Robust demand likely to support natural graphite anode supply chain: 2022 preview
Growing new energy vehicle (NEV) take-up is set to boost demand for anode material, which along with China’s decarbonization efforts, a seasonal halt and global logistics interruptions, will support the natural flake graphite market at the start of 2022
China’s NEV production and sales maintained upward momentum in 2021.
From January-November, the country’s NEV output increased by 167.40% to 3.02 million units and sales increased by 166.80% to 2.99 million units compared with the first 11 months of 2020, according to the China Association of Automobile Manufacturers (CAAM).
Strong NEV growth will draw on increased volumes of natural flake graphite in 2022, given that sector is becoming a major downstream consumer of fine graphite flake, and support for the material has been solid since the end of 2020.
Meanwhile, intensifying global shipping issues, China’s power crunch and environmental inspections, and the suspension of production in winter have combined to send prices of fine flake and spherical graphite soaring in the second half of 2021.
This has driven upstream prices higher for the active anode material feedstock.
Fastmarkets’ assessments for graphite flake 94% C, -100 mesh, fob China and graphite flake 94% C, -100 mesh, cif Europe were at $750 per tonne and $755 per tonne on Thursday December 16 respectively, up by 44.23% and 24.79% from levels recorded at mid-year.
Fine flake graphite is then processed into spherical graphite, for which prices have also been rising strongly this year in response to demand and supply-side factors, such as the developing battery anode market.
Spherical graphite shipments in China’s domestic market were estimated at around 95,000 tonnes in 2020, in contrast to 130,000 tonnes in the first half of 2021.
Fastmarkets’ assessment for graphite spherical 99.95% C, 15 microns, fob China was at $3,100-3,300 per tonne on December 16, up by 24.27% from $2,350-2,800 per tonne on July 1.
“Chinese spherical graphite prices are at seven-year highs, and we would not be surprised to see the 2012 peak of $4,000 per tonne breached over the coming years,” Fastmarkets’ analyst Amy Bennett said. “Demand for active anode material from the EV battery sector is rising sharply, while Chinese spherical graphite producers are also facing rising power costs. We expect to see upward pricing momentum maintained well into 2022.”
Solid demand, uncertain supply
Fine flake prices in China are likely to stay near record highs for most of the first three months of 2022 due to solid demand for spherical graphite amid growing use in anode production along with supply interruptions and logistical problems, market participants said.
Additionally, demand from major consuming countries, such as South Korea and Japan, has been trending upward over the past two years despite the Covid-19 pandemic.
Shipments of uncoated spherical graphite from China to South Korea totaled 30,040 tonnes and those to Japan 14,877 tonnes from January-October 2021, up by 14.56% and 3.33% respectively from a year earlier, Chinese customs data show.
“There is limited spot supply for flake graphite, which will last until April of next year. Prices for flake graphite will be at a high level considering the uncertain supply situation in the major production region of Heilongjiang,” one flake graphite producer in China said.
While demand is showing strong growth, uncertainty about flake supply from China will continue from January-March 2022 due to a seasonal halt in production over the winter period and the 2022 Winter Olympics, sources told Fastmarkets. The games will be held in Beijing from February 4-20.
“There have been many new operation lines for spherical graphite in the past couple of years, indicating solid demand for flake fines as a raw material. Meanwhile, with artificial graphite operations for anode material being interrupted by energy controls in major production regions like Inner Mongolia, there could be growing space for its alternative, natural graphite, in the future,” a second flake producer said.
Production of fine flake graphite is expected to be relatively steady despite the current high price that has been driving producers to increase output.
“We don’t see too much other incremental supply coming online in the short to medium term, although there may be some increased future production in Madagascar and also Heilongjiang,” a third producer said. “Providing there remains robust demand from EVs, we expect prices to be supported.”
There is concern among producers that they might need to limit the volumes they offer into the market despite the current robust demand.
Oversupply in 2020 had caused prices for graphite flake 94% C, -100 mesh, cif Europe, to remain below $500 per tonne until November 26 of that year.
