Graphite – The only way is up

By Davide Ghilotti
Published: Thursday, 15 December 2016

Temperature-resistant, unusually stable and unreactive, graphite is a key ingredient in refractories, lubricants, batteries, flame retardants and pencils. But oversupply has dragged the mineral’s value down to record lows and only controls on Chinese production complemented by a surge in demand from new applications can reverse its fortunes.

The northern hemisphere winter used to be the favourite time of year for graphite suppliers. Chinese mines would close, meaning that supply would be short and prices for the mineral would increase. Today, however, surplus production means that the market no longer has to brace itself for shortages.

"We’ve been waiting for the winter to come, but for graphite prices, it hasn’t; not for three years now," one seller of refractory-grade graphite told IM in November.

Until a few years ago, few would have foreseen such a drastic downturn in the graphite market. Its thermal and electrical conductivity make it suitable for use in batteries, engines and fuel cells, while its resistance to high temperatures and thermal shock, inertness and lubricity are exploited by industries including refractories, lubricants and friction materials. Such a diversified demand base usually shields a mineral from sharp slumps in a single market. But a combination of factors, including the composition of graphite end markets, overcapacity and patterns of demand have weakened the sector.

In terms of end use, refractories remain the single largest end market for graphite. According to the IM Graphite Market Outlook to 2021, in 2015 refractories accounted for 40% of overall graphite consumption. Demand from other industries is expanding; metallurgy accounted for almost 30% last year, with the rest equally split between lubricants, components and batteries, plus significant niche markets in flame retardants and insulation (see box).

Large-flake graphite is used in refractory crucibles, bricks and nozzles; in magnesia carbon bricks for steelmaking furnaces; continuous casting applications in the form of carbon bonded mixes; speciality silicon carbide-graphite bricks for blast furnaces; and other heat-resistant products.

Graphite end markets 2015 
graphite1.jpg (22.2 KB)  
Source: IM Graphite Market Outlook to 2021 

Refractories

Graphite’s high level of exposure to the refractories market, which is principally reliant on steelmaking, led to strong expansion in demand from the late 1990s into the 2000s. Following years of strong annual growth, punctuated by a brief dip during the 2008-09 global financial crisis, worldwide steel output peaked in 2014 at 1.66bn tonnes, according to World Steel Association (worldsteel) figures. 

By December 2015, steel production volumes had shrunk 3%, wiping out 39m tonnes from yearly global output. China, which accounts for about half of global steel production, has set out bold plans to reduce its steel capacity by 100-150m tpa by 2020. This phased contraction is reducing China’s demand for refractories.

After a weak start to this year, a strong recovery since the second quarter has meant that 2016’s steel output to date has been fairly flat with 2015. In January-October, global crude steel production stood at 1.33bn tonnes, down just 0.1% on the same period last year.

Worldsteel expects global demand to grow by 0.5% next year, as the outlook improves in key regions such as Central and Latin America, North America (NAFTA), Europe, Africa and the CIS.

The Chinese government has put forward a number of stimulus measures that are expected to raise domestic steel demand, through boosts to infrastructure spending, real estate and the automotive sector.

At the same time, availability of cheap steel and oversupply in the last few years has unbalanced the market. The steel capacity utilisation ratio currently stands at around 70% of global capacity, meaning that restructuring has to continue to bring supply back in line with demand.

This will translate into more steel plants around the world reducing output or closing, which in turn will continue to reflect on demand and prices for the industrial minerals used in refractory making, including graphite.

China’s Natural Flake Graphite Exports Jan-Aug 2012-2016 
Graphite2  
Source: China Customs

Oversupply

"The issue for graphite mines is overcapacity – pure and simple," one North American graphite market participant told IM. "Demand today requires about 60% of current global capacity."

Existing graphite companies need to remain in operation to generate short-term cash flow. This has meant that supply has remained steady, even as demand has ebbed. China, where state-owned companies account for a significant proportion of graphite production, was particularly responsible for this. As Chinese inventories expanded, more and more supply was shunted into export markets at heavily discounted prices.

While it is difficult to assess the extent of flake graphite stockpiles in the warehouses of Chinese producers, market sentiment assumes high inventories and that production is not slowing down.

Many blame China’s government for this situation. Chinese authorities have arguably been less strict about reforming the domestic graphite industry than they have been in other industries, such as rare earths. 

Regulations to manage graphite supply have not been implemented on an effective scale. This is in contrast to Chinese government intervention two decades ago, designed to boost the then nascent graphite sector, triggering the fast sprawling of operators and sellers which reshaped the global graphite market and put many Western mines out of business.

However difficult reining in China’s unruly graphite sector might be, change is not impossible. In order to bring about better transparency, foster standardisation and solidify the rare earths industry, Beijing dictated a sharp restructuring, starting last year. Six leading companies were formed, each of them in direct control of several small subsidiaries which had previously been independent producers. This consolidation approach was designed to reduce the number of small players in the market and, thus, curb cutthroat price competition domestically and in exports.

