Aussie graphite mining company Syrah Resources Ltd [ASX:SYR] has had a shocking day of trading after the release of their graphite market update and operational response.
At time of writing, their shares are down 29.08% to sit at 50 cents apiece. They hit as low as 43 cents in the first hour of trading.
The company noted a significant decrease in the spot price of natural graphite flakes in China specifically, as a result of the recently depreciating yuan during trade war disputes.
Syrah have responded to the price decrease by reducing their production volumes in Q4 2019 to just five kilotons per month.
Investors are clearly unimpressed by the company’s inability to handle the market volatility during this trade war tension.
But while many businesses with China as a key asset — either as a customer or supplier — are bound to feel this tension, it’s not all doom and gloom for investors.
In fact, there are three unique opportunities available to Aussie investors to play this volatility. One has shot up 164% thanks to exports into China.
Syrah caught in trade war crossfire
In the first half of 2019, China imported 105kt of graphite, 75% of which came from Syrah.
But from around May this year, the US and China have been in a tit-for-tat tariff battle, with China being accused of playing the extra move of manipulating their currency past the key seven per dollar level.
This yuan depreciation — which may continue to fall — is ‘placing downward pressure on US$ dominated price re-negotiations with Chinese customers.’
And with such heavy reliance on China as their core customer, Syrah have been forced to reduce production in order to maintain costs.
While the company insists it is a means to increase ‘product quality’, the resulting non-cash impairment of between US$60–70 million suggests the price blow hit them hard.
What’s more, the imported graphite was being used primarily in the lithium battery supply chain for electric vehicles (EVs).
But in March this year, China cut EV subsidies by half, further affecting near-term growth in graphite demand.
Right product, wrong customer
Syrah insist that despite near-term challenges, demand for lithium-ion batteries ‘remains positive with significant growth expected’.
And while it may be a stretch to suggest the battery supply alone will pull Syrah out of this rut (their one-year return is a shocking -77.79%), they aren’t wrong regarding the potential of this sector.
Our smartphones, computers, and of course, electric vehicles all require graphite to make the lithium-ion batteries.
And with these devices only growing more prominent — and even necessary — it’s been estimated that demand for graphite for batteries could increase up to 23% by 2027.
There is certainly lucrative potential within this sector, it’s just a matter of finding it.
For Money Morning