“We want to maintain balance in the market and the biggest limitation to our activity is containers and shipping line reliability,” the third producer said.
Logistics have added significantly to producers’ costs for sales on a cif basis. Several producers in China have responded to the logistical problems by marketing their material on an fob basis and handing the issue of transportation over to the buyer.
Chinese exports have been hardest hit by soaring logistical costs but they have also risen elsewhere.
“Furthermore, logistics will remain a problem for shipments from outside China, especially Mozambique for flake fines. Freight costs [from Mozambique to China] have been rising to $110-140 per tonne from $40 per tonne under normal circumstances,” the second source said.
If the logistics problems ease for producers outside of China, increased volumes will be allowed to come into the market and offer prices could be lowered as a result.
“We anticipate reduced availability from China with continued high freight rates. However, there could be a recovery in delivery options from Africa and this could lead to a price reduction for these grades again, in particular for the specific grades from Mozambique, such as -194,” a fourth flake producer said. “Otherwise, we are assuming stable price levels in Europe at a relatively high level for 2022.”
But the importance of freight rates in setting spot prices in China should not be overestimated, the third producer said, noting that China’s domestic price was more important than supply chain issues.
“The China market is by far the largest from a supply and demand perspective, so the price is set domestically based on inland delivery on a short-term spot basis. Delivery from imports takes quite a lot longer to fulfill sales and, therefore, the realization of spot prices is at a lag to the situation on the ground in China,” he said.
“As freight prices reduce, and freight availability opens up, it’s unlikely the price will move at this time due to balancing short supply conditions and strong demand growth,” the third producer said.
The cif Europe market could see prices fall if the freight market softens, assuming the Chinese market does not absorb the material, this source said.
“If freight rates do drop, then flake prices in the rest of the world are likely to soften, providing there is enough material and supply in China to satisfy local demand,” he noted.
Olympics and beyond
Fastmarkets’ research team expects flake prices of all sizes to remain elevated through the first quarter of 2022, at least until after the Winter Olympics.
“We expect China’s production to remain restricted during that period, however from the second quarter of 2022 onward we may see some modest downward correction in prices as China’s production returns to more normal levels,” Bennett said.
“Rising demand and production restraints will limit any potential price declines, however, with annual average prices in 2022 expected to remain above  levels,” she said.
Once production resumes following the winter halt in Heilongjiang, consumers - including those of spherical graphite for the anode market - in China might also increase the pressure for prices to be reduced.
“The current high prices are unsustainable and difficult for downstream consumers to accept. They have resulted from a combination of extreme factors, including the power crunch, environmental inspections, reduced shipments from outside China and the winter halt. Things might improve when spring comes [and operations restart in Heilongjiang],” a spherical graphite source in China told Fastmarkets.
Traders could have sufficient inventory for the winter season. But refractories - the traditional major downstream consuming sector of fine flake graphite - face pressure in China, with steel mills’ output cut in line with China’s decarbonization policies.
There could, therefore, be some downward adjustment in price next year, one trader source in China said, even if demand from the anode battery sector continues to rise for spherical and fine flake.
The impact of the policies to decarbonize China’s economy might also be felt on the supply side and in terms of domestic demand.
China’s position as a significant net exporter of energy-intensive material has been declining in numerous markets, including in the energy-intensive ferro-alloys sector, according to Bennett, which has left less material available for export.
“We can see similar developments for the Chinese graphite industry in the coming years, reflecting both the rapid expansion in demand for graphite from the EV battery sector and environmental controls and persistent issues with electricity costs and availability,” she said.
While Chinese production has been hampered by rising costs and falling flake reserves, producers in Africa and elsewhere have sought to increase their market share.
“The domestic supply chain is about to be broken in China,” one market participant said. “We think their problems will remain when Chinese manufacturers restart production in 2022. These problems occurred before they stopped their production and will exist after they return.”
Fastmarkets’ research team focuses on tracking, analyzing and forecasting supply, demand and prices, and providing market insight and thought leadership.
This piece was originally published to Fastmarkets Metal Bulletin on Monday December 27, 2021.