Spherical natural graphite prices plunge to 11-year lows on more competition from synthetic graphite

The price for spherical natural graphite in China has fallen to its lowest level in June 2023 since Fastmarkets began tracking it in 2012. The question remains, what is behind this historically low price?

The main argument commonly suggested is that demand in China for electric vehicles (EVs) – which use graphite in their batteries – was slower than expected after the removal of EV purchase subsidies, while there was also low consumer confidence and greater availability of low-cost internal combustion engine (ICE) vehicles in the country.

While the pace of Chinese EV sales slowed on a monthly basis in the first quarter of 2023, compared with the final three months of 2022, the number of EV units sold was still higher year-on-year.

But the price of spherical graphite began a downward trajectory in mid-June 2022, falling each month until January 2023. So the slowdown in EV demand in the first quarter of this year and the build-up in anode inventories were not the only factors behind the current low prices.

In the most recent calculation on June 8, Fastmarkets assessed the price of graphite, spherical, 99.95% C, 15 microns, fob China, at $2,000-2,200 per tonne, down by more than 42% year on year compared with $3,500-3,800 per tonne on June 9, 2022.

Competition with synthetic graphite

Impressive growth in demand for lithium-ion batteries from the EV sector, combined with tightness in graphitization capacity during the first half of 2022, led to soaring graphitization costs in China.

Graphitization costs for high-end products were up by 76% during their peak in April-June 2022 compared with the first quarter of 2021, while the low-end graphitization costs doubled in the same comparison.

High graphitization costs and limited capacity prompted significant moves by the industry to rapidly add graphitization capacity in China. Phenomenal demand growth from the EV battery sector also prompted the switch of graphitization capacity away from the electrode sector to the battery anode sector, attracted by higher margins.

Consequently, graphitization capacity in China more than doubled to more than 2.3 million tonnes in December 2022 from 1 million tonnes in March 2022, according to data from Chinese news provider BAIINFO.

The rapid increase in graphitization capacity during the second half of 2022 meant that graphitization costs tumbled, with the pace of decline accelerating in line with the growth in graphitization capacity. This trend was especially visible in the final quarter of 2022, when another 1 million tonnes of graphitization capacity was added to the market.

In May 2023, graphitization prices in China were down by 60% compared with their peaks a year earlier and fell below the January 2021 lows. The sharp reduction in graphitization costs prompted a significant rise in the output of synthetic graphite in 2022, up by 62% in the seond half of the year versus the first half.

As shown in the chart (below), prices for uncoated spherical natural graphite (uSPG) followed a similar pattern to those for graphitization costs. Producing uSPG is not associated with graphitization costs, which instead comprise the key cost component of the competing synthetic graphite precursor anode material. But the effect of lower graphitization costs was directly reflected in declining synthetic graphite prices and, in turn, rising competition in the uSPG market, with uSPG prices falling to an 11-year low in May 2023.

Declining coke prices reduce synthetic graphite production costs

Since last year, needle coke prices have gone down by more than 40%. During peak needle coke pricing, battery anode producers turned to cheaper feedstock, including non-needle coke and material with higher sulfur content. This has been confirmed by traders and Fastmarkets understands that some anode producers last year were taking orders for low-sulfur sponge coke, a feedstock usually used in the aluminium industry.

Another reason for anode producers to switch to other coke materials and grades was the fear that there might be insufficient supply of needle coke to feed the expanding production of synthetic graphite in the years ahead.

Furthermore, producers have found economically viable ways to desulfurize higher sulfur grades, thus improving their quality, while remaining cost-competitive against needle coke.

The combination of graphitization overcapacity, declining coke prices and weaker-than-expected demand from the EV sector has led prices for synthetic active anode material (AAM) to decrease significantly, with the price differential between synthetic and natural-based AAM narrowing to previously unseen levels.

In April 2023, the price differential between low-end synthetic AAM and low-end natural AAM fell to around 5%. As a result, the price competitiveness enjoyed by natural AAM has been erased. Natural graphite AAM was 50% cheaper than its low-end synthetic equivalent during the summer of 2022.

Near-term outlook for spherical graphite

With spherical graphite prices now at an 11-year low, the most common question is whether the market has reached a bottom and is a rebound in prices coming? The prospect of rising prices in the near term does not look promising, for several reasons.

First, after graphitization capacity rocketed by the end of 2022 and supply of synthetic material began to exceed demand, capacity utilization rates at graphitization facilities plunged to less than 30% of capacity in April 2023 from almost 80% in November 2022.

This indicated the enormous potential of the synthetic sector to bring idled capacity back into production once demand picks up. As a result, Fastmarkets does not expect any shortfall in synthetic graphite supply in the near term and, with so much available capacity, graphitization prices should remain low.

Second, the availability of cheaper and abundant coke feedstock provides extra room for synthetic AAM producers to cut prices in order to attract demand.

Finally, ample supply of natural graphite in China would hinder a more pronounced rise in prices, given that prices were continuously declining during the usual winter stoppage of operations in China’s major graphite hub, Heilongjiang.

Even with graphite producers in Luobei keeping production at a halt in April and May, prices continued to decline.

We could see an eventual rise in prices from restocking activity during the summer, but this would probably have a limited effect on prices, considering the other factors. Hence, natural graphite supply constraints are unlikely to be a significant factor for prices in the coming months.

Prospects for markets in Europe and North America

The anode supply chains in Europe and North America are in their infancy. Local supply in both markets is far from matching expected demand in 2023 and this supply gap will only become wider by the end of the decade.

The maturity of the Chinese graphite and anode industries provides China with significant advantages regarding knowledge and economic terms, with the scale of production allowing Chinese producers to remain competitive even in periods of subdued demand and prices.

The Chinese industry also benefits from support from traditional state subsidies on both demand and production. Lower local environmental, social and governance (ESG) requirements have also supported the initial growth of the anode industry, compared with the more stringent requirements in both Europe and North America.

For the development of localized graphite and anode supply chains, the support of the markets and governments will be crucial in Europe and North America. Support from local and regional governments is important to secure the development of local mining or refining capacity.

Local markets also need to recognize that, for local supply chains to be developed and to meet the higher ESG requirements of European and North American original equipment manufacturers (OEMs) and consumers, a premium over the price of Chinese anode material will be necessary.

Only through support from local markets and governments – as well as a commitment from consumers to pay premiums for diversified, local, ESG-friendly supply – will a sustainable local anode chain be established. This could provide the needed liquidity for the development of transparent pricing mechanisms, reflecting the dynamics of the European and North American markets.

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