China’s slowdown leaves graphite industry with unshakable hangover

By Shruti Salwan
Published: Monday, 30 November 2015

Falling consumption of graphite in China as a result of weaker demand for steel, cement and glass refractories – which continue to represent the largest end markets for the mineral – looks set to ensure the sector remains on a downward trend until growth from batteries can take up the slack, IM Analyst, Shruti Salwan, discovers.

Those who had hoped for a recovery in the natural graphite market in 2015 have been disappointed. The year turned out to be one of the worst performing in the sector’s industrial history, with demand and prices eroding to levels not seen since before 2011, a year when selling values spiked amid supply concerns and a surge of enthusiasm about new applications.

With the exception of a few isolated upticks, graphite has been heading south for more than four years and the slump has taken all segments of the industry down with it.

The failure of prices to rebound in all end use sectors, from "traditional" markets such as refractories, gaskets and lubricants right through to the much vaunted battery applications, emphasises the extent of graphite oversupply which began to accumulate during the boom times and has now become a structural problem for the industry. Looking at the immediate picture, consumers have more than enough material in inventory and ready at suppliers’ warehouses to last them well into next year and, at the moment, demand doesn’t look set to increase rapidly enough to drive down stockpiles in 2016.

The recovery of the graphite industry is beyond its own control, since even production cuts are unlikely to revive prices without a significant rise in demand. Overcapacity has been compounded by difficulties in the mineral’s downstream markets – mainly the steel sector, which remains the largest single end market for natural graphite through refractories. Here, shrinking demand has disrupted the entire supply chain. 

There have been other external issues, too. Just as the industry was beginning to come to terms with, and attempting to negotiate, its deep-seated supply-demand imbalance, currency markets aimed a further blow at graphite in the second half of this year. The sliding value of the euro against the US dollar, followed by the devaluation of the Chinese renminbi as China scrambled to prop up sagging exports, posed new challenges for graphite producers.  

Despite some local capacity closures, either in response to weak market conditions or as a result of official orders to shut polluting and inefficient facilities, China, the world’s dominant graphite supplier, has maintained its output. This has forced higher cost, lower profit operations elsewhere to reduce or halt production levels, as Chinese companies manoeuvre to outcompete domestic and international rivals.

Looking at China and wider global economic growth projections, it seems that the present slump in graphite consumption will probably last longer than initially expected, with next year likely to register yet another decline from the 2011 price peaks. 

trends1 

Trends in 2015

Fading flake demand

Demand for refractory products is linked directly to consumption of steel, cement and glass, which in turn rely on economy-led construction and infrastructure activity. In H1 2015, Chinese steel output fell by 4.3% compared to the same period last year, while both cement and flat glass production registered declines of around 9%.

The figures for H2 2015 are expected to show further reductions in industrial output and lower usage of both flake and amorphous graphite. 

Shrinking demand from refractories manufacturers, which are also facing overcapacity and a generally sluggish construction market, caused Chinese flake graphite exports to drop by 30% year-on-year (y-o-y) in H1 2015. Shipments to the US and Japan declined considerably, while imports to Europe remained around the weak levels seen since the global financial crisis, signifying bleak demand conditions in major graphite-consuming markets.

Domestically, China’s steel and subsequently refractories overcapacity have forced many refractories producers to operate at less than 60% capacity this year. 

trends2  

Steel slump drags down amorphous segment

Following similar consumption patterns to flake, amorphous graphite, which is also used in refractories applications and as a carbon raiser and similarly relies on steel as a major demand driver, has been feeling the pinch of excess production, declining consumption and increased competition from low-cost coke products this year. 

Lower consumption rates of amorphous graphite in Europe’s top steel-consuming markets – construction and automotive – contributed to a 34% y-o-y drop in Chinese exports into the region in H1 2015.

Industry sources told IM in the second half of this year that coke shipments from Russia, which has been an intermittent producer of graphite in the past, are reaching European customers as a cheaper substitute for natural amorphous graphite. 

Falling Chinese amorphous exports prompted the country’s only amorphous producer, South Graphite Co. Ltd, to cut its prices in an effort to stimulate orders. On the demand side, some relief came in the form of recovering steel demand from Japan, owing to the country’s preparations for the 2020 Tokyo Olympics, but this was not enough to prop up prices.

Although the amorphous market has shown greater resilience than flake material to price erosion this year, IM understands that, in order to maintain orders in the face of weak trading conditions, some suppliers have agreed sales at price levels substantially lower than those reported at the beginning of the year.

In the present heavily discounted market, as sellers continue to negotiate orders of small volumes at the lowest possible price levels in order to offload material, the market could experience further volatility approaching the end of the year.

trends3  

Vein loses market share

Despite being the world’s only commercial source of this rare type of high purity graphite, which is used in thermal and high friction applications such as car brakes and clutches, Sri Lanka’s vein graphite producers had another challenging year in 2015, in terms of production and sales. This compounded an already fragile market situation for the country, which only recently emerged from civil war and possesses only rudimentary types of beneficiation technology.

Sri Lanka recorded vein graphite exports of just 3,100 tonnes last year – a five-year low for the industry and down by more than 40% on 2008. This figure is expected to drop below 3,000 tonnes in 2015. 

