The high profile hedge fund manager, Jim Chanos, reckons Australia’s biggest money earner – iron ore – will fall from $140 per tonne to $100 per tonne.
To profit from this, his fund Kynikos – Greek for cynical – is short-selling Fortescue (ASX: FMG). Not that hedge funds are any sort of all-seeing oracles. Plenty of them get it wrong. Last year the average hedge fund lost 9%.
Although, looking at serious delays to the world’s new big iron ore projects, I reckon it’s hard to see iron ore prices falling that far. Where I agree with Chanos is that it’s hard to see iron ore prices rising much from here.
But forget iron ore for a minute.
This is a commodity that drove the last bull market and made Australian investors rich. But it won’t be the commodity that drives the NEXT bull market.
In fact, it’s getting harder for Aussie resource investors to find new areas of the market to make money from. Mainstream commodities are well known, and often the easy money has been made already.
The good news I want to bring to you is that there is a new generation of investing opportunities in the world of strategic minerals.
A New Story
The commodities story is changing. It’s still driven by the rise of the emerging markets, especially China and India. But Asia’s long-term future commodity demand isn’t just about skyscrapers and infrastructure.
It’s also about developing cleaner transportation, more efficient nuclear power, and new power sources. China’s economy is evolving. The whole growth story of the developing world is evolving. The mineral I want to tell you about today is playing a pivotal role in this evolutionary leap forward.
Welcome to the world of strategic mineral investing.
But you may be wondering, what do I mean by “strategic minerals”?
It’s simple. Strategic minerals usually face supply restrictions, and are integral to the national defense, aerospace or energy industries.
The commodity I’m talking about fits the bill as a ‘strategic mineral.’ Over 80% of supply comes from just one country. It is essential to the energy sector – in the form of batteries. And it’s not all about batteries either. It is also essential for modern nuclear reactors, fuel cells, and the evolution of electronics.
This is what I call a ‘high tech commodity’. It’s where you’ll find the commodity bull markets of the future.
I’m talking about FLAKE GRAPHITE.
The word graphite may make you think of pencils. But the reality is very different!
With new technologies creating new levels of demand, and little flake graphite being available, this strategic mineral has a big future.
Graphite is a form of carbon with unique properties. It is like a diamond in two dimensions.
It’s important I make the point upfront that most of the world’s graphite is ‘amorphous’. This is used mostly for equipment in the steelmaking industry, and may as well be a different commodity to flake graphite.
Comparing amorphous graphite to flake graphite – is a bit like comparing thermal coal to coking coal.
The rarer, high-quality type of graphite to invest in is ‘FLAKE’ graphite.
Flake graphite production levels are just 400,000 tonnes a year. Analysts at Investment Bank, Canaccord, report that demand from lithium-ion battery manufacturers is increasing at 20% a year.
And you can see why. Uptake has been slow thus far, but the US still plans to put 250,000 electric cars on its roads each year by 2015. China wants to put a million electric cars on Chinese roads each year in the same period. With 50 kg of graphite going into the battery of each electric car, the market will need to find an extra 250,000 tonnes of flake graphite to keep up with this demand alone.
But it’s not just electric cars that have batteries…
The battery in your mobile phone contains graphite as well.
They may be much smaller than a car battery – but according to the International Telecommunication Union, out of a population of 7 billion people alive today there are 5.9 billion mobile phones in use around the world. That’s an incredible statistic. And by 2015, they reckon there will be MORE mobile phones in use than there are people on the planet.
In fact, any heavy-use electric gadget will have a graphite-filled battery. Electric cars mobile phones, your laptop computer, cordless drills, and electric toothbrushes….all these devices significantly increase the demand for flake graphite.
Based on this increased demand, the price of high quality flake graphite soared from US$1000 to $3000 a tonne in the last five years.
I’m convinced it has plenty more to run. Battery makers are not the only ones queuing up for flake graphite.
A new generation of nuclear reactors called ‘pebble-bed nuclear reactors’ use large amounts of flake graphite.
The reactors get their name from the pebble-sized spheres of graphite mixed with uranium they contain. This structure allows pebble bed reactors to produce power more efficiently – and safely – than conventional reactors. This technology means nuclear reactors can be smaller, and as easy to run as turning a switch.
Graphite demand from pebble bed reactors alone could be greater than current annual production by the end of this decade.
Electric batteries and pebble-bed nuclear reactors are two current technologies driving demand. In my view, these two applications alone are enough to justify a bullish long-term outlook. But “high tech” commodities are rapidly evolving. And more markets (with more demand for flake graphite) are already developing.
The Future of Graphite – Fuel Cells and ‘Graphene’
But the real future of graphite may lie in fuel cells.
According to the United States Geological Survey, fuel cells could create more demand for flake graphite than all other applications combined.
A fuel cell is like a large battery that produces power through chemical processes. You need to ‘refuel’ it from time to time. This fuel contains graphite.
This is not science-fiction. Fuel cells are already used to power phones, vehicles, and provide back-up power for buildings such as hospitals. Toyota plans full-scale commercial production of fuel cells within three years.
If fuel cells are the next source of demand for graphite, then graphene is the ‘blue sky’ for demand.
Graphene is a one-molecule-thick sheet of graphite.
The carbon molecules line up in hexagons. Close up it would look like chicken wire. It is stronger than diamond, is more elastic than silk, and conforms to any shape. It conducts electricity at the speed of light, and can transmit 1000 times the electric current than copper. This amazing material is quite new to science, and we are still working out its potential applications.
Click here to enlarge
IBM has already used graphene to produce the fastest computer chip in history. The US Air force and Navy are funding research to investigate its potential. Graphene chips may displace silicon chips in computers. If this happens, then graphite demand would go through the roof.
IBM are not the only ones researching it. Intel, the world’s biggest microchip manufacturer, is also investigating its potential uses, along with at least 200 other industrial companies.
Graphene production doesn’t generate any real graphite demand yet. This is still at the research and development stage. It’s worth mentioning here, because if scientists are even half-right, graphene could change the world we know it, and the price of graphite will soar.
Where’s the graphite going to come from?
The graphite price looks good to keep rising. Demand continues to rise, and there is very little flake graphite production coming on line.
The only new project of any size that could be in production soon is the Almenara graphite project run by Magnesita (unlisted) in Brazil. This could produce 40,000 tonnes of graphite a year, increasing global production by just 10%. Production is still at least a couple of years away.
With so little new production queued up, and new projects taking around five years to bring to production, it is hard to see how demand will be met. Analysts at a Canadian investment bank, Canaccord, reckon that demand for flake graphite will increase six-fold by the end of this decade. This paints a very bullish picture for flake graphite prices. A six-fold increase to demand without any significant increase in supply should send prices one way: UP.
Analyst predictions aren’t any kind of guarantee this will actually happen, of course. I think what is probably more important is just how strategically important graphite is: particularly graphite deposits based outside of China.
Whether it is used for batteries, nuclear reactors, fuel cells, or even graphene – the point is that graphite is essential for a group of new and developing technologies.
This makes it a commodity that important groups will want to control… and that makes it a great investment opportunity.
This story has just started on the Australian market. It has the same hallmarks that the rare earths stock boom had back in 2009. Investors that got into that at the start made spectacular returns.
The time to look at graphite is now.
Dr. Alex Cowie
Editor, Diggers & Drillers
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Written by Dr. Alex Cowie
Dr Alex Cowie is Money Morning‘s Chief Resources Analyst. (To have his newest investment ideas delivered straight to your inbox you can subscribe to Money Morning for free here).
He is also the editor and chief analyst for Diggers and Drillers — Australia’s premier resource stock advisory service.
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