Graphite stocks look oversold as they diverge from their lithium cousins
It’s been a tough year for investors exposed to graphite, the commodity which is the essential “other side” of a lithium-ion battery with prices for the two materials disconnecting: lithium up and graphite down.
Whether the divergence can continue for much longer is an interesting question for investors because both are exposed to the same end market, batteries used in the booming market for electric vehicles (EVs), and static electricity storage systems.
It’s the common end market which leads to a critical question: has graphite fallen too far with a price recovery in the wings?
If that is the case then it might be time to brush up on the stocks in the downtrodden graphite sector.
Stocks in focus
Stocks such as Talga (ASX: TLG) with its promising Swedish graphite project look promising despite a fall of 15c (10%) to $1.26 since the start of the year, along with Ecograf (ASX: EGR) down 8.5c (40%) to 13.5c, International Graphite (ASX: IG6) down 7c (27%) to 18c, Evion (ASX: EVG) down 4c (55%) to 3c and one-time leader of the pack, Syrah Resources (ASX: SYR) down $1.42 (69%) to 60c.
The contradictory performance of lithium and graphite, one up, one down was clearly demonstrated at the annual Diggers and Dealers mining conference in Kalgoorlie earlier this month with lithium stocks starring while graphite stocks were stuck in the doghouse.
There are many examples of the lithium vs graphite difference but the best is through a comparison of stock market performances of leaders in the two sectors, a financial drag race between Pilbara Minerals (ASX: PLS) and Syrah Resources.
Since the start of the year lithium miner Pilbara has seen its shares rise by 30%, up from $3.62 to $4.72.
Graphite producer Syrah, as mentioned earlier, has dropped by 69%.
Understanding the commodity markets
Using share prices as a guide to the lithium and graphite markets is surprisingly important because one of the problems shared by both materials is that there is not a standard market for either commodity with multiple products sold in a variety of grades and differing chemical composition.
If you think it’s illogical to compare lithium with graphite then try comparing lithium with lithium because there are multiple versions of the same commodity, firstly as unprocessed ore (grading about 1% lithium), up to part processed spodumene (6%) or one of the early-stage lithium chemicals (hydroxide or carbonate). Graphite has an equally confusing mix.
Go back 12-months and it seemed to be a much simpler situation with the world (except China) emerging from two years of Covid restrictions and consumers ready to party, splurging on big ticket items such as international travel or a new EV.
Lithium roared back to life in late 2021, rocketing up by 270% from around US$22,000 a tonne for lithium carbonate to US$82,000/t by the end of 2022 – before easing back to around US$35,000/t.
Even at the latest price, lithium miners are hugely profitable which is why it has become the top performing commodity in the world today driven, ironically, by the rush to be ESG (environment, social and governance) compliant.
Graphite’s unpredictable journey
Graphite, in theory, should be following lithium but it hasn’t as Syrah demonstrated in its June quarter report which revealed a weighted average price for its natural graphite rising by 4% over the past year from US$662 a tonne to US$688/t and less in the first three months of the financial year when the price fell to US$636/t.
There are reasons to explain the difference between the commodities which end up sharing the insides of a long-life rechargeable battery in a Tesla.
One explanation is that the lithium market today is dominated by batteries with limited earlier applications such as specialty glass, grease, and even medicine.
When battery demand first exploded about three years ago there wasn’t a deep lithium market from which to draw supply, whereas graphite already had a deep market which meant there was material to draw on before new sources had to be developed.
So far, so good, though there is another glitch in the graphite story and that’s synthetic graphite made from oil which is popular with battery makers in China.
It’s the synthetic material which has proved to be extremely cost competitive for much of the past 12-months as the price of oil fell from US$102 a barrel at this time last year to US$71/bbl in early June.
Since then, the oil price has been trending up, reaching US$85/bbl earlier this week and possibly heading back to US$100/bbl if Saudi Arabia and Russia continue to squeeze supply.
The investor’s dilemma
All of that background information can be treated as an explanation (or excuse) for graphite not delivering a “lithium lookalike” performance, but it also means that there are two factors working in favour of companies mining graphite.
The first factor in favour of the miners is that graphite demand will continue to rise, lock-step with lithium, as governments force car and truck drivers into politically (if not financially) correct EVs in the name of ESG regulations.
Boiled down, every investor understands (or should understand) the case for lithium. It might rise and fall in the perpetual commodity battle of supply v demand, but the trend for the foreseeable future (say 5-10 years) is for demand to overpower supply, underwriting a high price.
Graphite, as discussed is a little different because there is already a well-developed supply chain feeding long established industries which will continue to consume the material as demand from battery makers rises and eventually takes top spot.
The graphite sell-off has hurt investors who had been promised a boom year in ’23 but it could be time to take a fresh look because the case for graphite might have been blackened but it hasn’t been killed and the entry price today is a lot less than last year.