Could A Graphite Shortage Derail The $3 Trillion EV Boom

LONDON, Jan. 6, 2022 /PRNewswire/ -- The $3-trillion EV market needs batteries that are 20-30% graphite–a material the U.S. currently doesn't produce at all. That makes graphite a matter of national security in the global energy race.  Mentioned in today's commentary includes:  Tesla Inc. (NASDAQ:TSLA), Nio Limited (NYSE:NIO), General Motors (NYSE:GM), Ford (NYSE:F), Blink (NASDAQ:BLNK).

Each EV battery requires not only lithium–a metal that investors are very interested in–but even more graphite, the metal that prevents the lithium batteries from breaking down. Yet, the U.S. hasn't produced any graphite for decades.

Now, with the EV market starting to explode, and automakers and battery manufacturers expected to consume far more than ever, we're looking at a nightmarish graphite supply chain that is mostly dependent on China–but not necessarily on the Chinese.

Currently, China is one of the few countries with graphite processing facilities, but one of the leading producers in the world is an international company with both a North American technology and production arm and wholly owned Chinese subsidiaries and expert team operating since 2008. And it's parked right next to the largest graphite mine in the world, in China allowing it to secure this critical supply today while growing with the explosive demand of tomorrow.

The company is Graphex Group Ltd (GRFXY, 6128.HK), and we think it's one of the key companies set to benefit from a graphite market that is expected to continue towards a valuation of $22 billion and which Benchmark Mineral Intelligence predicts will be in shortage by the New Year.

Our Pick For The Most Compelling Graphite Story

Both the United States and the European Union have now declared graphite a "supply critical mineral". Over 70% of all graphite is produced in China. And even that output may be uncertain as gigafactory demand dictates a supply crunch. China remains dominant and even got a boost from the COVID-19 pandemic, which saw it very quickly recover from production facility closures, ensuring that the supply chain did not see any real diversification.

Most of these battery manufacturers are Asian, so whether they are made in Korea or Japan, much of the graphite originates or is processed in China. From there, it either gets further processed in China or it moves to South Korea or Japan for Panasonic or LG, for instance, which make certain parts of the battery.

For North American investors who may have no way to get in on the looming graphite shortage outside of China, Graphex could make for quite a compelling story. And now Graphex is looking to jump into the U.S. market just as manufacturers may be about to feel a supply chain squeeze.

Graphex are veteran graphite processors with major long-term contracts in China, and they're expecting double-digit demand growth over the next five years.
We think market fundamentals back that up perfectly.

American EV sales are expected to come in at 450,000 for 2021. Year-to-date sales through November were up 88% compared to 2020, and the New Year is gearing up for an even bigger surge as new models flood the marketplace. AutoPacific forecasts EV sales at 650,000 next year, for another 45% increase.

Globally, the numbers are even more impressive. EV sales more than doubled in 2021, even as overall car sales dropped under pandemic pressure.

Giant Ford (NYSE:F) plans to produce up to 600,000 EVs a year globally by the end of 2023. That is already twice what it originally intended. Ford's F-150 pickup truck broke sales records, and the automaker is now gearing up to build three battery factories and an electric truck plant. By 2025, we expect to see an astounding 13 new battery gigafactories coming to the U.S. alone.

Considering that there is more graphite in an EV battery than there is lithium, we're anticipating a major demand surge for this "supply critical mineral".

For this battery material, it's all about processing, and it's not a market to easily entertain newcomers. The barrier to entry is technologically very high.

Graphex (GRFXY, 6128.HK) is already well known in China. It's not only one of the top five graphite producing companies in China … it's one of the top globally. 

Set up right next to the largest graphite mine in the world, Graphex is producing 10,000 metric tons of spherical graphite–which represents approximately 5% of China's total spherical graphite production.

And right now, they are planning to increase production to 40,000 metric tons over the next three years.

Stability All-Around

The stability of this setup is one of the most attractive parts: Graphex says it has stable and expandable processing contracts with the Chinese state owned mining companies. It has stable raw material supplies since it's located right next to the biggest flake graphite source in the world in China's Heilongjiang Province. It has 23 patents on its production methods, equipment design, environmental protection and graphene applications.

Combine this with proprietary expertise for high-volume, high-yield spherical graphite production and a high-quality product that is ready for direct application in advanced batteries, and we believe you have quite a lot of investor confidence. 

Even better, it boasts a gross margin of around 28%, with raw materials coming in at around $600 and final product being sold for about $2800. This helped give the company $51 million in revenues in 2020.

Coming to America…

There's more to the Graphex game plan than a ramp-up to 40,000 metric tons …

These veterans are in the process of expanding to North America and the European Union in the near-term. They look poised to enter these markets as one of only a few companies able to support this growing manufacturing expansion in North America. On the supply side, they are capable of supplying their own material from their wholly owned facilities in Asia while exploring additional supply globally.  On the production front, they have the ability to process both in Asia and focusing now on setting up production locally near domestic manufacturing.   This is where Graphex could become not only one of the top producers in the world, but also a potential top tier production and technology company.

Graphex  (GRFXY, 6128.HK) proprietary technology helps upgrade less valuable flake graphite into far more valuable uncoated spherical or coated spherical graphite. That's a difference of $600 per ton and up to $12,000 per ton.

