Synthetic graphite fends off natural competition

Followers of the graphite market quite often hear mining companies say that the natural form of the carbon mineral is cheaper than the equivalent synthetic graphite, especially when it comes to battery applications.

While there is some justification for this claim, the truth is not as simple as many suggest.

Natural large-flake graphite can be mined relatively cheaply in large quantities, but it must be put through several stages of meticulous and highly technical processing before it has the right structure and purity to be used in battery anodes.

Synthetic material, on the other hand, is produced in small batches from often expensive carbon precursors that must be heated (calcined) to extremely high temperatures in specially engineered furnaces.

But according to end-users in the lithium-ion battery supply chain - who buy graphite from select suppliers, based on its quality, uniformity and reliability - prices for natural graphite are similar to those for the synthetic alternative when battery materials made from one or the other source are compared like-for-like.

Each processing stage required to bring natural graphite up to battery-grade standard is performed by specialists with a minimum of four different steps in the battery supply chain, whereas the synthetic value chain is much shorter and more concentrated (and usually comprises only two steps).

Total global supply of synthetic graphite, including all material earmarked for batteries, electrodes and speciality applications, is estimated by the industry to be around 1.5 million tonnes per year. The size of the natural flake graphite market, for all applications, is around two-thirds of that, at 1 million tpy.

Synthetic graphite suddenly gained prominence in 2017, when a global shortage of needle coke, the main feedstock for synthetic graphite, sent prices rocketing.

The shortages were caused by a combination of environmentally driven closures among needle coke plants and steel blast furnaces in China, consequent surging demand for electrodes for use in electric-arc steel furnaces (EAFs), and rapidly increasing consumption of graphite anodes in lithium-ion batteries for use in electric vehicles.

Only around 10% of annual synthetic graphite output is used in the lithium-ion battery anode market, with most of the rest going into electrodes. But due to the speed of growth in the battery sector, much of the focus has been on demand from this area.

Industry geography

The majority of anode-grade synthetic graphite material is produced in China and is either consumed domestically, or exported to further processors in Japan and South Korea.

Domestic trading tends to be peer-to-peer on a spot basis, while exports are typically sold on short-term contracts.

Graphite electrodes are produced in bulk and traded like a commodity.

Well-known graphite electrode traders include Switzerland-based CM Swiss; UAE-based DEG Trading; US-based GES; and a number of Chinese companies, such as Duranice Applied Materials (Dalian), Graffie Import & Export (Dalian), Handan Yongsheng Carbon, Honor Group, Kaiheng Commerce & Trade, Ma’s Group, Shanghai Carbon International Trade, and Yeson International Trading.

The largest market for synthetic graphite is for ultra-high purity (UHP) electrodes. In China, there is also a large market for non-UHP electrodes, supplying furnaces that produce low-quality steel.

In addition, there are several high-value but very niche applications for synthetic graphite, with small quantities sold by companies such as US-based Asbury Carbons and Superior Graphite, and French company Imerys’ Graphite & Carbon division in Switzerland.

Synthetic versus natural graphite

Synthetic graphite competes with natural graphite in the battery anode market and in some speciality applications.

Consistency issues are the main barrier to wider acceptance of natural graphite in batteries.

Natural graphite can never be made "perfect" because it will always have irremovable impurities, but it can make up for this through other properties.

Many synthetic graphite and anode producers have very close relationships with battery makers, built on years of testing and working together to develop highly customized anode materials.

This means that there is very little "like-for-like" or standardized material in the synthetic graphite market, and most anode material is bespoke to a certain extent.

Synthetic graphite is by far the leading material globally for batteries in general. For lithium-ion batteries specifically, on the anode side, there is roughly a 50:50 market split between natural and synthetic graphite.

It is difficult to see what will change in this respect over the next five years, because supply chains and battery chemistries are embedded into manufacturing processes and some long-term supply agreements, especially with electric vehicle companies.

Standards, specifications

Synthetic graphite for battery anodes must meet very specific criteria (see sidebar: "Main specifications of traded synthetic graphite"), and so too must material for UHP graphite electrodes used in high-frequency electric-arc furnaces (EAFs), run by the most high-tech steelmakers.

