Syrah Resources (ASX: SYR) (FRA: 3S7) (OTCPK: SYAAF) shares are down 16% in heavy trade. The SYR share price is declining on the back of their quarterly and half-year results. They've actually had to stop production because no one is buying their lovely natural graphite. Yes, even in the midst of the battery boom they've had problems in shifting battery components. This doesn't really bode well if we think about it.
Now, the specific is claimed to be simply stocking problems. The wholesale channel got stuffed in earlier quarters, there was a slight dip in demand in China for EVs, therefore batteries. Once that stock overload is worked through - as with the pig through the python - then things will return to hunky dory. Which could indeed happen. So, it's entirely possible to describe an upside for Syrah shares. Minor timing turbulence in a rapidly expanding market, times will be better ahead.
And, well, we're not sure. Yes, it's true that natural graphite is the preferred material for battery anodes - over synthetic. Yes, it's true there has been that dip in Chinese demand. We would also happily assume that there's going to be a revival of that EV demand and thus for batteries and so on. We're fine with most of Syrah's explanation of why things are going to get better. Why they'll be able to restart production (suspended for a couple of months, so bad is the stock issue) and so on.
Syrah Resources share price from ASX
Here's the bit in the report where we have problems: “Domestic natural graphite production in China increased seasonally in the June 2023 quarter, resulting in reported natural
graphite prices in China falling by ~20% since the beginning of 2023. However, Benchmark Mineral Intelligence reports that lower grade ore, poorer recoveries and other factors have driven domestic natural graphite production costs to parity with current market pricing. Natural graphite supply chain inventories are reported to have increased slightly with domestic production commencing, offset by both reduced imports from Madagascar due to challenges associated with the imposition of a 10% export tariff, and increased sales from previously warehoused stock.
Given the combination of: pressure on synthetic graphite AAM price versus production cost; low spherical graphite processing capacity utilisation due to cost exceeding price; and production cost pressures on Chinese domestic natural graphite production, the Chinese AAM supply chain appears to be at an unsustainably low price point across various product
segments. Increased AAM demand, driven by recovering EV sales, will require higher prices to incentivise increased production.”
Stripped of the complexity there they're saying that there will be a reduction in competitive pressure on prices in the Chinese market. And that's just not, to us, a bet we're willing to take. Not a story we're willing to buy. We've some experience of raw materials within China and that just isn't, to us, what happens at all.
Our actual expectation is that the harder times get for the domestic synthetic and natural graphite industry then the more intense the price competition will be. And people will drop out of the market much, much, later than we would expect.
To the extent that Syrah's problems are based upon price competition in the China market we think they're only likely to get worse.
