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Graphite Shortage Anticipated

Chinese Crackdown on "Graphite Rain" Polluters

Written by Briton Ryle
Posted May 5, 2014

While zero-emission, environmentally friendly, electric-powered automobiles are keeping American air clean, they are also partly responsible for millions of tons of pollution halfway around the world. The irony is difficult to miss.

As electric vehicles grow in demand, consumption of the mineral graphite used in electric power cells has been soaring as well. Each hybrid electric car uses about 22 pounds of graphite, while a fully electric auto uses about 110 pounds.

Most people’s contact with graphite is limited to the “lead” inside pencils. But if you live in China’s provinces of Shandong or Heilongjiang, where graphite is mined, you’ll come into contact with it in the air you breathe, the water you drink, and the vegetables you eat.

All that pollution is produced in the mining of graphite, a key ingredient in the electric car’s lithium-ion battery — the very thing that makes it clean.

In a surprising change of character, the government of China — notorious for its lax environmental standards — is closing down several graphite mines in an attempt to save its environment.

What will that do to the electric car industry? What will it do to the price of graphite? And might there be an opportunity here for investors?

Graphite’s Impact on Electronics

In addition to its critical role in electric vehicle power cells, graphite is also used in a variety of consumer electronics, from laptops to tablets to cell phones — anything that demands long-lasting and lightweight batteries.

It all stems from a scientific breakthrough in 2004 at the University of Manchester, when microscopically thin layers of graphite were used to produce sheets of graphene — a highly conductive, lightweight material made of densely packed carbon atoms.

But graphene doesn’t produce an electric charge; it’s just the best means of carrying one. We still need to add an element that produces the electricity, preferably something equally lightweight.

Enter lithium — one of the most “energetic” metals on the planet for the ease with which it gives off electrons and the third-lightest element in the universe behind helium and hydrogen.

The combination of lightweight, high charge-producing lithium with lightweight, high current-carrying graphene gives us the cutting edge in lightweight, long-lasting power cells: the lithium-ion battery.

It’s great for keeping the environment clean... after its parts are assembled together, that is. But digging up all those ingredients — especially graphite, which is carbon-based and related to coal — is causing severe environmental problems in and of itself.

Graphite’s Impact on the Environment

Remember the “acid rain” fallout in the Great Lakes region of the U.S. and Canada in the 1980s? Pollutants spewed from industrial smoke stacks would rise into the atmosphere, get zapped by the sun’s rays, mix with water vapor, and then rain back down to Earth with acidic toxicity.

China is experiencing a similar fallout from its graphite mining operations, known as “graphite rain” — a silvery dust that blankets farms and water reservoirs for miles around each mine.

Then there is the hydrochloric acid used to process graphite ore — a highly corrosive acid that kills fish, sickens humans, and destroys crops.

“The corn we grow is covered with black pollutants,” informs a farmer on the outskirts of the city of Jixi in the province of Heilongjiang. “One of my clients even rejected my corn, saying it held too much lead.”

Rivers that serve as the only freshwater supply for residents and farms will at times turn muddy from the falling graphite ash. Even after filtration through thick sponge mats, the water still comes out yellow. Samples showed mercury levels nine times above acceptable amounts, with lead content a horrifying 700 times the national limit.

After decades of criticism from scientists, environmental groups, and even other nations urging China to do something about its dense smog and toxic rivers, China’s government finally seems to be getting its act together.

Leading up to last December, China has already suspended as many as 55 graphite operations in Shandong province, which controls 10% of global supply.

And with dozens more graphite mines and processing plants scheduled for closure — some temporarily, others permanently — manufacturers are getting nervous.

The Road Ahead

The reduced supply of Chinese graphite could send prices rising by as much as 30%. Yet it’s not just the higher cost that is making electronics and automobile manufacturers nervous. The availability of graphite is as well.

German automaker BMW recently announced it has 11,000 orders for its fully electric four-door i3 sedan, while Chinese automaker BYD — backed by Warren Buffett’s Berkshire Hathaway — is gearing up to start production of electric buses in the U.S.

