What are ASX graphite stocks?
ASX graphite stocks are shares in companies involved in the production and refinement of graphite. They include junior companies with projects in development, larger companies with operational mine sites that already produce graphite, and vertically integrated companies that supply battery-grade graphite to the electric vehicle (EV) industry.
Along with coal and diamonds, graphite is one of three naturally occurring types of carbon. China produces about 80% of the world's mined graphite. Other nations with reasonably large quantities are Brazil, Mozambique, and Russia.
Making synthetic graphite by superheating other carbon substances (like coal or oil) is also possible. ASX graphite company Novonix Ltd (ASX: NVX) owns a plant in Tennessee in the United States that produces synthetic graphite. The company claims it is superior to natural graphite as it helps create longer-lasting batteries.
Graphite has been in the news recently, with China (the world's largest graphite producer) announcing it was tightening export controls. The government argued this was for national security reasons to protect its EV manufacturing industry.
However, this could disrupt the global supply chain for graphite, driving up prices. This then provides a unique opportunity for junior players to expand to fill the gap left by Chinese producers.
Why invest in them?
Well, as we've just mentioned, current events could make the near-term an exciting (but uncertain) time for the graphite industry. Export controls placed on Chinese producers could limit the global supply, presenting an opportunity for smaller graphite producers.
Graphite has a diverse range of applications. Traditionally, we have used it in everything from pencils to lubricants to steelmaking and glass production. However, graphite's use in cutting-edge technologies makes investors most excited.
Graphite is a crucial component in the lithium-ion batteries that power EVs and popular electronic devices, including smartphones. Kilogram for kilogram, more graphite is required to build a lithium-ion battery than lithium!
Graphite is very good at conducting electricity. It reduces battery charging times and increases the amount of electricity a battery can store (a property known as 'energy density').
With demand for EVs, smartphones and other battery-powered electronics expected to continue to rise over the coming decades, many investors feel bullish about the graphite industry prospects. It's a great reason to add ASX graphite shares to your investment portfolio!
Top graphite shares on the ASX
Graphite companies comprise only a tiny part of the ASX's mining and metals sector. With most of the world's graphite produced in China, those companies based in Australia are mainly junior companies or speculative shares.
Compared to mining giants like BHP Group Limited (ASX: BHP), with market caps in the hundreds of billions, emerging small-cap graphite companies like Syrah Resources Ltd (ASX: SYR) and Novonix barely rate a mention.
However, we should all remember that everyone has to start somewhere. If China strangles global supply at the same time as demand for EVs increases, graphite could be an exciting section of the market to watch.
Here are three ASX graphite stocks ranked by market capitalisation from highest to lowest.
|Syrah Resources Ltd |
|Vertically integrated graphite stock with operations in Tanzania and the US|
|Novonix Ltd |
|Produces a synthetic form of graphite, which it claims is greener than mined |
|Talga Group Ltd |
|Vertically integrated graphite producer supplying the European market|
Syrah is the largest vertically integrated global graphite company trading on the ASX. It owns and operates the Balama mine in Mozambique. It's a significant natural graphite resource with an estimated mine life of more than 50 years. This makes Syrah a potentially stable long-term investment for those seeking exposure to the international graphite industry.
Syrah is also building a battery anode production facility in Louisiana, in the United States. It will come online this quarter (Q4 2023), potentially expanding in 2024. Syrah hopes the facility will make it the largest EV battery anode material producer outside China.
Once operational, the facility will supply the growing US market with battery materials for EVs. California – one of the largest economies on the planet – has pledged to ban the sale of petrol-only cars by 2035, so there is a real possibility that the US EV market could expand rapidly over the next decade.
As we've already discussed, Novonix is an exciting play for investors seeking exposure to the graphite industry because it produces synthetic graphite. The company claims its artificial graphite is safer and more environmentally friendly than naturally occurring graphite.
Like Syrah, Novonix's operations are in the US. The company also hopes to supply the growing US market for lithium-ion battery materials and reduce the country's reliance on Chinese graphite producers.
As we've already discussed, the Chinese government has just lent it a helping hand with its export controls.
Another vertically integrated graphite company, Talga mines natural graphite at sites in Sweden and then uses it to make high-quality battery anodes. It also supplies the European market with battery anode material.
