Graphite is a critical raw material in the anode battery mix but it is seeing shifts in its supply chain which could lead to a bottleneck, against a backdrop of rocketing demand from the new electric vehicles (NEV) sector and with competing requirements for synthetic material for graphite electrodes, sources have told Fastmarkets.
From January to November 2021, China’s NEV output increased by 167.40% to 3.02 million units, and total sales increased by 166.80% compared with the first 11 months of 2020 to 2.99 million units, according to the latest data from the China Association of Automobile Manufacturers (CAAM).
Estimates of China’s total sales of NEVs in 2022 have been as high as 5.48 million units, according to an analyst with one broker in China. This would suggest average monthly sales of 460,000, against a monthly average of 270,000 in 2021.
This means that the world is going to need a lot more graphite, given that graphite, in both natural and synthetic forms, is used for the anode of the lithium-ion batteries used to power NEVs.
Synthetic graphite has been dominating the anode market for the past couple of years, with natural graphite battling to increase market share.
Currently, synthetic graphite makes up around 80% of the anode market in China, and has needle coke as its largest ingredient, according to sources.
Nevertheless, 2021 might see a supply shift in graphite anode raw materials amid China’s decarbonization efforts and given downstream manufacturers’ awareness of supply chain diversification.
Graphitization: synthetic anode versus graphite electrodes
“Demand for synthetic graphite from the steel industry for graphite electrodes is still the major market, but the share taken by the battery sector is rising,” Fastmarkets analyst Amy Bennett said. “We understand that, in 2020, demand for needle coke from anode material producers accounted for 45% of total Chinese needle coke production.”
Both graphite electrodes and synthetic anode material use needle coke as raw material. While electrodes and anode materials are mostly processed via different procedures, they share the Acheson furnace graphitization process before the product is finished, according to sources.
This indicates that there is the possibility of a shift from electrodes graphitization to the anode sector due to increasing demand and soaring marginal profits in anode graphitization.
“A new conflict is emerging between the traditional steel manufacture and new battery applications,” Benjamin Sarkoezy, an analyst with graphite electrodes consultant GES, told Fastmarkets in October.
There is the siphon effect of high marginal profit for anode graphitization compared with the electrodes sector, according to a second analyst with another broker in China.
“The latest graphitization cost of anode material stands around 20,000-25,000 yuan [$3,135-3,919] per tonne while the cost for graphite electrodes is 5,200 yuan per tonne,” the same analyst added. “The wide gap in processing cost is leading to the gradual conversion from graphite electrodes capacity to the anode sector.”
Several graphite electrodes producers confirmed the phenomenon, and said that about 10% of furnaces used for outsourced electrodes graphitization have converted to anode processing, while many others are waiting on the market sidelines to see whether the current profit in the anode sector will be sustainable.
If the marginal profit remains consistent, the capacity competition could intensify.
This has sparked concern in the electrode sector that it might become increasingly difficult to secure raw material, as well as access to processing facilities amid energy consumption controls in China, according to market sources.
China is the world’s biggest producer of graphite electrodes and coated spherical graphite. A shift from graphite electrodes to anode manufacturing could mean that supply will remain limited for graphite electrodes in the context of China’s rigid anti-pollution efforts.
Additionally, there is little enthusiasm for expansion of the electrode sector in Europe.
“Around 90% of electrodes output is Chinese, and I don’t see this changing in favor of Europe. You can’t start a facility in Europe just because there is strong demand for small-diameter electrodes,” Sarkoezy said.
“Europe’s policy-makers take a very different approach to the electrodes and anode sectors. On one hand, they are very keen to develop local production for the anode, but they are just trying to keep the steel-making electrode sector out of here,” he added.
While there is concern among those in the electrodes market about the developing influence of the anode market, some market participants believed that the steel market would be able to respond to the higher electrode costs.
“If there is a shortage in capacity then any swinging graphitization companies will meet the demand from the steel sector,” a graphite producer source said. “The cost of electrodes is totally insignificant in terms of the production of steel for electric-arc furnaces.”
Synthetic or natural graphite
The debate around the use of natural or synthetic graphite in anodes has been vibrant in the industry.
One winner in the rivalry between synthetic graphite and graphite electrodes may be natural graphite, if its existing price advantage over synthetic material increases further, according to sources.
“Synthetic anode material has been holding its dominance in the battery sector,” according to one anode producer in China, “due to its superiority in cyclic performance for longer life, efficiency in the charging and discharging process, and compatibility with electrolytes, which means it gets used most often in the power battery market and high-end consumption market.”
US-based electric vehicle producer Tesla made three public comments at the start of December supporting waivers for tariffs on graphite. It said that only mainland China could provide the quantity of artificial graphite it needs to manufacture its batteries in the United States.
But natural graphite anode is competing with lower energy consumption in its production process and lower costs, especially since China imposed energy consumption controls on graphitization.
“About half of national graphitization capacity is based in [the Chinese province of] Inner Mongolia, where energy consumption controls in the past two years have interrupted capacity significantly and increased consumers’ awareness of expanding supply chains to natural graphite, given its accessibility and lower exposure to energy controls against the Acheson graphitization process,” a battery manufacturer in China said.
Meanwhile, despite major producers’ efforts toward integrated graphitization capacity expansion, the increasingly strict environmental review processes, as well as local regulations on existing capacity, indicated growing uncertainty about synthetic anode production.
Elsewhere, regarding anode prices, industry sources told Fastmarkets that the average price spread between synthetic and natural anode material of similar grades reached 16,000 yuan ($2,508) per tonne by the end of December 2021, against 12,000 yuan per tonne in middle of the year.
Fastmarkets assesses the price of uncoated natural graphite rather than coated active anode material, which is the last stage of processing graphite before it can be used in a battery anode.
The most recent price assessment for graphite, spherical, 99.95% C, 15 microns, fob China, was $3,100-3,300 per tonne on December 30, 2021, a rise of $700-750 per tonne from $2,350-2,600 per tonne at the start of the same year.
This price differential has sharpened consumers’ appetite for natural graphite, at the same time as they have sought diversified suppliers of material to ease their dependence on China.
There is international support in Europe and the US to develop a strong anode supply sector. And this can be expected to feed into several graphite producers developing their downstream sectors, according to sources outside China.
Original equipment manufacturers (OEMs) had been reluctant to commit to offtake agreements with producers. But Australia-based graphite miner Syrah Resources secured an offtake agreement in December with Tesla to supply natural graphite active anode material from its Vidalia production facility in the US.
