A few years ago, graphite was one of the hottest sectors in the resource space. Among other factors, concerns about Chinese supply and anticipated demand from lithium-ion battery megafactories had sparked a huge amount of interest in the metal.

Graphite has since fallen from favor a little. The market was fairly quiet in 2016, and it’s likely that 2017 will not be a breakout year. Nevertheless, the long-term outlook for graphite remains positive, and some savvy investors are entering the space now in anticipation of future gains.

To help investors who are considering investing in graphite get a better understanding of the space, we’ve put together a brief overview of what graphite is, what’s going on in the market today and what the future could bring for the metal. Read on for insight on those topics and more.

Graphite investing: What is graphite?

Graphite has a layered, planar structure, with carbon atoms arranged in a honeycomb lattice. It’s thermally stable and can conduct electricity, but is also valued for its self-lubricating and dry-lubricating properties. There is more than one type of graphite, with the three main kinds being flake, amorphous and vein. All are important for different industries, but currently flake graphite is getting the most buzz.

Flake graphite has become especially important since early 2014, when Tesla Motors (NASDAQ:TSLA) CEO Elon Musk announced that his company would be building a lithium-ion battery gigafactory. Graphite is used in lithium-ion battery anodes, and the announcement immediately sparked predictions of how much of the metal the gigafactory might require.

Aside from lithium-ion batteries, flake graphite can be used in pebble-bed nuclear reactors, as well as in the refractory and steel industries. It’s also used in fuel cells and vanadium-redox batteries. Amorphous graphite is used in the refractory industry as well, and also in mechanisms like brake linings, gaskets and clutch materials. Vein graphite finds a home in advanced, thermal and high-friction applications.

Graphite investing: Supply and demand

As mentioned, flake graphite is currently gaining a lot of attention as graphite market participants try to guess how much impact facilities like Tesla’s gigafactory — and other lithium-ion battery megafactories — will have on graphite demand.

While it’s tough to pinpoint exactly how much graphite those megafactories will require (and when), it’s safe to say that they will need a lot. Some market watchers have provided estimates, and Benchmark Mineral Intelligence is one firm that has written extensively about the topic.

For now, however, much of that demand has yet to materialize. Many companies that rushed into the graphite space a few years ago have not yet secured offtake agreements for the material they plan to produce. As a result, some are stalled in the exploration and development phases; it will be difficult for them to move forward until end users start locking down supply.

In terms of supply, the majority of graphite comes from China. The Asian nation produced 780,000 MT of the metal in 2016, far ahead of India, the world’s second-largest producer.

That said, in recent years there have been some concerns about the security of Chinese graphite supply. Back in 2013, the Chinese government began making an effort to streamline graphite production in the country, with part of the process being to take polluting producers back online. While some were expected to come back online, weak graphite market conditions have hampered that process.

The upshot is that graphite demand appears set to rise substantially with no guarantees that producers will be able to keep up. Prices remain subdued, but may start to rise as buyers become more concerned about impending megafactory demand.

Graphite investing: Prices

Speaking of prices, how much does graphite cost? Unfortunately, it can be difficult to get exact figures. That’s because unlike gold, silver and other more common metals, graphite is not traded on an exchange. Instead, graphite miners will typically set up offtake agreements under which end users agree to buy a specific amount of graphite over a particular period of time.

That setup comes with a variety of issues for graphite companies and market participants alike, but for many investors the key concern is that they can feel like they’re operating blind. After all, it’s hard to get an idea of whether a company is putting out good results without having an idea of how much it will be able to sell its product for.

Luckily, some industry experts are looking to increase transparency in the graphite sector. Benchmark is one firm that provides accurate and up-to-date information on graphite pricing.

Graphite investing: How to invest

While the graphite market is certainly compelling, it can be tricky for investors to gain a toehold in the space. As noted, graphite is not traded on an exchange, meaning that investors can’t get exposure to the physical metal. What’s more, it isn’t easy to invest in graphite-producing companies — most of the largest producers are in China, and in many cases are privately owned or only listed on Asian exchanges.

For that reason, many investors choose to invest in graphite exploration and development companies. While some have struggled to move forward for the reasons discussed above, there are still plenty that have good projects and are making progress.

To help investors decide which graphite companies to invest in, we’ve put together a two-part list of graphite companies trading on the TSX and the TSXV. Click here to see the first part of the list, which features TSX- and TSXV-listed graphite companies with market caps of more than $15 million, or click here to see the second part of the list, which features TSX- and TSXV-listed graphite companies with market caps of less than $15 million.

 

This description was last updated on April 10, 2017.

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