Most battery anode producers have very tight relationships each with a specific synthetic graphite supplier.

UHP electrodes also have very detailed specifications, but unlike the situation for battery chemistries, a select handful of different suppliers could produce the same product for an EAF.

Small-diameter electrodes and secondary synthetic graphite is more commoditized, and there are fewer criteria for the material’s structure, although it still must meet certain minimum levels of carbon purity.

Most synthetic graphite powders offered for sale on internet trading sites such as Alibaba are not UHP, and are therefore not suitable for anodes. These products are mostly low-grade carbon powder, often made from crushed, recycled electrodes (also known as secondary synthetic graphite).

Feedstock for synthetic graphite

Needle coke is the main carbon precursor for synthetic graphite, although some synthetic producers use other kinds of coke.

There are two main types of needle coke. Petroleum needle coke is produced at oil refineries by converting by-products of the refining process (decant or slurry oil, along with high-quality vacuum residue) into dry, pure, highly crystalline carbon powder.

Coal-based needle coke (sometimes called pitch needle coke, or just pitch coke) is made from coal tar pitch, a by-product of coking metallurgical coal used in blast furnace-based steelmaking.

There are around 10 major producers of needle coke globally and the majority of their output is petroleum-based, from large refining operations.

Most medium-sized oil refineries do not have delayed cokers or the complex coking set-up required to produce needle coke.

Only seven significant producers of needle coke operate outside China, with the largest being Phillips 66 (US- and UK-based, and accounting for around 20% of global production capacity). This is followed by Seadrift in the US (which supplies 100% of its needle coke output to Ohio-based GrafTech international, accounting for 70% of its annual coke consumption), while in Japan there are C-Chem, Petrocokes, JXTG Nippon Oil & Energy and Mitsubishi Chemical.

Global needle coke capacity ex-China has remained broadly flat for the past 10 years because of the high capital costs, technical expertise and stringent regulatory requirements imposed on the development of new projects.

China produces significant quantities of low-grade needle coke – more than 1 million tpy, according to industry estimates.

Despite being a large producer of needle coke, China is also a net importer, particularly of high-purity material. It has increased its purchases from foreign suppliers since the country’s government, in its attempts to reduce pollution, started to force the closure of needle coke capacity around two years ago.

Global needle coke capacity was estimated to be about 1.6 million tonnes in 2017.

Updated accurate figures for the sector are difficult to obtain, but market sources say that plant closures in China, coupled with some expanded production elsewhere in Asia and North America, have kept this figure fairly stable over the past two years, while demand has been rising gradually by 3-5% per year.

Not all anode or speciality synthetic graphite producers use petroleum needle coke, however, with Hitachi Chemical being one example. It supplies material to Panasonic, which produces batteries for Tesla Motors in the US and Nissan in Japan for their electric vehicles.

Imerys Graphite & Carbon, for example, produces synthetic graphite for alkaline batteries and other speciality applications using non-needle coke feedstock, but this section of the industry accounts for a relatively small share of the global market – less than 5%.

In the past five years, Asian suppliers have been unable to keep up with Chinese demand for needle coke, so North American producers have stepped in to make up the shortfall.

North American needle coke suppliers prioritize (publicly, at least) their domestic customers over Asian partners. Even though North American buyers take comparatively small amounts, local suppliers are willing to guarantee supply for long fixed periods (more than six months), whereas their agreements with Chinese customers tend to cover shorter periods.

Prices

Global average prices for needle coke have increased from around $1,400 per tonne in 2016, before the 2017 supply squeeze, to around $3,500 per tonne in the second quarter of 2019, according to industry sources.

Some in the sector have warned that, although prices seem to have stabilized so far in 2019, they are unlikely to fall in the near future. This has prompted synthetic graphite producers to look for more transparency in their supply chains and to seek ways to minimize the effects of higher feedstock prices.