Despite these external factors, prices for vein material, which are set by the Sri Lankan government, have held up. A much-anticipated downward price revision of high purity vein grades from Sri Lanka was called off this year after China firmed up its stance on preserving its own natural reserves for further value addition, giving Sri Lanka an excuse to maintain its pricing structure, even though demand continues to fall away.

As a result, stable vein graphite prices are expected to prevail into 2016.

Table 1: Flake graphite price declines 2014-2015

Grade

% Decline since 2014

94-97% C, +100 mesh -80 mesh, FOB Qingdao

24%

90% C, -100 mesh, CIF Europe

23.07%

85-87% C, +100 mesh -80 mesh, CIF Europe

23.33%

Source: IM

Spherical – slow and steady

Demand for battery grade graphite has remained stagnant in a saturated market over the last 12 months. Although there are firm indications that this industry is growing at a tangible pace, the segment is also grappling with the familiar problems of weak demand and overcapacity. 

Flake graphite is used as a feedstock to make spherical graphite, which in turn is used to produce anode material for lithium-ion (Li-ion) batteries. Prices for processed spherical graphite have not tracked the raw material price downward, but have not increased either so far this year.

Spherical graphite exports from China, which dominates this industry
as a supplier, were down by 40% in H1 2015 compared to the same time last year.

Demand from South Korea and Japan for Chinese spherical graphite slowed considerably in the first nine months of this year, as production of portable batteries for smartphones, tablets and electric vehicles (EVs) has struggled to match the strong sales seen in 2010 and 2011. 

IM’s price for spherical graphite today stands at $2,500-3,000/tonne for 15 micron, 99.95% C, uncoated material on an FOB China basis.

However, the proportion of natural graphite demand accounted for by the battery sector is gradually expanding. Improved consumption rates for batteries used in EVs and electronic devices has fuelled confidence in this sector as a future growth market. But, as the industry waits for higher demand from this segment to translate into volumes, the arrival of any significant additional capacity in current market conditions could delay any upturn in prices. 

Another factor to consider is that natural graphite is competing against synthetic material for the battery market. Synthetic graphite, produced primarily from high carbon precursors such as petroleum coke and coal tar pitch, currently accounts for around 60% of the total material used in battery anodes. 

Synthetic graphite’s greater consistency in purity and availability offsets a price disadvantage compared to the mined form of the mineral, although a number of junior graphite companies have claimed the ability to iron out quality issues and guarantee supply of consistent natural material that matches or even exceeds the performance of synthetic graphite in battery and other applications. 

Future supply

Although dozens of new graphite mining projects continue to be developed around the world, only a couple of mines have come on stream since the 2011 exploration boom and at least one was forced to close this year shortly after opening in the face of tough market conditions. There are currently no signs of notable capacity expansions in the immediate or near future, but there are several on the horizon.

There is an expectation that new large flake graphite suppliers will emerge within the next two years, but who these are will depend on which new projects win the race for funding to start up operations. 

The present development timelines of even the most ambitious juniors suggest that it will be 2017 before any significant new tonnages hit the market. Many, on the supply side at least, are hoping that this will
coincide with a seismic upturn in demand, otherwise prices may be adversely impacted.

Price problems

As IM’s price data suggests, 2015 has been one of the worst years on record for graphite demand with markets in all major regions of the world feeling the pinch at the same time. There has been no consistent demand improvement at any point over the last twelve months that could underscore a positive change of direction for the industry approaching 2016. 

Despite apparently declining Chinese flake graphite output, a return to the pricing highs of 2011 remains unlikely. A significant swathe of upstream businesses now view this as a positive projection, favouring stability over volatility, however many fear that further declines in prices from present levels will rule out much of the new capacity under development.

Natural graphite prices for medium-to-fine mesh flake, imported into Europe on a CIF basis, fell by between 15 and 22% entering Q2 2015. 

Medium mesh grades that have registered significant declines since the start of the year are outlined in Table 1.

IM’s CIF Europe flake graphite prices, meanwhile, have fallen on an average by 60% since 2011, with the most significant decreases seen at the end of 2012. 

However, higher mesh grades with a carbon content of more than 97% – a purity achieved using either flotation, or chemical treatment, or both – have shown greater resilience than lower mesh grades to weaker demand.

While the junior side of the industry remains optimistic that an upturn in demand and prices could be on the horizon, led by growth in the battery sector and based on the fact that the majority of graphite prices have remained relatively flat since May 2015, further price decreases may be seen in Q1 2016. With battery demand not expected to make a quantum leap in the next three months, how prices fare will depend on consumption of steel refractories in Europe and the US at the start of next year.

Chinese demand is not expected to pick up until after the country’s New Year and Spring Festival holiday in February, and even then, any resurgence may only be temporary. 

While winter and holiday mine and plant closures in China usually result in an uptick in prices before the West’s Christmas break, as buyers replenish inventories in preparation for supply stoppages, increased supplies from Russia and Madagascar, coupled with weak Chinese domestic demand, is likely to pacify any rebound this year. 

As of now, the flake graphite industry is likely to face even more challenges going forward as demand side pressures in an oversupplied market continue to mount.