Tesla Motors' proposed auto factory alone may require as many as six new mines on top of current graphite production.

A spokesperson for Toyota, maker of the highly popular Prius electric hybrid, noted in an email that it is “important to maintain a stable supply of any raw material.”

“They can see demand growing,” Chris Darby, chief executive officer of Valence Industries of Australia, explains.

“They want certainty of supply, and they’re uncertain about the supply that’s coming out of China, or any of the other regions around the world.”

The demand for lithium-ion batteries is expected to increase graphite consumption by 52% to $41 billion over the next four years. Looks like a potential investment opportunity, doesn’t it?

Not quite.

Don’t Pencil Graphite onto Your Shopping List

According to the U.S. Geological Survey:

“Although natural graphite was not produced in the United States in 2013, approximately 90 U.S. firms, primarily in the North-eastern and Great Lakes regions, used it for a wide variety of applications... steelmaking, brake linings, foundry operations, batteries, and lubricants. These uses consumed 70% of the total natural graphite used during 2013.”

Some 60,000 metric tons were imported into the U.S. in 2013, the third-highest annual rate since 2008. The average price per ton of flake graphite in 2013 was $1,360 — the second highest on record, right behind 2012’s $1,370 per ton.

Meanwhile, the price for amorphous graphite at $433 per ton is the highest on record, some 27% higher than 2012’s $339 per ton. And the closure of mines in China could drive prices up another 30%.

But since the world’s largest producers of graphite are China (48%), Mexico (25%), Canada (17%), and Brazil (6%), investing in graphite producers will generally take you to the OTC (over-the-counter) market, where deals are not very transparent and are fraught with risk.

Most are low micro-cap and nano-cap exploration companies that are burning through cash at alarming rates. Though some have stakes in graphite operations around the world, you have to contact them directly to get any financial data.

In all honesty, the average investor really has little to gain from graphite companies.

Note these three companies below. As unattractive as they are, they’re pretty much your best choices, which doesn’t say much for the graphite market.

  • There’s Mason Graphite Inc. (OTC: MGPHF), a $42.98 million nano-cap that owns Lac Guéret graphite property covering an area of 11,630.34 hectares in Canada.

    Its $0.63 stock is trading at 2.19 times book value, with an operating cash flow of -$2.29 million during the trailing 12 months. Trading publicly since December 2012, its stock has ranged from $0.25 to $1.03, with a quarter million shares traded on an average day.

  • Focus Graphite Inc. (OTC: FCSMF) is a $52.31 million micro-cap engaged in the acquisition, exploration, and development of graphite, rare earths, copper, nickel, platinum, palladium, and base metal deposits. The company owns interests in the Lac Knife graphite deposit, covering 2,986.31 hectares, and in the Kwyjibo polymetallic Iron-Rare Earth Elements-Copper-(Gold) property, covering 6,278 hectares — both in Canada.

    Its $0.48 stock currently trades at 1.84 times book value, with operating cash flows of -$7.52 million over the past 12 months. Publicly traded since the start of 2011, its stock has steadily declined from a high of $1.80 in 2011 to as low as $0.25 late last year.

  • One of the few graphite companies posting its revenues is China Carbon Graphite Group, Inc. (OTC: CHGI), a $3.42 million nano-cap manufacturer of graphite-based products that are used by the automotive, chemistry, defense, and nuclear industries in China, Japan, South Korea, the U.S., the U.K., Spain, and India.

    Small though the company is, revenues ttm surpassed $9.53 million, some 278% of its market cap. Yet its operating margin is atrocious at some -356%, with an operating cash flow of -$2.74 million and a return on equity of -362%. Trading since 2008, its $0.13 stock was worth $3.50 in 2010 but has been below $0.50 since the start of 2013.

Considering the choices, the average investor has no safe way of capitalizing on any graphite supply shortages or price spikes caused by mine closures in China.

The best way to invest in the growing demand for electric cars is just to buy the car makers themselves. Even a 30% hike in graphite prices would add only a mere 5% to the cost of the batteries and probably not even 1% to the price of the car.

Until next time,

Joseph Cafariello for Wealth Daily

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