The growing graphene investment bubble

Few outside the scientific community will remember Martin Fleischmann, who died last year. He was the electrochemist who, along with Stanley Pons, caused a stir in 1989 with his claim that nuclear fusion could be achieved at room temperature using deuterium, or “heavy water” and a suitable catalyst.

I can still remember sitting in an physics lesson, excitedly discussing how this “discovery” could turn the syllabus upside down just weeks before we took our A-levels. Conventional “hot” nuclear fusion requires very high temperatures and produces all sorts of nasty by-products. Releasing energy at normal temperatures, using commonly available elements and with little waste, would have transformed the world.

Would have. Alas, few other scientists could replicate the Fleischmann and Pons results. The furore soon died down, cold fusion remains to this day a great white hope, and the only way we can release nuclear energy by combining atoms is still to smash heavy metal isotopes into each other at high temperature.

I’m reminded of this tale by the growing hype over “wonder material” graphene. This is certainly more tangible than cold fusion.

Andre Geim, the Russian émigré working at the University of Manchester, has already won a Nobel Prize for his work on graphene, a “nanomaterial” just one atom thick and with a graphite-like hexagonal structure. It’s a brilliant conductor of electricity, light and very strong. There are thousands of potential applications for it.

“Potential”. Graphene has been around since 2004, and many patents connected with it have been filed around the world (the Koreans are especially interested). Bill Gates has suggested it be used to make indestructible condoms to prevent the spread of disease in the developing world. But so far there are no widespread commercial uses for it.

That hasn’t stopped people cashing in. There are already two graphene stocks on the Alternative Investment Market. One, Applied Graphene Materials, floated recently and shot straight to a big premium over its listing price – doubtless aided by the fact that it qualifies for tax relief under VCT and EIS. Applied Graphene isn’t some fly-by-night operation; it’s backed by the “incubator” IP Group and grew from research laboratories at Durham University. Its boardroom is packed with boffins. But at present it only has £11,410 in annual revenue (and not much more in tangible assets), and it’s only one of a number of companies rushing to commercialise graphene.

Then there are graphene funds. Yes, really. One that pops up a lot on Google is Viscount Resources. The idea behind this is that you give Viscount your money, which is then used to buy “physical graphene” (what does it look like, I wonder?) which is then stored in controlled and quality-assured conditions. If the price goes up – Viscount Resources predicts 20 per cent a year – you’re quids in.

“If”. But a lot of people expect the price of graphene to fall, not rise. That’s generally what happens when something is commercialised, and production starts to benefit from economies of scale. In its 10 pages of risk warnings, Applied Graphene’s prospectus refers somewhat long-windedly to “situations where new materials have been developed and the expansion of production capacity in advance of market demand has resulted in a decrease in the price of the material to a level where financial returns are limited”.

“Limited”. That’s a nice way of putting it. I wonder if they were thinking of solar panels; as governments around the world started throwing money at renewable energy, unit panel manufacturing costs fell and prices collapsed. Financial returns have become very limited indeed. In some cases they have become negative limited.

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Viscount Resources is based in Gibraltar, although it has a UK phone too. Its sales brochure is very similar to that of another graphene scheme, Capital Advantage Solutions; the same photography is used in both.

There isn’t much detail in either document about regulation, or investor protection either.

None of this means the companies are doing anything wrong, but combined with physical graphene’s somewhat uncertain price prospects, it doesn’t exactly fill me with confidence either.

There’s a broader point about all of this. It’s that innovation in itself is no guarantee of bumper returns, just as rapid economic growth in developing countries does not necessarily make equity investors richer. The lower levels of the UK stock market are littered with companies that talked a great talk about some new product or process, but have somehow never quite turned it into cold, hard cash.

What makes for consistent shareholder returns is competitive advantage, high barriers to entry and pricing power – the “economic moats” of Buffett lore. My advice would be to focus on businesses that display those, and leave scientific breakthroughs to the scientists. Who knows, maybe one day they’ll perfect alchemy.

jonathan.eley@ft.com