Graphite Output in focus as China Influences Graphite Supply, Up or Down!

• Graphite prices have fallen 10-13% in 2023 due to weak demand, oversupply in China, and competition from synthetic graphite.
• China remains dominant with 72% of production, but supply from Africa is increasing. Western supply still limited.
• Demand is forecast to grow 9% annually to 2030, doubling market size by 2050. About 22 new mines are needed.
• Batteries are now the biggest end-use. Natural graphite 10% of anodes, remainder is synthetic graphite.
• Some substitution from silicon-based anodes, but impact less than overall graphite demand growth.

The graphite market has experienced a rocky start to 2023, with prices for various graphite products down 10-13% year-to-date. This downturn has been driven by weak macroeconomic conditions, oversupply in China, and increasing competition from synthetic graphite. However, strong demand growth will return in the long run, driven by electric vehicles (EVs) and energy storage. China's influence and control over pricing in the sector is a concern in terms of supply but an opportunity for investors.

Prices Hit by Triple Headwinds

Across all flake sizes, graphite prices have faced significant downward pressure in early 2023. Fine flake sizes used in lithium-ion battery anodes have been hit hardest, with minus 23 fine flake delivered into China down 13% to $645/tonne. Medium flake is faring marginally better, down 9% to just over $1000/tonne.

There are 3 core reasons behind the price weakness.

1. The macroeconomic environment – with high inflation, people are buying fewer EVs, which reduces graphite demand.

2. A buildup of graphite stocks in China that we have to work through.

3. Competition from synthetic graphite, where a lot of new capacity has come online when demand isn’t there yet.

This combination of factors has dampened prices across the board, both in China and Europe. China’s oversupply is a medium-term issue that will take years to normalize as new battery demand comes online. The influx of new synthetic graphite capacity has lowered prices, allowing it to compete more directly with natural graphite in the short run. But ultimately, both will see strong growth.

China Dominates Production, But Diversity Growing

China remains the dominant graphite producer at 72% of the 1.6 million tonnes per year global natural graphite market. Its share is down from around 80% a decade ago, as new mines in Africa account for a growing share of production. Mozambique, Madagascar, and Tanzania are key sources of new supply diversifying the market.

Further downstream in the supply chain, more capacity is being built outside China, which will be critical for the security of supply for the West should China decide to significantly reduce exports. Prospective producers in Africa are looking to put in spherical graphite plants in the US or EU to produce the precursor anode material to go directly into EV end-use markets. So while mining capacity remains centered in China and Africa, there is a path towards greater geographic diversity in processing and anode production.

Long-term Demand Growth Still Strong

Despite recent price weakness, strong underlying demand will drive a robust long-term outlook. Wood Mackenzie forecasts 9% average annual demand growth through 2030. This would double the current market size by 2050, adding approximately 1.8 million tonnes of new demand.

To meet this demand, around 22 new mines will need to come online by 2040. While some analysts have suggested over 150 new mines may be needed, this may be excessive given efficiency improvements and expansions at existing operations. The average new graphite mine is 80,000 tonnes per year, indicating the market can be balanced with a relatively modest number of new projects.

Batteries Driving Demand Growth

The expected long-term demand growth is being driven by lithium-ion batteries.

Batteries are now the biggest use of natural graphite. For synthetic graphite, they are second behind electrodes, but this is a big shift from 7-8 years ago when they were eighth. In anode production, natural graphite currently comprises around 10% of the mix, with the remainder being synthetic graphite. The latter is preferred by battery manufacturers for its superior cycle life. There are opportunities to increase natural graphite’s share as its lower cost and carbon footprint appeal to automakers seeking to reduce their EV emissions.

Silicon Substitution Will Be Limited

Another topic garnering significant attention is the potential for silicon to substitute for graphite in EV battery anodes. Silicon can deliver major performance improvements, but it suffers from rapid volume expansion during charging. as silicon substitution will remain limited over the next decade.

At the moment it’s not really a substitution, it’s a synergy between the two...People are looking at using more silicon, but the impact will be significantly less than overall graphite demand growth. Early generation silicon-graphite anodes contain 5-10% silicon to minimize expansion issues. Advances in materials science may enable increased silicon content. But even then, silicon is not expected to displace the strong anticipated growth in natural and synthetic graphite.

Prices Forecast to Recover by 2025

Given the solid long-term demand outlook, graphite prices recovering from current low levels.

Prices should increase especially from where they are now...There’s definitely room for growth, particularly in battery-related products.

Analysts are projecting substantial supply deficits emerging around 2025. While less bullish on the magnitude of potential shortfalls, Wood Mackenzie’s demand forecasts also suggest tightening markets by the mid-2020s. This should translate into upward price traction. The pace of recovery remains uncertain, but the graphite industry appears well-positioned for the next decade.

Key Takeaways:

• Graphite has suffered falling prices in early 2023, but demand fundamentals remain positive long-term.
• New EV battery capacity will drive strong demand growth going forward. 22 new mines may be needed by 2050.
• China dominates production but supply diversity is increasing over time as China will reduce exports for its own needs
• Silicon substitution will have a limited impact compared to robust graphite demand growth.
• Graphite prices are poised to recover by 2025 as markets tighten on rising EV usage.

The Investment Thesis for Graphite

• Rapid EV adoption makes graphite demand outlook very strong through 2050. Around 22 new mines are needed to meet demand growth.
• Prices down 10-13% in 2023 provide a compelling entry point with recovery expected as demand picks up post-recession.
• A key risk is the potential for oversupply if too much new capacity comes online. Monitor utilization rates closely.
• Geographic diversification of the supply chain will reduce risks of concentration in China. But will take time.
• Substitution risk appears low over the next decade with silicon likely remaining a complement rather than a replacement for graphite.
• ESG factors favor natural graphite over synthetic. Lower carbon footprint and more local/renewable energy use.
• Well-positioned mining juniors with quality deposits offer the best risk/reward if entry timing is prudent. Avoid overpaying during the hype cycle.

In summary, graphite’s application in lithium-ion batteries positions it well to benefit from surging EV demand over the coming decades. Current oversupply issues are likely temporary. Investors with a 3-5-year outlook could be rewarded for taking positions at today’s discounted valuations, provided due diligence is conducted on asset quality and management execution capability. But patience will be required through potential further near-term volatility until demand accelerates post-recession. Overall graphite remains a compelling component of the EV supply chain investment thesis.