Back to black

By Davide Ghilotti
Published: Thursday, 14 December 2017

The graphite industry has gone through a year marked by abrupt changes in supply patterns and market prices - various factors shook up the sector after years of weakness. Demand from refractories and batteries is growing, injecting new hope to the industry, Industrial Minerals deputy editor, Davide Ghilotti writes.

It has been quite a year for graphite, one in which security of supply and price swings have pushed the mineral back onto the main commodities stage.

Looking back on a year in which there were arguably more changes than in the previous five or six years combined, one thing is glaringly evident: Most market participants active in graphite did not foresee the changes.

Major changes in demand patterns and in global supply led some unexpected volatility.

On the positive side, growth in leading end-markets - specifically steel - led to a rebound in demand for refractory-grade graphite. Lithium-ion batteries - and electromobility more generally - remain the talk of the day and, with that, the focus is on main mineral raw materials.

Graphite seems to be starting to benefit from increased demand although its journey has not been as exciting as that of lithium or cobalt - not just yet.

Chinese flake graphite exports (January-September) 
Source: China Customs

Supply: up and down they go

Securing sufficient supplies of graphite had not been problematic for consumers over the past few years. Until months ago, most perceived the global graphite market to be lingering in a situation of oversupply and sluggish demand.

Sales to the battery sector were increasing while those to refractories were weak but, overall, buyers knew they could place an order on almost any day and be certain of finding the material and at a good price. This was broadly the sentiment among delegates at the IM Graphite & Graphene conference in Berlin in March.

This year, however, the tide turned - and more than once.

China ended its export duty regime, creating downward price pressure on international sales. Shortly afterward, the environmental-related clampdown on polluting industries led by Beijing came to hit graphite processing as well, choking off production in the country and triggering a rebound in prices. Local sellers seized the opportunity they had been awaiting for for years, drastically reducing availability, leading prices higher still in the fourth quarter. 

As with many stories in mineral commodities, China was the epicenter. The country supplies more than half of the graphite consumed globally; developments there have wide-reaching effects.

Late in December 2016, the central government announced the scrapping as of January 1, 2017 its export taxes - they had been subject to a 20% duty - on international sales of natural and amorphous graphite products. 

The industry at the time believed that China wanted to reduce internal pressure from high stockpiles by giving domestic sellers the opportunity to pursue new business, cutting already-low export prices further still. With the tax scrapped, the theory was that there was room for a price drop while keeping margins unchanged. Several sources feared a price war might develop.

This is what happened - to an extent. By mid-January, Chinese producers had reduced their prices by an average of 10-15%, depending on the grade. This affected both flake and amorphous material. In practice, this meant a drop of anywhere between $40 and $150 per tonne - a significant feat after years of price declines.

This scenario characterized the market in the first and most of the second quarter until environmental inspections started.

Controls on industrial operations, which have intensified in China since the start of the year in a quest to curb high pollution levels, in the summer reached Shandong province, where many graphite companies are located.

As with other minerals, production facilities were unable to operate fully and new output was drastically reduced.

Plus mesh sizes have been particularly curtailed - these require acid processing, which is one of the many points of focus of the environmental controls because it is deemed particularly polluting.

Crucially, this led to a rebound in market prices, albeit at different paces. While high-purity grades and plus mesh products enjoyed significant increases in the second half of the year, lower-purity and minus mesh materials were steadier.


Price developments

Until very recently, selling prices had trended consistently lower - after peaking in 2011, prices fell gradually but steadily, losing over a third of their value by 2016. 

With the scrapping of the export duty, practically all graphite grades took another downward turn. 

By end of January 2017, flake graphite 94-97% C, +80 mesh, had fallen by 14% on average to $700-855 per tonne from $850-950 per tonne fob China before the duty cut.

Similarly, 94-97% C, +100 -80 mesh material fell 11% to $615-720 per tonne fob China from $700-800 per tonne while 94-97% C, -100 mesh product also dropped 11% to $480-630 per tonne fob China from $550-700 per tonne.

After several months of relative calm, markets moved again around the end of June but in the opposite direction. Within a month, +80 mesh material had gained more than $100, reaching $800-960 per tonne by the end of July, reflecting curtailed operations at Chinese facilities. The price uptick was more moderate for the other two mesh sizes, which rose by around $30 and $20 respectively. 

In the following months, all three grades increased rapidly. At the time of writing late in November, +80 mesh stands at $950-1,110 per tonne fob China, or 33% above its January level after the duty was cut; +100 -80 mesh is currently at  $800-940 per tonne, 30% higher, and -100 mesh material is at $555-690 per tonne, an increase of 12%.

While interruptions to Chinese producers affected output, sellers were quick to capitalize, causing the first price rise.

Several China-based graphite producers and sellers told Industrial Minerals over the past month that were now serving only those customers with whom they have a close relationship and were not taking new orders. Advance payment in full was requested as a necessary condition to commit to any sale. 

"When prices finally show they are beginning to rise, sellers usually stockpile the products and wait for the price to increase more," one graphite processor said.

