Like diamonds, graphite is one of strongest and hardest materials found in the natural world, and its value is about to skyrocket due to 2 major catalysts…
It’s often referred to as the highest grade of coal…but you won’t see it burning in any coal-fired plants.
Graphite is an allotrope, or another form of carbon. But unlike its diamond sibling, graphite is able to conduct electricity, instantly giving it far more usefulness than simply putting a rock on one’s finger.
Besides its common use in “lead” pencils, graphite has numerous applications in tech.
Natural graphite is mostly used for refractories, batteries, steelmaking, expanded graphite, brake linings, foundry facings and lubricants.
In particular with batteries, there’s been a growing demand for graphite used in electric vehicles.
See, the majority of mass-market electric cars currently utilize lithium-ion batteries. And within these batteries, a high amount of graphite is incorporated.
On average, approximately 22 pounds of graphite are used in hybrid electric cars, while 110 pounds of it can be found in fully electric ones.
With the popularity of electric vehicles on the rise, the US has become a major market for graphite.
That’s due to the fact that no graphite is produced at all in the US.
According to the USGS, the world’s largest producers of graphite are China (48%), Mexico (25%), Canada (17%), and Brazil (6%).
Some 60,000 metric tons were imported into the US in 2013, which was the third biggest year since 2008. This resulted in an average price per ton of $1,360 — the second highest price of all-time, following 2012’s record breaking price of $1,370 per ton.
According to the international coalition Electric Vehicles Initiative (EVI), there were over 180,000 electric vehicles on the road in 2012 — some 71,000 of which were in the US alone.
The EVI established a 20/20 goal, which was to get 20 million electric vehicles on the road by the year 2020.
If the US maintains its 38% market share, that would mean some 7.6 million electric cars in six years’ time.
Even if the EVI is successful in reaching half that amount, the industry is going to require a lot more graphite — a demand increase that is all but certain to cause prices to rise.
Another major catalyst that could send graphite prices soaring is production in China — or lack thereof…
The Chinese are responsible for most of the global supply of graphite.
However, it’s been reported that graphite-mining activities have been responsible for air and water pollution as well as damaged crops. This has raised the health concerns for those living near these processing plants.
Some environmentalists have even blamed graphite production for various cases of lead poisoning, acid spills, and “unbearable smog” in the country’s bigger cities.
In fact, due to environmental and health concerns, the Chinese government has halted production of graphite at various mines throughout the country.
At one point last December, 55 graphite operations were suspended in the Shandong province — a region that controls 10% of global supply.
With further plans to shutdown additional plants either temporarily or permanently, China’s environmental efforts could affect as much as a third of global graphite output.
Simon Moores, a London-based senior analyst at Industrial Minerals Data sees China’s tougher stance having the potential to push graphite prices up by as much as 30% this year.
What does this mean?
This is shaping up to be a bullish time for the graphite market.
The problem is, there is a great deal of risk with investing in graphite-related stocks — almost all of which are listed on the pink sheets.
The majority of them are micro-caps selling for less than $1 per share and not turning any profits.
So instead of playing graphite directly, I’m urging investors to consider another way: in the battery manufacturers themselves.
According to Brian Warshay, a New York-based analyst for Bloomberg New Energy Finance, the same 30% spike in graphite prices is likely to push up the price of EV battery packs by 5%.
But as input costs rise, battery manufacturers should be able to raise prices to keep up. US inflation is 2%.
Furthermore, the demand for lithium-ion batteries, which use graphite, will drive up the total value of the rechargeable battery market by 52 percent to $41 billion by 2018, according to Cosmin Laslau, a Boston-based analyst at Lux Research Inc.
Battery makers include Sony Corp., Panasonic Corp., Samsung Electronics Co. Ltd. and NEC Corp.
Meanwhile, Tesla Motors (NASDAQ:TSLA) plans to invest $5 billion building a factory to produce battery packs for its luxury electric cars. The project, dubbed the “gigafactory,” would be the world’s largest such operation.
Graphite use may be on the rise, but battery manufacturers will be the better long-term play.