Graphite sector may be sleepwalking into overcapacity again, Asbury says

By Davide Ghilotti
Published: Monday, 22 October 2018

The relative ease and cheapness of setting up a graphite extraction operation means that over-eager investors could create supply faster than demand grows to consume it, according to Asbury Carbons.

The graphite sector may be heading back to overcapacity in the near term should new production coming to the market cause global supply to expand faster than demand, delegates heard at the 7th Graphite and Graphene conference in London, held in September.

"We are looking to three years of tough times due to overcapacity," Stephen Riddle, chief executive officer of US graphite supplier Asbury Carbons, told delegates, citing several new producers expected to come onstream between 2018 and 2020.

"New capacity [being added] this year will total 230,000 tonnes [per year], with 80,000 tpy more next year and an additional 190,000 tpy added in 2020," Riddle estimated, based on production forecasts from main miners outside China that are currently in development.

This will add to existing production, which the US Geological Survey (USGS) estimated to be as much as 1.2 million tonnes in 2017. Fastmarkets’ research team estimated last year’s total at 1.018 million tonnes.

Total demand, on the other hand, is expected to reach 739,000 tonnes by 2020 based on all flake sizes, Riddle said. Demand volume may even be as high as 1.05 million tonnes by 2020 in an "optimistic" scenario, he added.

Demand is set to increase following the expansion of the battery industry and the growth of the electric vehicles (EV) market.

Most delegates canvassed at the conference by Fastmarkets agreed that the battery sector will be the single largest area of growth for graphite demand in the coming years.

Demand for natural flake graphite from the battery sector will enjoy a compound average growth rate (CAGR) of 20.5% in 2017-25, reaching 198,000 tpy by 2025, according to Christoph Frey, managing director of ProGraphite.

At the same time, Riddle expects that supply will outpace demand despite the growth from battery-related consumption.

"In a scenario of realistic demand based on 739,000 tpy by 2020, new capacity will outpace demand by as much as 69% by 2020," he said. "Considering optimistic demand of 1.05 million tpy [by 2020], overcapacity would still be 48%."

Low capex

According to Riddle, the relatively low capex needed to set up a graphite mining operation, compared with other mining commodities, can lead to a high inflow of capital supporting new graphite projects.

This, in turn, can result in a rapid increase in capacity to the market in a short period, which would be faster than the growth in demand needed to meet it.

"Investors assume that low capex results in low risk and are thus willing to invest in new capacity faster than demand grows," he said.

Additionally, the so-called China Factor may also come into play - in the past, graphite capacity added in China was sufficient to exceed demand levels and to create oversupply, generating a long-lasting bearish effect on prices.