Remember when you used to take standardized tests in school with a yellow No. 2 graphite pencil?

I can still remember myself in fourth grade filling in answer bubbles as my teacher scanned the room trying to catch anyone cheating.

Back then, pencils were probably the only thing I thought graphite was used for. But now I know graphite is for much more than just the classroom.

Today, it’s emerging as a unique opportunity for investment portfolios. And it’s ever more important that you pay close attention…

China supply deficit

As Canadian investment research firm Byron Capital Markets reports, within the next three years, the global supply of graphite is set to hit a deficit.

By 2020, the firm believes this supply shortage could increase to nearly 700,000 tons of graphite per year.

What’s going on?

Let’s look at the big picture.

China produces over 70% of the world’s graphite, or about 800,000 tons per year.

In recent years, the nation decided it wants to hoard 60% of this output for itself. In addition, China also added a 20% export tax and a 17% value-added tax on its domestically produced graphite, as well.

But that’s not all.

China also recently closed down nearly 200 of its graphite mines due to environmental concerns and stricter operational regulations.

As a result, the price of graphite has skyrocketed. Since 2005, its value has nearly tripled.

Prices may have recently cooled off, but there’s little reason to believe they won’t remain high for the next several years to come.

That’s because demand for graphite is steadily on the rise.

From 2000 to 2011, global consumption jumped 83% to 1.1 million tons. It’s expected to nearly double again over the next 10 years.

The United States and Europe have even labeled graphite as a critical mineral for their economic future.

In short, there will be a number of opportunities to profit as graphite continues to run higher.

But it’s important you know that not every graphite miner is set to be a winner.

It’s all in the details

You see, graphite can be categorized in three different ways:

1. Amorphous
2. Lump
3. Flake

Amorphous and lump graphite have long been used in steel, brake linings, gaskets and refractories. They make up 60% of the graphite supply.

The remaining 40% of the total supply is flake graphite.

Thanks to new technologies such as fuel cells, solar panels, pebble bed nuclear reactors, smartphones, laptops, lithium-ion batteries and more, flake graphite is becoming a more attractive opportunity to invest in today. (Believe it or not, lithium ion batteries require as much as 40 times more flake graphite than they actually do lithium.)

And the good news for investors, flake graphite is the rarest type of graphite there is. Meaning the companies that mine these deposits are best set to gain from the increasing usage of graphite.

But even more specifically, companies that mine large flake deposits should benefit the most. This is simply because the larger the flake size, the higher the price it will sell for on the market.

• Northern Graphite Corporation (TSX: V.NGC) is a Canadian-based graphite mining company, and 75% of its projects are considered large flake graphite deposits.
• Flinders Resources (TSX: V.FDR) is another junior miner that owns 100% of its Kringel Graphite Mine, a previously halted large flake graphite mining operating in central Sweden. The mine has a rated capacity of 13,000 tons per year of large flake graphite, which the company plans to start utilizing again next year.

Currently, there are no major publicly traded graphite miners in the United States.

However, our sister publication, The Oxford Club, recently discovered a company poised to soar as graphite prices move higher. It manufactures carbon and graphite products.

But more importantly, it’s developed and patented several advanced graphite products that stand to revolutionize the consumer electronics markets. Its shares are cheap right now (trading for less than book value) – and this is no penny stock.