40 SHADES OF GRAPHITE

Much attention has been given to lithium in recent months for the 'white oil's' importance to the creation of lithium-ion batteries, yet investors ignore the importance of graphite at their peril.

A Tesla car 'Model S' sits in a dealership in Berlin, Germany, November 18, 2015


Graphite is a primary but often overlooked ingredient in lithium-ion batteries, and may have first been discovered by shepherds in 16th-century northern England, who used it to mark their sheep.

Given the importance of wool in closing off the commons and the rise of modern capitalism, it's an ironic twist that 16,000km and 400 years later, these shepherds' descendants are now developing the graphite-powered lithium ion batteries that may yet save capitalism from itself.

As Timothy Mitchell shows in his groundbreaking work, Carbon Democracy, long-held assumptions about the possibility of endless economic growth were contingent upon the existence of inexhaustible carbon.

But what happens when the oil, coal, and natural gas run dry?

In the absence of extraterrestrial Potosi mines or subterranean American continents, many see battery-stored solar- and wind-powered energy as the next great hope to heat and electrify the homes and vehicles of the future.

Much has been written about lithium's potential role in achieving this carbonless future, not to mention its vast mines in Chile, Argentina, and Bolivia—and the plans of Tesla's Elon Musk, the metal's most prominent champion since Carrie Mathison.

The allure of white oil

Lithium's newfound popularity has certainly been reflected in its price, which has more than quintupled since 2002, from USD1,590 per metric ton to USD9,100 today—a trend that can't solely be blamed on the American medical industrial complex.

Riding on such news as Volvo's decision to produce only electric vehicles (EV) by 2019 and the Australian government's various partnerships with Musk, the metal's stock soared 18% between 2016-2017 alone.

This has already led to fears regarding Lithium supplies in the long term. But for the short term, these are boom times for South America's southern cone “lithium triangle," which runs between the three Andean nations of Argentina, Chile, and Bolivia.

Chile's state-owned Codelco, the world's largest copper producer, set up a subsidiary in April called Salar de Maricunga to focus solely on lithium production, and Stocks of Galaxy Resources, an Australian mining company with major lithium projects underway in Argentina, have tripled since late 2015.

Far less, however, is being said about global stocks of nickel and graphite, the important but often overlooked ingredients that go into making lithium-ion batteries and other electronic devices.

More than a pencil

While nickel comes a dime a dozen, with extensive deposits in the Philippines, Russia, Canada, Australia, Brazil, New Caledonia, China, Indonesia, and Cuba, the mining and consumption of graphite has been more limited.

As things stand, China controls 70-80% of graphite production in the world.

That does not mean that it's in short supply, only that if pinched it could have a serious bottleneck effect. If anything, contemporary worries about graphite are that it's under-valued, not over.

After all, the metal's predominant use is in steel, an alloy whose cost fell by more than 20% between 2014 and 2016 alone—always a telling indication of the state of the global economy.

Yet if the indomitable Musk is to be believed, graphite will play a far more important role in the future of the global economy than many currently assume.

With graphite the anode (the electrode that loses electrons, i.e. the negative end of a battery) and nickel the cathode (the electrode that gains electrons, i.e. the positive end) in lithium-ion batteries, Musk has brushed off fears over the vulnerability of lithium supplies by ensuring people that, while needed in the end product, lithium is merely “like the salt on the salad" and accounts for just 6% of the total volume of the battery.

This makes nickel and graphite the cucumber, tomato, cheddar, and ranch.

Indeed, three times more graphite is needed than lithium to make lithium-ion batteries, whilst almost 10kg of graphite go into every hybrid vehicle and 90kg into Teslas.

Though graphite has only recently rebounded to 1980s prices of around USD1,300 per metric ton—they had plunged as low as USD600 in the 1990s when China dumped product on the market to boost its foreign currency reserves—its cost has risen by an average of 5% per year for over a decade now.

Riding the grey-green dragon

Part of this is because people are beginning to appreciate its huge potential for an impending 'green economy' that techno-optimists hope will replace the carbon one: in addition to energy storage and electric vehicles, not to mention less eco-friendly uses such smartphones and laptops, it is also a key component in photovoltaics (PV) solar panels, fuel cells, and nuclear reactors.

It is also one of the most required inputs for Tesla's highly anticipated gigafactory in Nevada, which is expected to require over 42,000 tons of graphite anode material annually. And while Tesla plans to build three more gigafactories for electronic car manufacturing post-2020, plans are afoot by competitors to build 15 more elsewhere in the world.

When these materialize, they will represent nothing less than a revolution in the use (and cost) of graphite.

As things stand, the opening of one gigafactory alone will double the total global demand for battery-grade graphite (which is roughly three times more expensive than steel-bound graphite, or USD3,000/ton).

Though the steel market currently grabs about 75% of demand for the flaky stuff, this will hardly be the case in five, much less 10, years' time.

