Graphite Outlook: Challenging Market to Reward "Select" Juniors in 20142013 was an “extremely challenging year” for graphite juniors, House Mountain Partners’ Chris Berry recently told Graphite Investing News (GIN), but for “select graphite exploration and development companies,” 2014 may bring a turnaround. 

And, looking further into the future, 2015 and 2016 may finally bring the higher graphite prices that those in the industry have been waiting for.

2013 overview

Backing up a little, let’s take a look at the factors that made 2013 so hard for graphite juniors. Berry identified a few, including ”a mixture of financing difficulties, a ‘risk-off’ mentality, a general lack of understanding of how the entire graphite supply chain ‘works,’ opportunities for higher returns elsewhere and generally subdued results from graphite producers like GrafTech International (NYSE:GTI).” Combined, they left juniors “struggling to find their footing after previous market outperformance.”

That struggle has been reflected in the metal’s price this past year. While 2013 began with 90-percent large-flake carbon selling for $1,200 to $1,600 per metric ton (MT) and higher-purity 94- to 97-percent carbon flakes fetching between $1,400 and $1,800 per MT — above the 2012 average — by the time May rolled around, Simon Moores, data manager at Industrial Minerals, was saying that prices for the metal had bottomed out. Ron Struthers, publisher and editor of Struthers’ Resource Stock Report, followed suit in August.

Most recently, Moores told GIN that since the summer, graphite prices have “pretty much remained flat and inactive except for a slight fall in September. In June, the 80-mesh large flake was at a midpoint of $1,350 per tonne. Then in September it dropped a bit, so it was $1,275 per tonne.”

Other key events

Against that lackluster backdrop, a number of other issues reared their heads in 2013. While they did not have a sustained impact on graphite prices, they nevertheless help paint a picture of what happened this year.

  • Sri Lanka: Back in March, the Sri Lankan government announced plans to offer significant tax incentives and a liberal regulatory framework in order to encourage foreign investment. At the time, GIN reported the move as a “major boon to would-be graphite producers,” largely due to the opportunity to “pick low-hanging fruit using modern exploration techniques.” Saint Jean Carbon (TSXV:SJL), which recently signed a definitive agreement for 113 Sri Lankan lump graphite claims, is one company that’s moving in to take advantage of that opportunity.
  • Northern Ontario: 2013′s summer months were notable for graphite juniors’ rush to Ontario. Seemingly inspired by Zenyatta Ventures‘ (TSXV:ZEN) success at its Albany project, a slew of exploration companies — Ashburton Ventures (TSXV:ABR), Caribou King Resources (TSXV:CKR) and Benton Resources (TSXV:BEX), to name just a few — picked up properties nearby during that time.
  • Graphene developments: Of course, no graphite retrospective would be complete without a reference to “wonder material” graphene. And indeed, 2013 brought its fair share of graphene developments. Those include
    • Lithium-ion batteries: SiNode Systems, a start-up company out of Northwestern University, and a team from China’s University of Science and Technology are taking two different approaches to using graphene to improve the amount of energy that lithium-ion batteries can hold.
    • Quantum dots: Chemist James Tour of Texas-based Rice University found “simple methods” of reducing three kinds of coal into “microscopic discs of atom-thick graphene oxide” known as graphene quantum dots.
    • Condoms: The Bill and Melinda Gates Foundation gave US$100,000 to a research team from the University of Manchester so that it can develop a “super thin and durable” condom made of latex and graphene.

However, Berry told GIN that despite such developments, he still believes it is ”early days for graphene development” — as a result, “this ‘avenue’ of demand for natural graphite likely shouldn’t be relied upon.” For his part, he is keeping an eye on large-cap companies involved in graphene research, such as IBM (NYSE:IBM) and BASF (ETR:BASF). He is also watching ”a number of private enterprises to gauge the pace of graphene development and acceptance.”

2014 price outlook

At the moment, the main factor with the potential to move graphite prices is the fact that as many as 55 graphite miners and processors in the Chinese town of Pingdu have been ordered to stop producing flake graphite on environmental grounds.

Announced midway through December, the stoppage is expected to remain in place until June 2014, “or until the companies can prove an acceptable standard of environmental controls,” Moores said in a recent article. That’s significant because it is expected to take 10 percent of the world’s flake graphite supply — equivalent to 20 percent of China’s domestic production — off the market.

That supply loss, Moores notes, coincides “with the annual winter shutdown of China’s graphite producers,” which close their doors between November and February. As a result, the immediate impact is likely to be minimal, with ”[t]he strength of the demand rebound after February … dictat[ing] the future direction of prices.”

On a similar note, Berry told GIN that the news, combined with “an improving global macroeconomic picture,” could result in higher flake graphite prices in 2014. Speaking further on his outlook for next year, Berry said that while 2014 will “be another challenging year for graphite exploration plays,” he believes “we are at the bottom of the cycle.” From here, he sees company CEOs getting “more creative in bolstering their balance sheets” even as the challenging market environment reduces the number of graphite explorers out there.

However, “the real move higher in graphite likely won’t come until the 2015-2016 time frame” when “a mixture of steady demand for graphite runs head first into a China that continues to grapple with higher costs and environmental damage (hindering supply) and higher graphite prices attract financing opportunities (through both equity and debt) back into the space.”

Companies to watch

Of course, what many graphite market participants want to know is which companies are likely to succeed next year. Offering his opinion, Berry said that Focus Graphite‘s (TSXV:FMS) recent offtake agreement with ”an industrial conglomerate in China for up to 40,000 tonnes of graphite concentrate and value-added products over a 10-year period is hugely significant for not just Focus, but the entire junior graphite exploration market as a whole” because it shows “that there is room in the global graphite supply chain for junior mining companies.”

Berry also identified Northern Graphite (TSXV:NGC), Syrah Resources (ASX:SYR), Mason Graphite (TSXV:LLG), Energizer Resources (TSX:EGZ) and Flinders Resources (TSXV:FDR) as market leaders, commenting that the fact that they have “released more detailed information about their respective deposits which has given investors a clearer picture about which deposits are more attractive on a cash flow basis.” That’s important given how tricky it is to compare graphite deposits.

All told, 2014 looks set to be a very interesting year for the graphite market.

 

Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article. A family member of Chris Berry owns shares in Northern Graphite. 

Interviews conducted by the Investing News Network are edited for clarity. The Investing News Network does not guarantee the accuracy or thoroughness of the information reported. 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: 

Flake Graphite Prices Have Bottomed: Simon Moores

Simon Moores on Spherical Graphite and the Benefits of Exploration

Sri Lankan Graphite: A Major Opportunity Opens

Graphite Exploration in Northern Ontario