So the perception of shortage is being exacerbated by sellers themselves, who are holding back from offering and creating the conditions for prices to rise further.

"Now that supply is short… producers hoard material and don’t sell. By doing so, they are actively worsening the situation. They contribute to create a shortage so that they can sell at stellar prices," a graphite distributor claimed.

While production cuts are the prime drivers of shortages in minerals such as bauxite, alumina or magnesia, in graphite it is being driven by a combination of lower output and producers’ actions, he added.

While price increases are bringing in more revenues, profit margins are not rising at the same rate because producers’ costs are also growing.

"We are paying more for energy, feedstock ore and for waste. Road freight has increased and the inspections meant running at low capacity. All costs have gone up," one local producer said.

Meanwhile, the European market - not only Chinese supplies delivered to Europe but also non-Chinese producers selling in the bloc - behaved differently in the first half of the year although it subsequently witnessed the same price upticks in China in the second half.

Prices on a delivered EU port basis were initially unchanged after the duty cuts in China due to high China-Europe freight costs and higher offers from European suppliers. Falling availability over the summer months and a gradual increase in demand put European sellers in a position to secure higher prices. This did not affect all grades equally: High-purity graphite grades took off while low-purity grades remained stable.

Bullish sentiment among suppliers, both in China and in Europe, is likely to govern short-term price direction. With the winter now coming to mining areas in China, production will stop or be reduced further for a few months. 

The Chinese New Year festivities, which will fall in mid-February 2018, will mean very little activity in China in the run-up to the holiday.

So, little is expected to happen in China before March next year. By then, some market participants not only in graphite but other refractory minerals as well, are hopeful supply patterns will tend towards some form of normalization, although it is unclear if and how this will play out.

Controls on Chinese graphite operations, such as the one
pictured, meant that for some production came to a standstill. 

Demand: refractories and batteries

On the demand front, arguably the single most relevant factor supporting graphite trade this year has been the strong performance of steel markets. Steelmaking is the largest application for refractories, taking 60-70% of output of global refractories.

In turn, as much as 40% of graphite is used in refractories. The fortunes of graphite are intrinsically linked to the performance of steel.

According to the World Steel Association, global steel production increased by 5.6% in the nine months to September 2017 to 1.267 billion tonnes, with notable expansions across all regions.

Leading the way was Latin America, where output rose 8% on year-ago levels. Although the region remains the smallest among steel-producing origins, this increase is nonetheless indicative of an underlying strength in the sector after several years of falling output and closures. 

Steel output in Europe and North America grew 4% and 3% respectively. China, which accounts for about half of global output, rose 5% in the nine-month period to 399 million tonnes. 

This is good news for all industries that serve steelmakers, which includes refractories. In fact, in their latest updates to investors, leading refractories suppliers such as RHI Magnesita and Vesuvius all highlighted improving steel markets as a leading factor in growth in total business in 2017 to date.

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

Separately, the battery market continues to develop at a fast pace, mainly due to an electrically minded automotive sector that is keen to ride the wave of electromobility by shifting output and resources towards electric vehicles (EVs).

This tendency is evident in practically all major markets, including China, which according to forecasts is due to become the single largest market for EVs globally.

Global sales increased 55% last year to 695,000 units, centered on China, according to data from Bloomberg New Energy Finance (BNEF). 

Although EVs account for just 0.8% of the 84.24 million cars sold worldwide in 2016, they are forecast to account for more than half of new sales by 2040 - by that time, a third of all cars on the road will be electric, according to BNEF.

Carmakers are jumping on the bandwagon to harness the business opportunities that EVs offer. Volvo will produce only hybrid or full-electric models from 2019, it has said; the Volkswagen group said it aims to sell 1 million battery-driven vehicles by 2025; and PSA Peugeot Citroen is working to produce electric models of several of its compact cars by 2020.

Governments have done their bit, too, as they bring forward sustainability-centered agendas. France and the UK will ban the sale of combustion engine vehicles (ICEs) - petrol or diesel cars - by 2040. Other countries are considering similar timetables.
Graphite plays a crucial role in the chemistry of lithium-ion batteries as the main component of the battery anode.

While any higher output of EVs would raise graphite demand, this end-market remains at the development stage for graphite suppliers.

According to the Industrial Minerals Research Graphite Whitepaper 2016, a little below 120,000 tonnes of graphite goes directly into battery production.

To achieve a graphite product suitable for battery use, natural flake graphite needs to go through several processing stages - chemical purification, micronization, spheroidization and coating. The final end product is a coated spherical graphite.

On the processing front, there has been some improvement to ensure higher yield of spherical material from the processing of the flake. Having the highest yield possible is crucial to ensure it is economical for producers to consider manufacturing spherical material at all.

At the same time, despite the improvement, yield remains arguably the single largest hurdle for companies looking at this market.

Current yield levels still hover around 50%: this essentially means that half of the graphite fed into the process is discarded as waste while only half of feedstock is turned into sellable spherical graphite.

