Graphite escalates the Battery War | Hotter Commodities
China is once again flexing its proverbial muscles, imposing export controls on graphite and giving the Western world a reminder that it remains years ahead for certain aspects of the energy transition
Last week, the Asian country listed nine controlled items – three synthetic graphite-related items and six natural graphite-related items – that will be subject to dual-use item export license requirements.
This matters because China dominates graphite production worldwide, currently accounting for around 93% of capacity for active anode materials used in batteries for electric vehicles (EV). Graphite is the most commonly used anode material due to its high electrical conductivity, low cost and stable structure.
The trigger for the latest supply chain controls appears to be the very public trade spat between the United States and China, in which the pair are battling for semiconductor supremacy. But China’s new graphite export controls are actually yet another shot fired in the ongoing Battery War, which started quietly several years ago in Sweden and has escalated ever since.
In 2020, Chinese suppliers of graphite were told they could no longer secure licenses to export to Sweden. There was no formal announcement; consumers in Sweden were simply cut off.
The situation came against a backdrop of tense geopolitical relations between the two countries, in particular over a Chinese dissident recognized for an award by a Swedish advocacy group.
Perhaps a more interesting link is that Sweden is also home to Northvolt, founded in 2016 and building gigafactories reliant on graphite. With its first gigafactory currently ramping up in Skellefteå, Northvolt is widely viewed as a key competitor in the European battery manufacturing landscape and an important future alternative to China.
It’ll be interesting to see what happens to graphite exports to Sweden when Putailai, one of the major anode producers in China, builds Europe’s largest factory for anode manufacturing in Sundsvall in central Sweden in a couple of years’ time.
But it’s not all about graphite. Another escalation in the Battery War came earlier this year, when China moved to complicate the export of other products critical to the energy transition.
In July, China announced plans to limit exports of gallium and germanium from the start of August, triggering widespread consternation among manufacturers of advanced semiconductor chips and fiber optics cables, and leading prices to surge.
That’s because China, similar to graphite products, accounts for most of the world’s gallium output and around two-thirds of its germanium production.
It was a similar pattern for that particular ban, which followed an ongoing tit-for-tat fight between the United States and China that has seen the former restrict sales of advanced chipmaking equipment and technology to the latter.
As recently as October 18, the US further tightened controls on exports of advanced artificial intelligence chips in a bid to hinder China’s ability to manufacture advanced weaponry systems.
The graphite controls followed two days later.
With no end in sight to the geopolitical tensions, there is now a reliance on new graphite projects to ease reliance on China.
While Chinese capacity expansions are focusing on synthetic graphite, the rest of the world is turning its sights on new natural graphite supply, which is lower cost and typically more environmentally friendly due to the energy intensive manufacturing process of synthetic graphite.
Fastmarkets research has forecast that with new development occurring in Africa, the combined production of natural graphite from the continent will surpass China, becoming the major supply region globally in 2033 at 50% of global supply, up from 30% currently, with China dropping to around 30% from 60% currently.
But even with growth in capacity outside China, not all new graphite will be used in anodes; it has important other uses, including in its traditional consumption source, steel. Natural graphite is used as a component in bricks that line blast furnaces, while synthetic graphite is used in electrodes for the recycling of steel.
Unfortunately, weak graphite prices are not exactly incentivizing investment.
Within a year of peaking in the second quarter of 2022, prices for natural graphite battery precursor material slumped to an 11-year low and remain significantly below levels required to cover operating costs for new projects.
China itself is rapidly expanding its synthetic graphite capacity, having added significant capacity over the past year and with plans for much more to come, the vast majority of which is for anode material. In fact, Chinese capacity is expected to double in the next decade, to around 70% of synthetic production by 2033 from around 57% currently.
The bottom line is that even with all the new graphite capacity expansions, China will still account from around 80% of active anode materials capacity by the end of the decade, Fastmarkets research has forecast.
Efforts to use silicon instead of graphite in anodes will likely increase, according to panelists at Fastmarkets’ European Battery Raw Materials conference in Amsterdam.
But, given the cost advantages of graphite and the huge amounts of anode material needed going forward, silicon is in no way expected to replace the current market leader. And guess what? China is already responsible for most of the world’s output of high-purity silicon for anodes.
Despite all this, it is highly unlikely that China will suddenly switch off its graphite taps to the world with a complete export ban. Its own producers would suffer, and the vast sums of money already committed to graphite projects including across Europe would be wasted.
Similarly, it probably wouldn’t want to make it difficult for Chinese battery makers operating in Europe, including Contemporary Amperex Technology Co Ltd (CATL) in Germany and Hungary.
Ultimately, China accounts for almost 80% of global battery manufacturing capacity, and despite new gigafactories planned in the rest of the world, the Asia country’s dominance is set to continue.
Don’t forget that many western companies are partnered with their Chinese peers in projects through the battery supply chain, including in lithium, cobalt and nickel, and have no intentions of exiting them.
Ask the senior management at any of these western firms, including in the United States, Canada, Europe and Australia, and they speak with high regard of their counterparts in China and recognize the mutually beneficial relationships that they are in.
Erasing China’s dominance from the global active anode materials supply chain therefore seems highly unlikely, and the country has demonstrated it knows the strength of position it has. The Battery War is just getting started.