Working with downstream companies and local authorities in the U.S. and Canada, Graphex intends to use its patents, proprietary expertise, and experience to create solutions for the construction of facilities and production lines for spherical graphite.

Constructing facilities that can process high-demand spherical graphite in America at this point is a business move in line with the national interest.

With graphite demand set to soar along with the anticipated growth of EVs, energy storage and more battery gigafactories than anyone could have imagined just a couple of years ago, this "supply critical material" could be one of the best back-door investment themes of the energy transition boom. 

Electric Vehicle Producers Are Set To Grow In The Coming Years

Due in part to a massive influx of millennial money and the multi-trillion-dollar green energy boom, Tesla Inc. (NASDAQ:TSLA) is still the king of EVs in America. The company accounts for the majority of total EV sales in the country and just broke another production and delivery record last quarter. But legacy carmakers are pouring billions into EVs, and hundreds of new models are coming to the market.

"It's no surprise that Tesla's still dominating electric vehicle sales because they're the only ones that really have viable products in full swing," IHS Markit associate director Michael Fiske told CNBC.

Nio Limited (NYSE:NIO) is one of Tesla's most exciting new competitors, especially as China looks to grow its domestic market. After a rough start after going public in 2018, it's been on a tear, producing vehicles with record-breaking range. And it's showing no signs of slowing.

Nio has made all the right moves over the past year to turn heads on the streets and in the marketplace... From its stunningly beautiful - and fast - EP9 supercar to its new line of family-friendly high-performance sedans, Nio is well on its way to retaking control of its local market from Elon Musk's electric vehicle giant.

Recently, General Motors (NYSE:GM) dropped a bomb on the market with the announcement of its new business unit, BrightDrop. The company is looking to capture a key share of the burgeoning delivery market, with plans to sell electric vans and services to commercial delivery companies.

GM isn't just betting big on EVs, either. It's also looking to capitalize on the autonomous vehicle boom. Recently, it announced that it's a majority-owned subsidiary, Cruise, has just received approval from the California DMV to test its autonomous vehicles without a driver. And while they're not the first to receive such an approval, it's still huge news for GM.

Cruise CEO Dan Ammann wrote in a Medium post, "Before the end of the year, we'll be sending cars out onto the streets of SF — without gasoline and without anyone at the wheel." 

Ford (NYSE:F) is another old-school automaker taking the dive into greener waters. In addition to brand-new electric versions of its best-sellers, the F-150 and iconic Mustang, it's also carving out its own position in the hydrogen race, as well. In fact, it recently even unveiled the world's first-ever fuel cell hybrid plugin electric vehicle, the Ford Edge HySeries.

Ford became the best-performing auto industry stock last year, beating investor favorite Tesla as it doubled down on an all-electric future. 2021 was "truly a breakthrough year for Ford … easily the most important year strategically for the company since the financial crisis," Morgan Stanley analyst Adam Jonas told CNBC.

Blink (NASDAQ:BLNK) is another electric vehicle charging company. Its unique proposition is that many of the company's charging stations are found in practical locations, such as airports and hotels, making it convenient for drivers to charge up while waiting on flights or in their rooms. A wave of new deals, including a collaboration with EnerSys and another with Envoy Technologies to deploy electric vehicles and charging stations makes it an especially interesting company.

By. Tom Kool

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Forward-Looking Statements

This publication contains forward-looking information which is subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ from those projected in the forward-looking statements. Forward looking statements in this publication include that the global energy transition will continue as anticipated and that electric vehicles will continue to grow in market share and acceptance; that demand for electric vehicle batteries and the component materials and minerals used to produce electric vehicle batteries will continue to grow significantly; that the market for graphite and related products will continue to expand and achieve double digit growth in the next five years with an anticipated 29% compound annual growth rate; that there will be shortages in China, U.S. and globally of the graphite necessary to produce electric vehicle batteries; that Graphex Group Limited (the "Company") can leverage its existing operations and reputation in China to capture market share of global graphite demand; that the Company can expand its business operations to the U.S. and European markets and gain significant market share for the supply of graphite for electric vehicle batteries; that the Company can leverage its proximity to graphite mines to expand its operations and capture market share for global graphite demand; that the Company can achieve its business plans and objectives as anticipated. These forward-looking statements are subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ materially from those projected in the forward-looking information.  Risks that could change or prevent these statements from coming to fruition include that the global energy transition may not continue as anticipated and that other types of alternative energy vehicles may be developed and gain market share over current types of electric vehicles; that demand for electric vehicle batteries as currently produced and the component materials and minerals used to currently produce electric vehicle batteries may be less than expected for various reasons including the development of alternative materials and technologies; that the market for graphite and related products may not expand and achieve growth as anticipated; that for various reasons, including production of graphite or alternative technologies by other competitors of the Company, there may not be shortages of or increases in demand for graphite in China, U.S. and/or globally as expected or at all; that the Company may be unable to leverage its existing operations and reputation in China to capture substantial market share of global graphite demand; that the Company may be unsuccessful in the expansion of its business operations to the U.S. and European markets and fail to gain significant market share for the supply of graphite for electric vehicle batteries in China and/or globally; that the Company may be unable to leverage its proximity to graphite mines to expand its operations and capture market share for domestic and global graphite demand; that the business of the Company may be unsuccessful for various reasons. The forward-looking information contained herein is given as of the date hereof and we assume no responsibility to update or revise such information to reflect new events or circumstances, except as required by law.

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