Graphite Market Update: H1 2021 in Review

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In 2021, the world continues the fight against the coronavirus, and as economies begin to recover, battery metals and their role in green energy continue to receive a lot of attention.

Some market watchers remain optimistic about the future of graphite and its use in electric car batteries — at least for the next few years. Both synthetic graphite and natural graphite, in the form of the intermediate product spherical graphite, are currently used in the anodes of lithium-ion batteries.

What has happened in the graphite market so far in 2021? Read on to learn about the main supply and demand dynamics in H1 and what market participants are expecting for the rest of the year.

Graphite market update: Key trends

Last year, the graphite market had to deal with the uncertainty brought by COVID-19, with demand from the battery space showing resilience. By the end of 2020, all eyes were on potential stimulus packages that could boost growth, as well as on what could happen in China in terms of supply constraints.

In early 2021, prices for natural flake graphite were slightly higher than expected as a result of unexpectedly strict environmental investigations and closures in China, said Suzanne Shaw of Roskill.

“There was also considerable shipping disruption early on in the year with containers and vessels not where they should be as routes reopened post-COVID,” she told the Investing News Network (INN). “Limited availability was prioritized for higher-value cargos, with lower-value raw materials flows disrupted. This situation subsided through Q2.”

Speaking about trends in the graphite market in the first six months of the year, George Miller of Benchmark Mineral Intelligence also said freight has been a real challenge for the industry this year.

“With a huge resurgence in demand for shipping from China to Europe and North America following COVID-19, delays and freight costs have skyrocketed, making it very expensive and quite complex logistically to ship graphite from China, where the majority of flake is produced,” he said. “In some cases, freight costs will double the total price of the material for end customers, especially for cheaper ‘commodity’ grades like -100 mesh, across all purities.”

Pricing has been relatively flat so far during 2021, according to Benchmark Mineral Intelligence data.

“Prices for +100 mesh flake concentrate, across all purities, have moved upward by around 5 to 10 percent year-to-date, while pricing for all other grades has moved less than 5 percent so far this year due to continued structural oversupply in the graphite market,” Miller said. “Moreover, the global shipping situation at the moment is hindering upward price pressure.”

Graphite market update: Supply and demand

Looking over to what’s ahead for demand, Roskill forecasts that total demand for both natural and synthetic graphite products will be around 1.58 million tonnes in the second half of 2021. That’s around a 3 percent increase on H1 of this year and a 13 percent rebound compared to H2 2020.

“The batteries sector will continue to increase strongly and underpin growth across the graphite industry,” Shaw said. “We are expecting demand growth in excess of 20 percent for the full year across all graphite battery products.”

For Miller, demand for natural graphite looks set to improve in H2 given the ongoing recovery of demand from the steel, automotive and construction industries to higher-than-typical levels.

“With electric vehicle (EV) sales typically stronger in H2 also, and following robust production and sales figures worldwide in H1 2021, we certainly expect improvements in demand from the battery market later this year,” he said.

In terms of supply, Chinese production is expected to ramp up to meet rising domestic battery demand, as there is still a lot of overcapacity in China.

“However, the overall trend is that China is showing less appetite on the raw material side and investing in higher-value downstream industries rather than exploration/mining across most mineral sectors,” Shaw said. “It will continue to increase its own imports of flake graphite.”

China has considerable latent capacity when it comes to natural graphite supply, and as a result, Benchmark Mineral Intelligence expects this structural oversupply to continue. With state-owned metals conglomerate China Minmetals now engaged in supporting local producers in Heilongjiang province, there will continue to be new incremental capacity brought online if demand improves.

“That said, we still may see some tightness surrounding larger flake sizes, such as +80 mesh and +50 mesh flake concentrate, which is less produced in China,” Miller said. This is more abundant and easier to recover from Madagascan mines, which are smaller scale than those in China.

“Demand from China has been improving in line with the growth of the expandable graphite market, which may lead to tightness if imports from Madagascar are not scaled appropriately,” Miller added.

Elsewhere, mines are reopening as markets recover from COVID-19. Graphite miner Syrah Resources (ASX:SYR,OTC Pink:SYAAF) reopened at 15,000 tonnes per month in March and has kept its output more flexible than before. Meanwhile, Chinese imports from Mozambique remained low through to May.

“Madagascan production is ramping up and flowing into China. Tirupati Graphite (LSE:TGR) is expected to bring more capacity online soon in Madagascar,” Shaw pointed out. “Other ex-China projects are in the final stages of development and could potentially enter the market in 2021/2022.”

Graphite market update: What’s ahead

After a relatively stable first half of the year, investors are looking for cues as to what could move graphite prices going forward.

Shaw is expecting to see some steadying of prices in Q3 as mines in China continue to reopen following investigations earlier in the year and as the market stabilizes.

“This depends of course on the speed of the continued recovery in the battery sector,” she noted. “Prices are typically expected to rise in Q4 as scheduled winter closures restrict supply.”

When asked about factors investors should consider as the second half of the year begins, Miller said the ramp up of Syrah Resources’ sizeable Balama graphite operation in Mozambique will be an important supply-side factor to watch. “Otherwise, cell production and EV sales statistics globally are important to monitor on the demand side, as the battery market solidifies its position as the primary growth market for natural flake graphite demand,” he added.

For Shaw, on the demand side, investors should watch for a return to real long-term trends following the COVID rebound. “We are keen to see what happens with EV uptakes and crude steel production both inside and outside China,” she added.

On the supply side, China as always is the region to watch. “For graphite this means how much it looks to shift towards imports through the remainder of 2021, and what happens in terms of further environmental inspections/closures, which may happen unexpectedly,” she said. “Such closures could speed up China’s desire for foreign supply and, in the short term, drive up prices worldwide.”

Commenting on the challenges faced by miners in today’s market, Miller said pricing is key. “While we saw an uptick in flake graphite pricing during late 2020, prices have begun to settle at subdued levels due to ongoing difficulties in shipping flake graphite as a material, squeezing producer margins,” he said.

“As a result of the significant extra costs and logistical delays associated with shipping at the moment, flake graphite consumers globally have been unwilling to accept increases in contract or spot pricing.”

Shaw said environmental, social and governance concerns are the largest headache for junior miners, and could lead to significant changes in how natural graphite is processed for the battery industry.

“Battery/EV consumers want to know that their supply chain is sustainable. This is encouraging downstream production of spherical graphite with low/zero HF, much of which is being developed outside China,” she said. “The jury is still out on if any of this can enter commercial-scale production at a competitive rate to China, or if a premium will be paid by the consumers to ensure sustainability.”

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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.