All synthetic graphites are initially produced by heating unstructured carbon (cokes) at temperatures above 2,500°C, so energy prices are a determining factor in the price of synthetic graphite.

Oil and (less significantly) coal prices also affect the price of coke and, consequently, of synthetic graphite.

Prices for synthetic graphite depend on the type of raw material feedstock that is used (whether petroleum or pitch; if it is primary material, what quality of coke; if it is secondary, what other kind of precursor – for example, electrodes); the kind of heat treatment process that is used; and the amount and type of pitch binder.

Primary synthetic graphite, produced solely for the purpose of manufacturing highly consistent graphite powders, tends to have standardized inputs and processes, such as the Acheson and Desulco processes.

In contrast to primary synthetic graphite prices, natural flake graphite prices have relatively little bearing on the final price of battery graphite, even for premium large flakes sold for sphericizing, because the cost of processing and additional inputs determine the cost of the final product, and these fluctuate constantly.

Synthetic graphite for battery anodes is mainly traded on a spot basis in China or on contracts in Japan, which vary in length depending on who the parties are.

Small-diameter graphite electrodes and some UHP electrodes are traded on the spot market, but most UHP electrodes are sold through contracts, because this market is tighter than the market for small-diameter electrodes and steel mills only have a handful of preferred suppliers or traders.

For non-anode synthetic graphite ex-China, most sales are agreed on long-term contracts – for example, GrafTech enters contracts that are 3-5 years long with a diverse global customer base, on the basis of take-or-pay at fixed price and volume.

Excluding China, relatively little synthetic material is traded on the spot market in the primary powders market, because Western companies prefer to use contracts and most of their products are more or less bespoke for particular customers.

Outlook

With needle coke prices expected to remain high in the medium term, synthetic graphite prices are also expected to remain at elevated levels for the rest of 2019.

Stricter marine pollution (MarPol) regulations will come into force in 2020, and will limit the amount of sulfur allowed in marine fuel to 0.5%, down from 3.5% at the moment. This could cause further price rises in the synthetic graphite industry, because it will increase competition for the low-sulfur crude oil traditionally used in petroleum-based needle coke production.

New synthetic graphite capacity is being added in China, and capacities have also been rising in Japan, India, Europe and Mexico, and this is also likely to generate more demand for synthetic graphite feedstocks.

China is attempting to tackle tightness in the market by advancing needle coke production methods using coal tar pitch instead of oil. But the need to meet strict quality requirements means that direct substitution of petroleum coke could be some way in the future.

But even if synthetic graphite prices do rise dramatically, battery producers point out that the cost of graphite as a proportion of the overall cost of battery production remains so small that there is significant headroom to absorb price increases – and they are prepared to do this in the interests of maintaining quality, consistency and reliability of supply.

So while high prices for synthetic graphite could force some battery anode makers to reassess their sourcing strategies in favor of natural material, a major shift is not likely.

Most industry participants think that graphite supply to the battery market will continue to be split between natural and synthetic material for the foreseeable future.

Snapshot of the synthetic graphite industry

While the graphite electrode industry is widely spread geographically, and has many participants, the anode materials industry is more concentrated, with most producers based in East Asia.

There are estimated to be more than 50 battery anode producers in China.

Major anode manufacturers include Japan’s Hitachi Chemical, Mitsubishi Chemical, JFE Chemical and Showa Denko, and China’s BTR, Ningbo Shanshan and Jiangxi Zichen Tech.

Between them, these companies control around 75% of the market, although newer and smaller market participants are starting to capture market share.

These companies import coke, mainly from the US or Japan if they use petroleum needle coke, and graphitize it in China to produce 99.99% pure synthetic graphite.

Relatively little synthetic graphite for the anode industry is sold on the open market in raw powdered form.

In contrast, there are hundreds of graphite electrode producers globally. Many of these buy needle coke, which they heat-treat to make synthetic graphite and then shape into bodies.

These electrode producers then sell electrodes directly to customers on a spot or contract basis, or sell to traders in large volumes.

Electrode dumping by Asian companies has been a major problem in the US and Europe in the past five years, contributing to trade tensions with China.