Tight China supply likely to support graphite flake price

The new-energy vehicle sector is becoming a major downstream consumer of fine graphite flake, with solid support for the material since the end of 2020. Intensifying global shipping issues, China’s power crunch, its environmental inspections and suspension of production in winter have combined to send fine flake prices soaring in the second half of 2021.

Fastmarkets’ assessments for graphite flake 94% C, -100 mesh, fob China and graphite flake 94% C, -100 mesh, cif Europe jumped to $700 per tonne and $755 per tonne on December 2, respectively, up by 34.62% and 24.79% from the middle of the year.

With demand from the anode sector set to remain strong and ongoing uncertainty caused by the Covid-19 pandemic, graphite flake industry participants expect the market to remain bullish at least in the first quarter of 2022.

Solid demand, uncertain supply
According to market participants, fine flake prices in China are likely to stay near record highs for most of the first three months of 2022 due to solid demand for spherical graphite production to meet growing use in anode production, supply interruptions in major regions for production, and logistical issues.

In addition, demand from major consuming countries, such as South Korea and Japan, have been trending upward over the past two years despite the Covid-19 pandemic.

Total shipments of uncoated spherical graphite from China to South Korea and Japan were 30,040 tonnes and 14,877 tonnes from January to October in 2021, respectively, up by 14.56% and 3.33% from a year earlier, according to China’s customs data.

Sources say that expansion of spherical graphite production in China is also driving up demand for fine graphite flake, which is used as a feedstock.

Total spherical graphite shipments in China’s domestic market were estimated to be around 95,000 tonnes in 2020, in contrast with 130,000 tonnes just in the first half of 2021.

The spherical graphite price has also been rising strongly this year in response to demand and supply side factors, while the battery anode market develops.

Fastmarkets’ graphite spherical 99.95% C, 15 microns, fob China was $3,100-3,300 per tonne on December 2, up by about a quarter from $2,350-2,800 per tonne on July 1, 2021.

Multi-year high
"Chinese spherical graphite prices are at seven-year highs, and we would not be surprised to see the 2012 peak of $4,000 per tonne breached over the coming years," said Amy Bennett, Fastmarkets’ graphite analyst.

"Demand for active anode materials from the EV battery sector is rising sharply, while Chinese spherical graphite producers are also facing rising power costs. We expect to see upward pricing momentum maintained well into 2022," she added.

While demand is showing strong growth, uncertainties in flake supply from China will continue from January to March 2022 because of a seasonal halt to production over the winter period and the 2022 Winter Olympics, sources told Fastmarkets. The games will be held in Beijing, February 4-20.

"There is limited spot supply for flake graphite, which will last until April of next year. Prices for flake graphite will be at a high level considering the uncertain supply situation in the major production region of Heilongjiang," a flake graphite producer source in China said.

"There have been many new operation lines for spherical graphite in the past couple of years, indicating solid demand for flake fines as the raw material. Meanwhile, with artificial graphite operation for anode material being interrupted by energy controls in major production regions like Inner Mongolia, there could be more growing space for its alternative, natural graphite, in the future," a second flake producer source said.

Production of fine flake is expected to remain relatively steady despite the current high price acting as an incentive for producers to increase their output.

"We don’t see too much other incremental supply coming online in the short to medium term – although there may be some increased future production in Madagascar and also Heilongjiang," a third producer source said. "Providing there remains robust demand from EVs, we expect prices to be supported."

There is concern among producers to limit the volumes they offer into the market despite the current robust demand. Oversupply meant prices for graphite flake 94% C, -100 mesh, cif Europe, were significantly lower before November.

"We want to maintain balance in the market and the biggest limitation to our activity is containers and shipping line reliability," the third producer source said.

The availability of containers and problems finding space on vessels has hampered producers’ ability to export, according to multiple sources.

Logistical costs
Additionally, logistics have added significantly to the producers’ costs if they sell on a cif basis. Several producers in China have responded to the logistical problems by marketing their material on a fob basis and handed the issue of transportation over to the buyer.

Chinese exports have been hardest hit by soaring logistical costs, but they have also risen elsewhere.

"Furthermore, logistics will remain a problem for shipments from outside China, especially Mozambique for flake fines. Freight costs [from Mozambique to China] have been rising to $110-140 per tonne from $40 per tonne under normal circumstances," the second source said.

Should the logistics problems ease for producers outside of China, it would allow increased volumes to come on to the market and offer prices could be lowered.

"We anticipate reduced availability from China with continued high freight rates. However, there could be a recovery in delivery options from Africa and this could lead to a price reduction for these grades again, in particular for the specific grades from Mozambique, such as -194," a fourth flake producer source said. "Otherwise, we are assuming stable price levels in Europe at a relatively high level for 2022."

But the importance of freight rates in setting spot prices in China should not be overestimated, according to the third producer source, who stated the Chinese domestic price was more important than supply-chain issues.