The success of this policy is debatable, but there are signs that the Chinese rare earths sector is at least beginning to stabilise.

To date, this has not occurred to a meaningful, nationwide extent in China’s graphite industry. Local producer associations have called for a clampdown on illegal mining operations, stricter controls on permits and production practices and for the industry to become more concentrated. 

According to the China Graphite Commission, there were 194 active Chinese graphite companies in 2015 – a number which many feel is too high to be healthy.

The work of local industry bodies is meaningful, but without backing from Beijing, it cannot force the consolidation that is required to bring graphite supply under control.

Graphite3 
Flake graphite is processed and purified to obtain spherical, battery-grade material, suitable for battery anodes. 

Graphite price trends

Over the past year, and for a good part of 2015, global prices for graphite sourced from nearly all parts of the world have moved downwards, while those that did not have remained stubbornly flat.
Since 2011 when graphite prices peaked, values have fallen by more than a third on average, continuing to edge down throughout 2016, despite some short-lived rallies at various points throughout the year.

Flake graphite grades have been among the hardest hit. As of late November, prices for 94-97% C, +100 -80 mesh flake graphite into Europe stood at $700-750/tonne CIF, while lower purity 90% C, -100 mesh material was selling for $500-550/tonne on a CIF EU port basis. Both grades have lost several hundred dollars since early 2015.

Prices for Chinese-origin 85-87% C, +100 -80 mesh flake graphite hardly moved from the $450-500/tonne FOB Qingdao range for most of this year. The same trend was seen for 90% C, -100 mesh product, which remained flat at below $500/tonne FOB Qingdao. Higher purity Chinese 94-97% C, +80 mesh flake traded at an average $900/tonne FOB Qingdao during 2016. 

In terms of demand, the trading environment for graphite was mixed this year. Enquiries for the main grades of flake and spherical graphite picked up only slightly in the second half of the year, but overall volumes improved in 2016 compared to the year before, when there had been a sharp drop in Chinese exports.

In August, export prices for Chinese natural flake graphite rose 42% on the previous month, nudging average prices for the first eight months of 2016 1% higher year-on-year. After a quiet September, flake graphite prices regained their positive momentum from October onwards. Suppliers in India and China told IM at the time that there had been a sudden surge in enquiries from industrial consumers who had previously resisted purchasing.

This did not force upwards price pressure, however. In a market driven by buyers leveraging large available stockpiles, sellers were unable to raise quotations despite the higher demand in October-November. 

Producers are not optimistic of a market turnaround in the near future. "I do not believe the market has bottomed out yet," one supplier told IM. "The issue for all graphite mines is, which ones will run out of funding and be forced to close and which will survive these difficult market conditions," another source said.

The prolonged period of weakness may force some Chinese suppliers out of the market, although this has been forecast before without resulting in mass shrinkage in the number of producers. Some of the most financially exposed companies may have to shut or cut capacity, but unless this supply is permanently removed most mines can reopen again as soon as prices pick up, creating a vicious cycle. 

Most agree that regulatory intervention is needed to rebalance the market and reduce stockpiles, although others think that market forces should be left to shape the sector.

Flake graphite prices 
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Market prices for several graphite grades have remained under pressure
for most of this year. Higher demand in H2 failed to lift prices. (Source: Industrial Minerals)

Batteries: No easy way out

As the refractories industry appears to be locked in terminal decline, current and prospective graphite suppliers are looking for new markets. Most single out the battery sector as the one that will inject new dynamism into graphite demand.

The mass production of portable electronics and electric vehicles (EVs), both powered by lithium-ion (Li-ion) battery technology, have caused battery demand to surge. Graphite, which is used as anode material in Li-ion batteries, is one of the major raw material inputs – accounting for considerably more of a battery’s volume by weight than lithium.

But while lithium prices have skyrocketed this year, graphite prices have not. On the one hand, a bottleneck in lithium supply coincided with a sharp uptick in demand from the batteries industry, which caused prices to rise more quickly than they otherwise might have done, whereas graphite availability has been plentiful.

Specifications for battery-grade graphite, or spherical graphite, are much narrower and more demanding than those for refractory or lubricant grades. Adapting flake graphite for battery use involves a series of processing stages – chemical purification, micronisation, spheroidisation and coating – to achieve the spherical shape, size and high conductivity needed for anode materials. 

As with the raw material, China also has a monopoly on graphite sphericising technology. Although techniques have improved, the yield of spherical graphite from flake processing remains less than 50% its original flake volume.

Chinese spherical graphite is consumed in domestic battery production and exported in uncoated form to other battery-producing hubs, such as South Korea and Japan, where it is coated according to the requirements of local battery makers.

Outside China, a number of companies are trying to set up alternative spherical graphite operations using graphite sourced from their own mines or in some cases from non-Chinese partners. None of these have so far achieved stable, large scale commercial production.

