Graphite stocks shaken from their slumber as US slaps huge impost on Chinese imports

It hasn’t had the high drama associated with the Trump administration’s attack on China’s control of rare earths, but for a bunch of ASX graphite stocks the imposition of stonking anti-dumping duties on Chinese graphite has been just as telling.

The US wants to wean itself off near-complete reliance on China for its battery graphite needs and figures the best way to do that is to make the Chinese stuff so expensive that ex-China supplies become so much more attractive.

Ideally that induces a build-out of capacity in the non-China world, although China’s clear dominance is going to take years to erode. But given anti-dumping duties as distinct from tariffs are sticky, the required build out can now gather pace from a firmer base.

Any other region with electric car and battery energy storage industries to protect might now also get serious with the Chinese. But again, it is going to take years to get up the new mines and downstream processing facilities to make a difference.

The anti-dumping measure announce on July 17 by the US Commerce Department was set at 93.5% on active anode material (AAM) for batteries. When combined with existing tariffs applied to Chinese imports into the US, the impact is more like 160%.

Jarden analysts had a go at the illustrative level of what impact the anti-dumping measure will have.

“At the risk of over-simplifying, duties differ from tariffs. Functionally, our understanding is that a trading company exporting Chinese AAM and importing into the US must lodge the duty with US Customs and Border Protection upon the landing of the cargo,” they said.

“Illustratively, if natural graphite AAM was trading at $US4,000/t (FOB) China, the landed price in the US would equate to more than $US8,300/t following the payment of the applicable duties (and freight).

“US manufactured AAM becomes immediately more competitive.”

That’s just what a US lobby group of AAM producers, including the lead graphite stock on the ASX. Syrah (ASX:SYR) was after.

Syrah produces graphite in Mozambique and was waiting on a favourable anti-dumping investigation to move towards producing its first AAM at its Vidalia plant in Louisianna, starting off at annual rate of 11,250t with a longer-term view to get to 45,000t or more.

Jarden said it expects the new duties on Chinese material will drive increased demand for ex-China AAM supply, improving Syrah’s competitive position and accelerating commercial momentum at Vidalia.

“The benefits to Syrah are numerous - Vidalia becomes a cost competitive alternative, removing the previous price disadvantage, and remains a key strategic asset with immediate scalability to 45,000tpa capacity,” Jarden said.

“Meanwhile, the Balama mine (in Mozambique) has immense latent capacity to supply other ex-China AAM plants such as the existing offtake agreement with POSCO.”

Acknowledging what it called the seismic and durable shift in the graphite market construct, Jarden lifted its target price on Syrah from 28c to 40c. Since the July 17 move by the US, Syrah has raced up from 29.5c to 40.7c in Thursday’s market.

The company has also resumed shipments of graphite concentrates from Balama – on a campaign basis at least - following the operation being disrupted by unhappy resettled farmers in the area.

Who would have thought a graphite stock could put on 38% in a matter of days.

KINGSLAND:

The graphite cheer has found its way into the junior graphite space on the ASX.

The Northern Territory graphite junior with a world-class deposit under its belt, Kingsland (ASX:KNG), was one to benefit.

It traded at 14.5c in Thursday’s market, up 21% on its level before the US commerce Department did its thing.

Like all of the graphite stocks, Kingsland’s share price is showing the damage caused by graphite prices, as good as halving in the last two years with Chinese production keeping a lid on a near-term recovery.

But the US action and the sheer volume growth ahead of graphite for use in EV and battery storage systems means that like lithium before it, the bottom could well be in.

Ownership of the world-scale Leliyn deposit, 250km by road south of Darwin, gives the small cap serious leverage to the graphite thematic.

A demonstration of that leverage will come in a scoping study due for completion this quarter into a mine and processing facility. Results from testwork to confirm Leliyn graphite is good to go in batteries is also close at hand.

Kingsland noted during the week that the actions in the US had increased the focus on non-Chinese graphite sources, adding that Leliyn is well positioned to capitalise on the opportunity.

The 21% share price rise in less than a week suggests the market is warming to that idea as well.

Patriot:

While the graphite stocks have been making big gains, the ASX stocks exposed to the cathode side of batteries – the lithium stocks - have also taken off from beaten up levels in the last month.

Pilbara (ASX:PLS) has gained 47%, Liontown 40% (LTR), and Patriot (PMT) 110%. So while it has been impossible in the last two years or so to invest in the sector with any confidence, things have clearly changed.

As mentioned a couple of weeks ago, the lithium market seems to have bottomed. Spodumene prices which matter most to the ASX players have marched from a June low of $US575/t to $US790/t, with big gains in recent days.

A couple of factors are at play. There has been a mine closure on supposed licensing/environmental rounds in China and more closures could follow. It seems the Chinese are over subsidising loss-making operations.

Beijing is said to be walking prices higher to a more harmonious level for everyone. Or is it just out to put the squeeze on the US economy through higher battery prices for its electric vehicles and battery storage industries, as some pundits suggest?

Whatever the truth, the worst of the two year rout in the market seems to have passed and a tentative rally to higher levels seems plausible given the magnitude of the supply challenge that Rio Tinto and others reckon faces the lithium industry.

The latter point is not the consensus of western world analysts who have the market remaining in surplus until the back end of the decade. But with the recent apparent bottoming, will they need to start pencilling in higher lithium price expectations in their stock valuations?

Ken Brinsden clearly thinks they should. Brinsden built Pilbara’s Pilgangoora project, taking Pilbara’s market cap from $200m to $6 billion by the time he left in 2022 in the process. So he knows a bit about the lithium market.

After a short break he joined the dual-listed Patriot, which is developing the world’s next big hard-rock lithium project in mining friendly Quebec

He was on the airwaves from Montreal during the week on an investor call talking about caesium emerging as a likely value-add bolt-on cop-product stream to the lithium project, with a feasibility on the main event of the lithium project due this quarter.

It was interesting stuff given caesium has growing applications in the high efficiency solar panels set to eat incumbent technologies. In addition, caesium’s traditional uses face supply constraints and security concerns due to mine depletion and the hand of China control respectively.

The investor call moderator wouldn’t let Brinsden go without him giving a wrap on the state of the lithium market.

He said that while the story has been one of oversupply in the last 2-3 years the market was now at a point “where we should be intensely focussed on what is happening with demand”.

“Our view is that demand is likely being under-estimated,” Brinsden said.

He then let fly at western world analysts, saying that suggestions the market would not be back in balance to the end of the decade was a “gross misread”.