Battery sector to drive major increase in graphite demand

Canaccord Genuity

In this sector report we attempt to quantify the impact on demand for graphite from the rapidly growing Lithium-ion battery ("Li-B") sector. A major increase in installed Li-B capacity to 2025 is anticipated to drive a major increase in demand for graphite. Based on our modelled growth in the Li-B market, and certain assumptions for penetration rates for various battery chemistries, we estimate total demand for graphite (natural + synthetic) from Li-B’s to increase from 140kt in 2015, to more than1Mt in 2025, representing a CAGR of 23%. In this report we review the graphite market dynamics, including competition posed by synthetic graphite. We also provide updates on seven graphite companies, including market leader, Syrah Resources, which plans to produce ~340ktpa, with first production expected in the second half of 2017.

Demand growth for natural flake graphite in Li-Bs is reliant on a shift by end users away from synthetic graphite: Our research suggests that 60% of Li-B anode material is currently sourced from synthetic graphite. While the current preference for synthetic appears driven by requirements for consistent purity and lower quality Chinese graphite dominating global mined supply, cost savings of using flake versus synthetic represent a significant opportunity in our view. If natural graphite can achieve and maintain 60% market penetration by 2020, we estimate that annual demand could increase by +660% to 792ktpa by 2025.

Traditional markets represent the largest market opportunity for natural graphite in the medium term: Traditional graphite markets (ex-Li-Bs) accounted for an estimated 86% of demand for natural graphite in 2015. Looking forward, we see an opportunity for natural flake to capture market share from synthetic/alternative carbon sources due to improved product quality and cost advantages. We estimate that by 2020, demand for flake graphite from these markets could exceed 776ktpa, representing a market share of 74% (vs Li-Bs at only 26%).

Everyone wants exposure to the Li-B market - the fact is the market isn't that large...yet: While demand could increase significantly over the coming decade, this is offset by the potential for a significant supply side (ex-China) response. We estimate flake graphite demand from the Li-B market at 276kt by 2020, versus potential production from ASX-listed graphite companies targeting the battery market of 440kt. Longer term (by 2025), we estimate that global mined flake graphite supply would need to increase by +350% to 1.7Mtpa to satisfy forecast demand from the Li-B market and traditional applications.

Graphite prices: Our forecasts for a benchmark (95% TGC) graphite product call for average "basket" prices of US$770-US$926/t between 2016-2025, compared to current basket prices of US$750-850/t. We note that prices have fallen by 50-60% from their highs in 2012, despite a ~40% reduction in mined output and evidence of increasing demand from the both the Li-B and traditional markets.

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