In contrast, Chinese exports of uncoated spherical graphite reached a five-year high in January-August of this year, up by 55% against the same period in 2012. The uptrend was ascribed to growing demand from the battery industry, but the weight of supply meant that prices did not follow volumes, but rather went the other way, falling by 6% from 2015.

The softening of prices highlights stark competition between Chinese suppliers to win market share and demonstrates how new producers will have to be able to compete with China on price and be flexible with their production costs in order to secure buyers.

Graphite5 
The global market for natural graphite has been affected by severe
oversupply.

Synthetic alternative

Supporters of using synthetic graphite in many of the applications targeted by natural graphite producers claim that man-made material has inherent advantages in terms of supply security and product consistency over its geological competitor.

Synthetic material can be produced to fit specifics that are harder to achieve in mineral ores owing to variations in mineral structure, carbon content and impurity levels. Synthetic production processes can ensure that the final graphite product meets detailed criteria uniformly in mass produced batches for exacting markets such as batteries.

Because of the energy-intensive process needed to make it, prices for synthetic graphite are typically higher than those for natural graphite, but are much less volatile.

At the same time, current availability of synthetic graphite is low compared with natural graphite. Industry observers say the synthetic market will most likely expand in the coming years, but given the plentiful supply of cheap natural graphite, the mineral will be difficult to unseat in most of its established markets.

One possible outcome is a closer relationship between the two materials, as R&D departments work out ways of maximising the benefits of both types of graphite by combining them or using natural and synthetic components within the same products.

"There will [eventually] be a blend between synthetic and natural," one market source told IM. They stressed, however, that natural graphite will remain dominant in terms of overall volumes consumed. "It could be a 75% natural, 25% synthetic split," the source suggested.

Graphite6 
Junior developers hope the graphite market will rebound following high demand for the mineral from battery producers. 

Junior projects

Exploration activity by junior graphite mining companies has continued, although this part of the industry is significantly less crowded than it was five years ago.

Despite the low prices and repeated warnings that the market is oversupplied, graphite continues to attract investors seduced by the prospect of a battery-driven market boom or even a breakthrough in graphene technology.

Outside China, there are currently graphite projects at various stages of development in North and South America, Africa, Europe and Australasia.

Scepticism has grown over graphite’s investment case, for reasons not unique to the sector, including long project timelines of many juniors, the lack of financing, sovereign risk and the huge cost of building mines in some of the more remote locations. 

The unremitting decline in graphite prices and the failure of new applications to engineer a market turnaround has made financing even more difficult to come by for graphite than for some other minerals.

Graphite juniors are well aware of these challenges and many have rushed to put forward optimistic possibilities for the sector’s future. In a recent conversation with IM, Alistair Smith, managing director of ASX-listed TanzOz Ltd, which is developing a graphite project in Tanzania, suggested that the high availability of cheap graphite could eventually lead to the mineral being used as a carbon material in a much wider range of applications than it is at present.

This would help clear existing stockpiles, Smith said, which could bring the graphite market back into a position where higher demand can lift prices.

Most industry observers agree that the Li-ion battery market has the best chance of driving up consumption. Within this sector, energy storage technologies are the most likely to eat up large volumes of graphite, according to Smith. "There is more potential to increase [consumption] with battery storage than with EVs," he said. 

There are convincing reasons why this might be true. First, the EV industry is working to reduce the weight of its batteries in order to increase the efficiency of the vehicles they power, whereas stationary energy storage applications have fewer restrictions on size and weight and therefore on how much graphite they use. Second, energy storage is desperately needed to make the renewable energy economy work. Strong government backing for renewables around the world has led to explosions of wind and solar capacity, but so far this has not been matched by ways of storing the energy these generate.

Yet all these tantalising sensible arguments pointing to growth in graphite consumption have so far not translated into real demand. Instead, the sector is caught in a limbo of high expectation and tough reality. 

While some suppliers believe that the market has further to fall, others insist that the only way is up. 

It looks certain that there is not enough room in the market for all of the currently active juniors to enter the supply chain and the jury is still out on what project features are necessary to ensure success. In the end, though, the direction the graphite market takes from here ultimately depends on Chinese reforms.

Flame retardants

Expandable graphite flake made from natural crystalline graphite can be used as a fire retardant additive for materials including wood, foam, plastics and other construction materials. It can also be used to enhance the performance of other fire retardant additives, such as phosphates, halogens and nitrogen compounds.

The flame retardants industry is expected to expand in the coming years, as will its share of graphite consumption. 

Growth in flame retardant demand is due partly to increasing construction activity globally, which generates the need for fire-proof insulation, cables, wires and interior furnishings.  Stricter health and safety regulations which have led to the demise of halogenated, bromine-based flame retardants in favour of less harmful, halogen-free materials have also boosted graphite usage. 

A major shift from bromine-based to halogen-free flame retardants is not bound to happen overnight, but it is a trend in the right direction for graphite demand. Research is currently underway into expanding the range and versatility of graphite-based flame retardants, including as foils and resins.


Editor's note: the Graphite end markets 2015 chart was corrected on 3 January 2017.