A Gold Rush for Graphite

Eric Fry By Eric Fry
Macro Strategist


It’s Opposite Day in the stock market. Lots of high-flying story stocks are losing altitude, while lots of under-the-radar mining stocks are soaring.

This storyline is the opposite of what most of us investors have come to expect. We’ve become accustomed to seeing story stocks like Tesla (Nasdaq: TSLA) hit record high after record high, while mining stocks languish near multiyear lows.

But the script has flipped… and the revised storyline is ripe with investment potential.

The prices of several industrial metals have been flying high for one very good – and very big – reason. Demand for these metals is ramping up rapidly thanks to what I’ve been calling the “Second Electric Revolution.”

The leading electric vehicle and energy storage technologies consume prodigious volumes of industrial metals like lithium, cobalt, nickel and copper. But the list doesn’t end there. These technologies also consume large and growing quantities of “overlooked” metals like graphite and vanadium.

Demand for these metals has become so robust that their prices are likely to continue trending higher for a long while. And that means the companies producing these metals could enjoy many prosperous years.

In fact, no matter what happens in the overall stock market during the next decade, select mining companies are likely to flourish.

Here’s the story in a nutshell…

EVs are stealing market share from gas-powered vehicles. Meanwhile, utility-scale energy storage systems are enabling renewable power technologies to steal market share from thermoelectric power generation.

Both of these stories are very new and very big. The electrification of personal transport, combined with the growing deployment of energy storage systems, is a major trend that will unfold over several decades.

That said, finding the best way to invest in this mega-trend is a mega-challenge. Here are a few of the obstacles to successful investment in the electrification trend:

  1. Many of the companies leading the electrification boom are Chinese, and their stocks trade only in Shanghai or Shenzhen.
  2. Many market leaders in the battery and electrification industries are subsidiaries of much larger companies, so there is no way to invest in them directly.
  3. Many market leaders are losing money. Tesla is one high-profile example, but it is hardly alone. Innovation is both expensive and risky.
  4. The electrification boom is a battleground of competing technologies and continuous innovation. Today’s market leader could be tomorrow’s Betamax. I refer to this dynamic as “first-mover disadvantage.”

For these reasons, I focus primarily on the companies that are providing essential resources to the electrification boom. Most of the companies that fall into this category are mining companies like Glencore (OTC: GLCNF).

It is the world’s largest cobalt producer, supplying a whopping 30% of global cobalt production. But Glencore is also the world’s third-largest copper miner and a major producer of nickel, zinc, lead and vanadium.

In other words, Glencore stock is a solid play on the Second Electric Revolution. But it’s hardly the only one.

As this revolution develops and grows, it will create new demand for a growing list of metals. Graphite is one example…

Even though graphite has not attracted as much attention as have other battery metals like lithium, cobalt and nickel, it is just as essential for current EV battery technologies – perhaps even more so.

Here’s why…

All four of the leading EV battery technologies use slightly different combinations of metals to create their cathodes. But the anode material in all four is 100% graphite. That makes graphite agnostic about which battery chemistry becomes the most popular or prevalent.

And EVs use a lot of graphite. A Tesla EV contains about 200 pounds of graphite, which is roughly 10 times the amount of lithium or cobalt it contains. Therefore, as the EV boom gains momentum, the demand for graphite will soar.

Meanwhile, leading energy storage technologies also require graphite. And this source of demand is just beginning to take off.

Bloomberg New Energy Finance predicts the global energy storage market will “double six times” from now to 2030 – from a starting point of less than 5 gigawatt-hours to 305 gigawatt-hours. Additionally, an estimated $103 billion will be invested in energy storage over that time period.

To boost energy storage from where it is today to 305 gigawatts by 2030 would require an annualized growth rate of 40%!

So when you add together these two rapidly growing sources of graphite demand – EVs and energy storage – you get an astonishingly large growth projection.

According to one graphite mining company, the global demand for natural flake graphite will more than double over the next eight years – from 700,000 metric tons currently to 1.6 million metric tons.

Demand growth of this magnitude would require a doubling of global graphite production from current levels.

And, importantly, this demand projection is not particularly vulnerable to future battery chemistry changes.

Obviously, many factors could change between now and 2020, but the potential demand growth for graphite is significant. The same could be said for all of the other battery metals.

Opposite Day is opposite no more; it’s the new normal. A gold rush for industrial metals is underway.

Good investing,