Syrah Resources Under Duress; What to Expect from the Graphite Miner Ahead?

Syrah Resources Under Duress; What to Expect from the Graphite Miner Ahead?

The natural flake graphite market in China witnessed a sudden decline amid fall in the domestic currency, which in turn, is now affecting the offtake prices of ASX-listed graphite miner- Syrah Resources Limited (ASX: SYR).

China and Graphite

China is the world’s largest consumer and producer of natural graphite amid its high steelmaking capacity. The country was a net importer of graphite products in January 2019, and as per the data, China imported 105kt of graphite for the six months to June 2019.

Out of 105kt, Syrah supplied 75 per cent of the graphite for consumption in the battery supply chain. The sharp depreciation of Yuan has deeply impacted the prices of natural graphite.

Other Reasons for the fall in graphite are as below:

• Additional production from Madagascar
• Seasonal production increase in China
• Suppressed consumers sentiments amid global uncertainties

The U.S-China trade war has impacted the domestic currency of China against the United States dollar, which has severally impacted many such sectors and commodities price in China.

Recently, the lithium chemicals such as lithium carbonate and lithium hydroxide also took a jab in China over the falling domestic currency, which impacted the lithium miners in Australia, as China bags the number one destination of Australia resources.

The fall in lithium prices lead the local chemical processors in China to defer the shipments, which in turn, reduced the demand for Australian lithium and spodumene as well, thus, nudging many Australian lithium miners to suspend the production.

Also Read: Lithium Demand Plays Spoilsport; Alita, Galaxy and Pilbara Limits Production

What’s Next?

The increased production from Madagascar coupled with seasonal production increase from China implies that despite strong demand growth projections, the graphite market is currently in the oversupplied zone, with the global production being more than the demand.

Many industry experts still anticipate a shortfall in the supply of graphite and growth in demand over the long-run.

Also Read: Graphite Anticipated to Witness a Shortfall; While BSM and BAT Aims Future Growth

Despite near-term challenges experienced by the battery raw material manufactures, the market and the industry experts are still bullish on the lithium industry amid an estimated increase in sales of plug-in vehicles coupled with many other reasons such as global transformation towards zero-emission, rising demand for the energy storage system, etc.

To Know More, Do Read: Why Are Market Players Clinching to the EV and Lithium Forecast?

The projections for lithium rush are also beneficial for the graphite industry as graphite is used in the making of anode for the lithium-ion batteries.

Syrah’s Adaptability:

Syrah previously presented the production strategy and decided to ramp up the production in accordance with the global demand. The company also planned to target the cost of per unit of production through increased volumes, and optimisation of carbon grade & product mix for relative price benefit.

However, post observing the current market condition, SYR decided to focus the production on value rather than the volumes. The near-term operational plan of the company is as below:

• Syrah to curb the output by the end of Q3 and significantly reduce it to approx. 5kt per month by the last quarter of the year 2019.

The company decided to reduce the graphite production to increase the fixed carbon grade and product quality, to target for higher prices as compared to its peers.

• Syrah to perform an immediate review for cost reduction at its Balama prospect.
• The company to work closely with all the respective stakeholders to manage the impact of revised operational plans.
• Syrah plans to conduct a strategic and operational review next year.

SYR Q3 Preliminary Update:

Syrah continues to implement the production enhancement measures and achieved strong progress over the processing plant stability and recovery levels.

• The logistic supply chain of the company is moving nearly to 240k tonnes per annum.

The sales volume for the third quarter of the year 2019 is around 45kt (subject to final shipping schedules) with a lower realised price.

• The realised price recognised by the company in Q3 is around US$400 a tonne, down by 14.25 per cent against the previous quarter price of US$457 a tonne.

The company is progressing towards the completion of the Vidalia Battery Anode Material Facility and the commissioning is underway. The project would focus on capturing the strategic value in ex-China production by producing purified spherical graphite.

Yuan and SYR Plunge:

The onshore Yuan nose-dived against the dollar from the level of CNY6.3628 (low in March 2019) to the present high of CNY7.1847 (Day’s high on 3 September 2019) a dollar, which in turn, marked a fall of almost 11.50 per cent in Yuan against the dollar.

The depreciation in the domestic currency of China prompted the Chinese natural graphite consumer to reduce their exposure towards the dollar quoted graphite, which in turn, impacted the negotiations and contract renewals of Syrah.

Syrah on Charts:

Syrah Daily Chart (Source: Thomson Reuters)

On the daily chart, the stock is moving in a continuous downtrend from the level of approx. $6.414; however, the stock has now corrected over78.6 per cent of the Fibonacci retracement, which might instigate the bulls’ interest.

Syrah Daily Chart (Source: Thomson Reuters)

Recently on the daily chart, the stock marked a breakaway gap-down opening by crossing the minor upward sloping trendline; however, the stock was on the rise during the past three trading sessions, before losing steam and trading downwards on ASX today.

Syrah Daily Chart (Source: Thomson Reuters)

On further analysing the daily chart with technical indicators, we can observe that the stock is currently trading below the 21- and 200-days exponential moving averages, which are at $0.673 and $1.228, respectively.

The stock, which is trading on a positive note to fill the gap, could face a primary hurdle at the 21-day EMA following a hurdle of the downward sloping trendline.

Investors should monitor the averages as a break and sustain above 21- and 200-days EMAs with good volumes could generate bulls’ interest, which is presently subdued.

The 14-day Relative Strength Index is moving down and is currently at 33.998.

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