Supply/demand of Syrah's graphite

Doctor Faoud highlighted an important market development in another thread and I didn't want it to get lost. I think the announcement by Imerys is an important development and also provides a road map for supply/demand and graphite pricing for fines for 2019. We know Syrah is bringing a large amount of volume to a small market. Prices will remain low. 

The bears have bet on this (among other things). Owners of Syrah have bet on the company being low cost and managing this moment. The cost curve will be reset and then move higher after the market becomes balanced. When demand from EV catches up to supply prices will explode higher. Over the next year low volume/high cost miners will become displaced. This will be a volatile process/year.

Doctor Faoud: "However i am not very optimistic about prices syrah is getting per tonne. From Imerys Q3 2018 report :

Implementation of “care and maintenance” program for Namibian natural graphite assets

Imerys has decided to implement a care and maintenance program for its Namibian graphite assets to preserve their long-term value for a future point when market pricing allows a proper value to be achieved for this high-quality graphite product. The implementation of a proper care and maintenance program enables Imerys to preserve its mining rights and resume production once general market conditions become more favourable. These assets have a balance sheet value of ca. €50 million"

While Imerys' decision to shelve the mine won't have a significant impact on current supply/demand its an important development. We know from rough estimates of Syrah's basket price that fines pricing has been low. The company has stated that prices on China mainland are lower than what is being reported by Benchmark Minerals and other people who track graphite. We can estimate that they are selling fines at or below cost. Analysts estimate $375 as a price. This has been happening for a while and high cost producers are now reacting to this dynamic (large losses).

Corporate decisions to cut production don't occur quickly, even when prices are below cost. It takes many months of losses before high cost mines decide to close. The good news is that some of that is happening now as a response to lower prices in 2H 2018. It is fair to assume other producers are having the same conversation. Its also positive that this is happening before Syrah tonnes have impacted the market. It should shorten the time it takes for other producers to close as Syrah product hits the market.

This is how I expect 2019 to evolve: 

Syrah needs to aggressively ramp production (and actually ship/deliver tonnes in 2019).

We should also expect that their volumes will CONTINUE to depress prices through the first half of 2019. (I'm sure we will all be disappointed when they finally report pricing, but we shouldn't be surprised). As long as the higher value flake allows for them to become cash flow positive the company and stock should be fine. In fact, it should rally as the low in pricing has been defined. I also expect this is when shorts will decide to cover. They can squabble about valuation if profits are low but everyone understands that Syrah is positioned low on the cost curve and that there is only upside to prices after this moment.

I expect TOO many graphite producers will decide to close in response to low prices.

Graphite prices will then rebound strongly. After this, marginal producers will then resume production and graphite prices should settle at the top 10% of the cost curve. The top 10% is much higher than the current $400 pricing we are seeing in fines. When this happens (late 2019) Syrah will make nice profits across all flake segments. 

The economic argument discussed above doesn't include the PROBABILITY that China may choose to dramatically slow their internal production regardless of pricing. The quality of their graphite has been steadily eroding. While a large portion of their graphite is also low on the cost curve a decent portion of it is high cost (and even higher cost when environmental impact is included). China has demonstrated they are serious about curtailing pollution and they have imposed environmental restrictions on steel, coal and iron ore. Each of which has resulted in higher prices of the commodity. The Chinese are very aware of Syrah and could choose to keep a few mines closed after the winter. Again, this will allow the market to come into balance faster than normal.