Once Tesla's gigafactory is off the ground—not to mention those in Germany, South Korea, and China—demand for battery-grade graphite could easily overtake demand for steel-grade, both driving up the price and qualitative barrier to entry along with it. As such, industry insiders predict as much as a tripling in the demand for the battery-grade material by 2022 alone. Given that electric vehicles are expected to shoot from 0.2% of total new car sales today to 54% by 2040 should have more than pencil manufacturers trembling in their Mephistos.

What's more, Beijing has also begun hoarding the stuff—both by consolidating (i.e. closing) old mines and slapping a 20% export tax on graphite to preserve its domestic supplies.

Indeed, given that the US has no known reserves, and Canada's sole graphite mine is on the verge of depletion, the mineral is considered critical to national security for any major power; whoever can break the Chinese near-monopoly is likely to reap huge rewards.

The southern curtains are drawn

Though dwarfed by China, the world's other biggest graphite producers represent a near-perfect roll call of who's who in the 21st century—practically in order—with India in second, Brazil in third, and Russia in sixth place in terms of total production.

Yet this seeming diversity still masks a certain geographical trend: the current Sino-centric nature of known reserves.

Not only is the world's fourth-largest producer North Korea, a staunch ally of China, but fully 80% of India's known reserves lie in isolated, mountainous, and exposed frontier provinces on the border with China.

Indeed, a full 43% of Delhi's reserves lie in Arunachal Pradesh, which lies on the border with Chinese-occupied Tibet and the northernmost tip of Myanmar, while another 37% are in Jammu-Kashmir, sequestered between north Pakistan and the restive Chinese province of Xinjiang.

Taken together, these are two of the least accessible and politically unstable parts of the planet.

Since Canada, the world's fifth-largest producer of graphite, it reputed to be on its last known reserves, countries like Russia, Brazil, Mexico (7th), Ukraine (8th), Turkey (9th), and Madagascar (10th) are each trying to pick up the slack.

Yet few seem up to the task of meeting future Muskian demand.

Mexico, for example, has been a major producer since the 1890s, but its production has fallen off a cliff in recent decades, from 43,000MT in 1998 to merely 5,000MT in 2009—largely as a result of its lower-grade flake graphite creating less American demand.

Requiem for the Red Island

This leaves the market wide open to newer entrants such as Madagascar who, according to miners operating in the country, is ripe for the picking.

With estimated measured and indicated reserves of 100 million tons, the world's fourth-largest island is also thought to possess a disproportionately high proportion of high-purity and large flake graphite—the kinds which fetch far and away the highest price.

For a country whose GDP per capita hovers around USD1,500, making it the 11th poorest country in the world, graphite also offers a key opportunity to redress the gaping hole between the country's vast untapped resources and its post-colonial failure to even extract, much less equitably distribute, them.

According to Canada's NextSource Materials Inc., the country has proven reserves of 14 million tons of 7.0% carbon graphite and 22.4 million tons of proven and probable reserves of 7.02% C (before purifying it, the ideal rate of carbon is between 6-10%).

One reserve being developed by NextSource Materials Inc is the Molo Deposit, located near the southernmost tip of Madagascar. This asset alone has over 100 million tons of graphite, making it the third largest on the planet. With a 100-year mine life and lying near the top of the earth's surface, one can practically scrape it out the ground with a garden trowel.

In phase one alone, which NextSource Materials Inc. expects to be fully operational by summer 2018, Molo will produce 17,000 tons of 98% carbon large flake, of which 5,000-7,000 tons will be used in the battery market. By phase two they expect Molo to yield a total of 50,000 tons. Given that Tesla's entire annual battery-related graphite consumption is 5,000 tons, the opening of Molo is a potential milestone.

Elsewhere on the island, Australia's Bass Metals ASX is rapidly expanding its operations and has plans to ramp up production to 20,000 tons/year by 2019.

Back to the first continent

But Madagascar is not alone; Mozambique, Namibia, and Tanzania are also thought to each contain significant deposits of the flaky good stuff—and have various large firms investing heavily in digging it up: Australia's Triton Gold and Syrah Resources in Mozambique; Canada's CKR Carbon in Namibia; and Australia's Kibaran, Magnus, Volt, and Walkabout Resources in Tanzania.

Taken together, four trends will determine the cost of graphite in the coming decades: the extent to which global economic recovery triggers an uptick in steel production; the pace of Chinese development and its willingness to export graphite; the scope of new resources in Madagascar, East Africa, and Namibia; and the uptick in lithium-ion battery production and global electronic car consumption.

Of all these factors, none are more interrelated than last two.

Before long, the fortunes of Stockholm and San Francisco may soon rely more on Madagascar than anyone cares to admit; whether the former leaves a trail of prosperity in Antananarivo thicker than the thin dark grey strokes of a first-class Stabilo will determine the fate of both.