Syrah Resources Ltd (ASX: SYR) plans to reduce its graphite production volumes in the fourth quarter. The reduction is in response to a decline in spot natural flake, graphite prices in China. The depreciation of the Chinese Yuan in response to the growing trade tension with the U.S appears to be taking a toll on the graphite business.
Slowing Graphite Business
For starters, Yuan depreciation continues to affect negotiations and contract renewals with Chinese clients, something that is affecting Syrah graphite business. The mining company has since had to carry out a review of structural costs at its Balama Graphite operation. The company may have to pursue cost reduction as a way of shielding itself from reduced revenues from the graphite business, given the depressed prices.
China is the world’s largest consumer and producer of graphite. Therefore, a sharp decline in the Yuan always takes a toll on Graphite business. Syrah relies on China for graphite sales as the country accounts for as much as 75% of its total production.
In addition to price pressures because of the Yuan depreciation, increased production from Madagascar has all but continued to pile pressure on Syrah core business. Increased Chinese production has also led to an oversupply of graphite in the market, something that continues to affect prices.
Syrah has also seen demand for graphite edge lower following a cut in Chinese electric vehicle subsidies. The cut has had a negative impact on near term, graphite demand growth, mostly used in lithium-ion batteries, used in electric cars.
International trade tension between the U.S and China has all but continued to compound the matter making it extremely difficult for the company to sign long-term contracts. Companies have had to go slow on new contracts and deals awaiting to see the long-term effect of the ongoing trade tensions as well as trade tariffs.
Syrah Graphite Business Restructuring
Amidst the near term challenges in the market, demand for lithium-ion battery remains high as automakers shift focus to electric cars. Evolution of strategic partnerships, as well as capacity in Europe and North America, should continue to shrug off slowing graphite demand in China in response to the Yuan depreciation.
Syrah response to the near term challenges involves increasing production in line with market demand. The company also plans to carry out unit cost reduction as well as focus on carbon grade and product mix. The company will also work with customer’s suppliers and stakeholders to find a sustainable way of managing the revised operational plans.
“Syrah continues to implement its production improvement initiatives achieving strong progress of process plant stability, product mix, and improved fixed carbon grade distribution with stable recovery levels. The logistic supply chain is achieving rates ~ 240ktpa demonstrating capability and improvements to date,” the company in a statement.
The company boasts of solid cash and liquidity levels ideal for responding to changing market dynamics. The company expects its cash position to be about $60 million as of the end of September, supported by additional liquidity of $55.8 million on the completion of a Convertible Note.