Chinese flake graphite prices 
Source: Industrial Minerals 

Spherical exports: a mixed picture

China mainly sells spherical graphite in its uncoated form to other destinations in Southeast Asia, such as Japan, where the coating is applied. Chinese exports of coated spherical graphite are, by comparison, much lower.

In January-September, exports of Chinese spherical graphite (including both coated and uncoated material) stood at 28,860 tonnes, up 12% from just above 25,000 tonnes a year earlier.

In value terms, exports in the first nine months of the year at $91.11 million were 7% lower at than $97.63 million a year earlier.

Data for the past few years highlight a clear discrepancy between exported volumes, which have gradually increased, and value, which has declined.

Exports of coated spherical graphite alone are very different. There were double-digit year-on-year decreases in almost every month so far this year in both volume and value terms. As of September, coated spherical exports accounted for less than 300 tonnes.

What this may show is that, finally, additional demand from the battery sector is directly translating into higher trade. But the drop in value - and average unit price - suggests that the stellar price boost the EV industry has delivered to other battery raw materials such as lithium and cobalt has yet to be replicated in graphite.

If the forecasts for EV consumption are to be believed, batteries would take up an increasing share of graphite supply in the coming years. Until now, however, for graphite this has been a gradual and long-term adjustment rather than a rapid surge. 

Flake trade rebound: exports and imports

After several years of slow but steady declines in exports, 2017 has finally brought about some respite to Chinese sellers.
In January to September - the most recent data available at the time of writing - natural flake graphite exports from China (with HS code 25041010) reached almost 110,000 tonnes, according to China Customs data - an increase of 20,000 tonnes of 35% from a year earlier and up 36% from 2015 and 23% from 2013.

Apart from February, traded volumes have risen in every month of 2017 from the corresponding 2016 period. The value of exports showed a similar pattern.

The rate of growth, however, may have started to ease in the latter months of the year: in September, year-on-year growth in natural flake exports was a mere 5% after double-digit increases in earlier months. As well, September volumes were lower than in the May-August period. This may reflect production stoppages in main graphite-producing areas as environmental inspections intensified.

The uptrend in exports in 2017 to date was supported early in the year by the scrapping of duties and then by the resulting price cuts, which led to more competitive prices from China, boosting sales. 

Subsequently, while the impact of further environmental controls spread, several customers thought of covering their requirements - and potentially of stocking up - while they still could in the event of inspections affecting graphite production.

This led to increased demand that, combined with the disruptions in production that indeed materialized from the third quarter, sharply curtailed availability towards the end of the year.

At the same time, the volume of imports of graphite reaching China also jumped.

In the nine months to the end of September, China imported 2,852 tonnes of flake graphite, up 250% year on year. 

The country imported around 900 tonnes in July alone - more than it bought in the whole of 2014.

The value of imports has more than doubled, rising 215% to more than $1.2 million this year from below $400,000 in January-September last year.

Local industry observers repeatedly highlighted this tendency in discussions at the 30th Anniversary Meeting of the China Nonmetallic Mineral Industry Association in October in Changsha.

While the bulk of imports originated from North Korea and Madagascar, other suppliers may soon join the list.

BTR New Energy Minerals’ deal with Syrah is due to lead to the inflow of thousands more tonnes of graphite from the latter’s African operation, for example.

African horizon: Syrah’s giant mine

While customers grappled with reduced availability in China and fast-rising prices, ASX-listed miner Syrah Resources was commissioning its graphite mine in Mozambique.

First production at the Balama project was achieved in the second half of October, with initial bagged volumes shipped to customers in November.

Primary end-markets in the first year of production will be refractories and metallurgy (carbon-raising applications), Syrah told Industrial Minerals at the UniteCR refractories conference in Santiago, Chile, in September,

But the company is also keen to establish a presence in the fast-growing battery market, it added. 

The deal with Chinese anode maker BTR New Energy Materials is testament to this focus: BTR signed a binding agreement for the supply of up to 30,000 tonnes graphite, sourced at Balama, in the year to the end of 2018.

In the first phase of work, Syrah will produce two grades, 95% C and 96% C, each in four mesh sizes: +50, +100 -80, +80 and -100 mesh. It will then add 97% and 98% grades, with the same mesh variations, from early 2018, expanding its portfolio to 16 products.

There are no two ways about it: Syrah is doing things on a large scale.

The Balama operation is forecast to produce 160,000-180,000 tonnes in 2018, up from the expected 140,000 tonnes. Once at full capacity, output will reach 380,000 tpy, according to company forecasts.

No other projects in development or production has similar output.

Demand for its initial volumes was strong, the company said, due to reduced availability from China for some grades but also, according to company executives, a willingness to secure alternative, non-Chinese sources of supply.

"Users see the necessity of diversifying their sources of supply to avoid having to depend on China alone," an executive said.

The existing shortage in several mineral raw materials due to reduced Chinese output - such as magnesia, bauxite and alumina - is strengthening Syrah’s business case, he added.

Separately, the company is working with US battery technology firm Cadenza Innovation on a project to develop and test anode materials for lithium-ion batteries for application in electric vehicles and grid.

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