"The China market is by far the largest from a supply and demand perspective, so the price is set domestically based on in-land delivery on a short-term spot basis. Delivery from imports takes quite a lot longer to fulfil sales and therefore the realization of spot prices is at a lag to the situation on the ground in China," he said.

"As freight prices reduce, and freight availability opens up, its unlikely the price will move at this time due to balancing short supply conditions and strong demand growth," he added.

The cif Europe market could see price falls if the freight market softens, assuming the Chinese market does not absorb the material, according to the source.

"If freight rates do drop, then flake prices in the rest of the world are likely to soften, providing there is enough material and supply in China to satisfy local demand," he said.

Olympics and beyond
Fastmarkets research expects flake prices of all sizes to remain elevated through the first quarter of 2022, at least until after the Winter Olympics.

"We expect China’s production to remain restricted during that period, however, from the second quarter of 2022 onwards we may see some modest downward correction in prices as China’s production returns to more normal levels," said Bennett.

"Rising demand and production restraints will limit any potential price declines, however, with annual average prices in 2022 expected to remain above this year’s levels," she explained.

Once production resumes following the winter halt in Heilongjiang, consumers in China may also increase the pressure for prices to be reduced.

"The current high prices are unsustainable and difficult for downstream consumers to accept. They have resulted from a combination of extreme factors, including the power crunch, environmental inspections, reduced shipments from outside China and the winter halt. Things might improve when spring comes [and operations restart in Heilongjiang]," a spherical graphite source in China told Fastmarkets.

Traders may have sufficient inventory for the winter season. However, refractories – the traditional major downstream consumer for fine flakes – face pressure in China, with steel mills’ output cut in line with China’s decarbonization policies. Therefore, there could be some downward adjustment in price next year, according to one trader source in China.

The impact of the policies to decarbonize China’s economy may also be felt on the supply side, as well as in terms of domestic demand.

China’s position as a significant net exporter of energy-intensive materials has been declining in numerous markets, such as in the energy-intensive ferro-alloys sector, according to Bennett, which has left less material available for export.

"We can see similar developments for the Chinese graphite industry in the coming years, reflecting both the rapid expansion in demand for graphite from the EV battery sector and environmental controls and persistent issues with electricity costs and availability," she said.

While Chinese production has been hampered by rising costs and falling flake reserves, other producers in Africa and elsewhere sought to increase their market share.

"The domestic supply chain is about to be broken in China," a market participant said. "We think their problems will remain when Chinese manufacturers restart production in 2022. These problems occurred before they stop their production and will exist after they return."

Large flake’s strength
The first quarter of 2022 will define the outlook for the market for larger graphite flake, according to a fifth graphite flake producer source.

Some producers expect to increase their capacity, but this material will be absorbed primarily in China, where supply is tight.

"While most of the new capacity will continue to come from outside China, for 2022 China will remain the primary location for downstream processing. Thus the new capacities outside China would fill the non-Chinese upstream markets to some extent and the rest getting to China for further processing," Shishir Poddar, managing director of Tirupati Graphite, told Fastmarkets.

"Overall therefore, we can say that we expect to see the prices remaining firm and diversity of source evolving through 2022," Poddar added.

Industry participants agreed that large graphite flake will remain bullish.

Meanwhile, the shift in demand for large graphite flake from China to overseas sources, especially Madagascar, will continue in the near term, given the interrupted global shipping conditions and supply tightness in China.

The graphite flake market has witnessed a major demand shift due to soaring freight costs from China to other suppliers since the end of 2020. The trend has developed throughout 2021 due to availability issues in China.

Fastmarkets assessed the price for graphite flake 94% C, +80 mesh (+894), fob China on December 2, 2021 at $1,200 per tonne, which had surged by 18.81% from $1,010 per tonne at the start of the year. Meanwhile, the corresponding cif Europe price for +894 jumped by 39.5% to $1,395 per tonne on December 2 from the start of the year at $1,000 per tonne.

At the time of writing, the latest freight costs were about $8,000 per 20ft container from Qingdao port to Rotterdam, equivalent to $400 per tonne. Meanwhile, shipment costs from Madagascar to main ports in Europe range from $50 to $90 per tonne, subject to different ports, according to one producer source outside China. This disparity in transportation costs has reduced the attraction of Chinese graphite and driven consumers towards other suppliers.

"We expect Chinese graphite exports to remain below 2018 peaks, with non-Chinese material continuing to gain market share in Europe, as the Chinese industry increasingly consumes greater quantities of graphite domestically. Using Germany as a proxy for Europe, the Chinese share of total German imports of graphite fell from 45% in 2018 to 37% in the first nine months of 2021, with this trend expected to continue," Bennett said.

Limited availability will continue to support price for large graphite flake and the shift in demand away to the sources outside of China will be established as the "new normal", according to sources.

"Major refractory producers in Europe are showing interests in diversifying their sourcing channels, especially with the skyrocketing freight rates making it extremely costly to ship material from China, the traditional major supplier," a second trader source said.

"Despite limited growth for global refractories, we are seeing the new sector of expandable graphite triggering increasing demand for large flake graphite," the source added.