist. “They’re not just aiming to be a graphite producer but what they’re really looking at doing is going further up that supply chain and producing spherical graphite for specific customers,” he said.

When it comes to looking to invest in the graphite space, Hykawy stated that the one thing that will matter the most is production cost.

“Any company in this space that’s going to succeed is going to have to be able to produce at a cost that makes them entirely competitive with the Chinese,” he said.

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Securities Disclosure: I, Jocelyn Aspa, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network.

Focus Graphite and Alabama Graphite are clients of the Investing News Network. This article is not paid for content.

 **The article below was originally published in December 2015. Please scroll to the top of the page for the most recent information**

2014 was undeniably the year of Tesla Motors (NASDAQ:TSLA) for the graphite industry, but as 2015 draws to a close it seems market participants are starting to look beyond the hype. 

That’s largely because despite excitement about lithium-ion battery megafactories from Tesla and other major companies, 2015 was still a tough year for graphite. The metal has been beaten down by low demand and high supply — both due in large part to issues in China — and as yet it still seems as though a recovery is a ways out.

To learn more about what happened in the graphite space in 2015, and what may be in store in 2016, the Investing News Network (INN) reached out to industry experts including Andrew Miller of Benchmark Mineral Intelligence. Read on to see what he and others had to say about the the market.

2015 graphite themes: Low demand, high supply

As mentioned, low demand and high supply were key issues in the graphite space in 2015, and China was at least partially to blame on both counts.

Summarizing the situation, Miller said that because the graphite market is “still driven by industrial end markets, [its] direction … in 2015 was always going to be dictated by developments in the emerging economies. With China’s industrial output underperforming on expectations at the start of the year, the decline was a bit sharper than we expected, but the trend was as we imagined.”

He added that lower demand out of China was “compounded by price competition from China, which has put a real strain on higher-cost producers.” That said, he pointed to “specialist and value-added grades, such as expandable and spherical graphite,” as areas of optimism.

On the whole, industry executives appear to agree with that summation. Case in point: Blair Way, president, CEO and director of Flinders Resources (TSXV:FDR), told INN that one of the main challenges in the graphite industry this year was “the reality [that] graphite demand is down and supply is very high.” Similarly, Greg Bowes, CEO and director of Northern Graphite (TSXV:NGC) said that he expected a weak market in 2015, “and that is pretty much what happened.”

That said, even with China dampening both graphite supply and demand, 2015 wasn’t all doom and gloom. Most notably, many are still positive about impending demand from Tesla’s gigafactory and other megafactories.

For instance, Simon Marcotte, vice president corporate development at Mason Graphite (TSXV:LLG), told INN that while 2015 was indeed not the easiest year for graphite, “when compared with other commodities (like iron ore), graphite didn’t get hit as much.” He believes that’s partially because “the growth in the battery sector is already very meaningful to the graphite market and is just beginning to see very strong growth.”

On the same note, Bowes said, “in this economic climate there is very little growing at +20 percent per annum as lithium-ion batteries are … this growth will continue, and electric vehicles, grid storage and replacement of lead starter batteries is still to come.”

2016 graphite outlook: Solid prices, megafactory deals

Looking forward to 2016, it seems as though positivity in the graphite space is only set to increase.

According to Miller, while industrial markets will continue to dictate graphite demand in the short term (making developments in Europe, North America and emerging markets important), the defining story of the year will be growth in battery-grade graphite. “The emergence of this new industry will solidify next year and start to gather real momentum, driven by electric vehicle uptake and construction of lithium-ion battery megafactories,” he said. Overall, that should lead to “more solid” graphite prices in 2016.

Miller also believes that those megafactories will need to “start securing volumes in the new year” — in other words, they’ll need to start signing supply deals with graphite companies.

Graphite market watchers have been waiting for that to happen since Tesla’s gigafactory was first announced last year, and speculation about which companies it and other megafactory builders will team up with has only intensified since the company signed two conditional lithium supply deals earlier this year.

One of those deals is with Bacanora Minerals (TSXV:BCN,LSE:BCN) and joint venture partner Rare Earth Minerals (LSE:REM), while the other is with Pure Energy Minerals (TSXV:PE). They both excited lithium market participants because they are with juniors that are not yet producing; for that reason, they’ve raised hopes that Tesla will sign graphite supply deals with graphite juniors. However, it’s worth noting that the lithium deals are light on details, and have faced other criticism from analysts as well.

It’s also worth noting that lithium-ion batteries require both natural and synthetic graphite, meaning that megafactory builders will need to source both. As Miller explained, “how this plays out in terms of natural spherical vs. synthetic will tell us a lot about how demand from this sector will develop in the coming years.”

He suggested watching BTR, China’s leading spherical graphite producer, for clues on which way the pendulum will swing. “This company will be a bellwether for what happens in the battery sector [in terms of] consumption of natural graphite vs. synthetic.”

Investor takeaway: Don’t be too hasty

While the idea that Tesla and other megafactory builders may start signing graphite supply deals in 2016 is certainly exciting, market participants are aware that such deals won’t necessarily bring the market out of the woods — at least not immediately.

On that note, Miller said that Benchmark sees “significant new supply” entering the graphite market in the next 18 months — Syrah Resources (ASX:SYR) will be one to watch on that front — and noted that the firm’s biggest concern about the space is that this new graphite supply “will enter the market before there are suitable markets to consume this new material.”

Way echoed that concern, commenting, “the greater graphite investment market is promoting the exact opposite of the reality — that there is this huge demand, and mega graphite projects planning to sell up to 300,000 tons a year is possible.” (More of Way’s thoughts on graphite supply and demand can be found in this interview).

Miller did provide some hope, however, noting that graphite juniors have been doing “a lot of work … in building networks of potential consumers and securing offtake agreements in 2015, and we expect that to continue.” He added that it’s also possible that the production of more flake graphite could lead to it being used in other markets, which could be “a big development in the industry’s structure.”

Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article. 

Editorial Disclosure: Flinders Resources is a client of the Investing News Network. This article is not paid-for content. 

The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

Related reading: 

Graphite Outlook 2015: Tesla and LG Chem to be ‘Catalysts for Everything’

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