Winter conditions prolong flake graphite production slowdown; prices slide as suppliers offload inventories
First published 8 May 2015 in Benchmark Mineral Intelligence's Newsletter. Get it first; Sign up at www.benchmarkminerals.com (bottom right).
Much of China’s flake graphite production remains offline following a prolonged suspension of operations in many areas due to severe winter conditions.
While the closures have eased pressure on inventories that accumulated throughout 2014, weak demand and the strengthening of the US dollar led to lower prices over recent months.
A gradual increase in output is expected towards the end of Q2, which threatens to push the market into further excess over the short-term, with demand showing few signs of an immediate upturn.
Benchmark Mineral Intelligence expects tighter supply conditions later in the year, however, with China likely to ramp up its consolidation programme as the market moves towards recovery.
Although industrial demand is unlikely to instigate a recovery in demand in the near-term, greater consumption from the battery sector will prevail later in the year as major battery suppliers expand.
This growth in the emerging hi-tech markets for flake graphite will increase the chances of a supply squeeze, particularly for grades which are also used in existing industrial applications.
As this unfolds, Benchmark expects China’s raw material exports to fall as they develop downstream industries domestically. When the effects of this are felt, prices are likely to rebound in the latter stages of the year.
The changing role of China
China’s evolution from low-cost raw material supplier to downstream producer will be critical in fuelling a recovery in the flake graphite market.
In 2014, a blueprint for the consolidation of the market was laid out leading to the temporary suspension of operations in Shandong and Heilongjiang provinces and the closure of some of the most inefficient mines in these areas.
Although mines and processing plants have now been given permission to begin production again, weak market conditions saw many reduce output prior to the winter season, with the majority of miners yet to bring capacities back online.
As regional governments put further emphasis on the development of value-added industries domestically, demand from these markets will increase and supply availability to the rest of the world will fall.
If this coincides with greater demand from areas such as Japan and the US, where significant battery development projects are underway, there could very quickly be a spike in the market.
With junior projects being slowed by the decline in exploration finance and the few new market entrants, as yet, still incapable of supplying consistent product on a large scale, the market could become increasingly turbulent into 2016.
Simon Moores
Managing Director Benchmark Mineral Intelligence
London
TON Price at posting:
35.5¢ Sentiment: Buy Disclosure: Held