Talga focuses on sustainability and the environment, and the company claims its in-house proprietary process creates the world's greenest battery anode.
Talga's mine sites use Swedish hydropower, and its vertically integrated structure allows the company to control carbon emissions tightly throughout the entire anode production process. This makes it a desirable investment for green energy investors.
How are market conditions changing?
The global shift towards renewable energy sources provides significant tailwinds for the graphite industry. As the world tries to reduce its reliance on fossil fuels – particularly oil – demand for lithium-ion batteries for EVs is likely to increase. And, as we've already discussed, this could be a boon for graphite producers, as more graphite is needed to build lithium-ion batteries than lithium.
China's recent export controls could also strangle the global supply of quality graphite for the EV industry. It could drive up graphite prices, making it more attractive for junior companies to launch new projects or for smaller players to enter this industry.
However, the graphite market is relatively opaque, unlike most commonly traded commodities (like oil or precious metals). Graphite prices are rarely published, so transactions are typically negotiated between individual buyers and sellers.
Pros of investing in ASX graphite shares
Some of the pros of investing in graphite shares are:
Graphite has a wide variety of applications: Because it has industrial applications in steel production, demand for graphite remains relatively stable over time.
Graphite stocks are tied to the renewables theme: The main benefit of investing in ASX graphite stocks is it gives your portfolio exposure to the global renewables transition. This makes it a suitable choice for ESG investors. Because it is a necessary ingredient in lithium-ion batteries, the international graphite market could expand significantly in coming years as EVs and other environmentally friendly technologies become more widely adopted.
And the cons…
The graphite market is opaque: Because there isn't an accepted market index that tracks the price of graphite, it is a difficult commodity to value accurately. Investors and analysts can find it challenging to forecast company revenues accurately, making stock-picking difficult. This increases the risks associated with investing in ASX graphite shares.
Graphite can be made synthetically: Companies like Novonix have created synthetic graphite, which they claim is more environmentally friendly and of a higher grade than mined graphite. If synthetic alternatives can be developed and sold at lower prices than naturally occurring graphite, it could shake up the industry. It may even threaten the profitability of junior graphite producers.
Are ASX graphite shares right for you?
Investing in graphite is another way to give your portfolio exposure to the renewables thematic. Its use in the lithium-ion batteries needed to fuel a greener future has many investors feeling particularly bullish about the prospects for the graphite industry.
However, we have to balance this against the risks. The graphite market is opaque, which means you need to do your research and make sure you understand the industry before choosing to invest. Graphite can also be created synthetically, adding extra complexity to the industry.
Ultimately, whether or not you choose to invest in ASX graphite shares will come down to your personal risk appetite and investing goals. And remember, graphite is just one of many ways to invest in the transition to renewables, so weigh it up against the alternatives before deciding if it's right for you.
Investing in graphite can be one way to get exposure to the renewable energy theme. This is because graphite is an essential material used in lithium batteries in electric vehicles --, kilo for kilo, more graphite is used in a lithium battery than lithium! Historically, China has produced most of the world's graphite, meaning ASX-listed graphite shares have tended to be minor players. However, recent export controls put in place by the Chinese government could present opportunities for smaller graphite companies to expand to fill the shortfall in supply. Investing in graphite does come with risks. The graphite market is opaque, making it difficult to get a sense of pricing trends or predict the industry's future direction. This means you should do plenty of research before choosing to invest.
None of the leading ASX graphite companies are currently profitable -- although Syrah Resources Ltd (ASX: SYR) is starting to get close. But investors are buying graphite shares now in the hope that demand from the global EV industry will drive up the price of graphite, leading to fat profits in future years. Needless to say, this makes graphite shares quite risky. Given their valuation relies on expectations about future performance, failure to deliver can result in big losses for shareholders. So, before investing in graphite shares, ensure you are comfortable with the risks involved.
Unfortunately, no one has a crystal ball. And making predictions about the price of graphite is also particularly difficult because the market is so opaque. However, there are positive signs. Graphite will be an in-demand mineral for the transition to green energy because it is necessary for EV batteries. Many economies worldwide are accelerating their transitions to green energy, not least California, which is planning on banning the sale of petrol-fuelled cars by 2035. This could drive up graphite demand, potentially leading to higher prices.