Should Securing Graphite Supply Be Next on the List for EV Makers?

US electric vehicle pioneer Tesla (NASDAQ:TSLA) has inked a graphite supply deal with Australia’s Magnis Energy (ASX:MNS), as carmakers continue to look for ways to secure battery metals output to meet their targets.

The deal between Tesla and Magnis is only the second one signed for graphite production with a mining company. The first one also involved the Elon Musk led company, which secured supply from Syrah Resources (ASX:SYR) at the end of 2021. Syrah operates the Balama project in Mozambique and its Vidalia processing plant in Louisiana.

Magnis Energy is moving forward with its Nachu project in Tanzania and is in the process of selecting a US location for its anode active materials facility. Both are vertically integrated companies with assets outside of China, which is the top graphite producing country and without any doubt controls the graphite supply chain.

Within battery metals, lithium has received most of the attention from investors ― perhaps because its price hit historical highs in the past two years ― and EV makers are stepping up their games to ensure they will have enough supply into the future. Add to that the increasing geopolitical tensions as governments around the world push for supply chains less dependent on Asia and it comes as no surprise that many lithium juniors saw interest in their projects increase.

But for graphite the story has ― so far ― been a bit different, even though batteries require large amounts of graphite, either natural or synthetic, for their anodes. In fact, by volume, graphite is one of the most important elements in any electric vehicle battery, with between 50 and 100 kilograms of graphite, whether synthetic or natural, present within each vehicle.

As the graphite market is opaque, attracting investments into the space can be a daunting task for juniors. However, graphite for the battery sector might be in short supply in coming years. So will the industry see more involvement from EV makers?

“There are several drivers in the graphite market that would suggest that securing graphite supply could be prudent for automakers,” Wood Mackenzie’s James Willoughby told the Investing News Network (INN). “However, deals have been more common between flake graphite miners and anode producers.”

Analysts at Project Blue also believe that downstream battery manufacturers and OEMs should be considering securing access to the full suite of battery materials.

“There are, however, some nuances which make securing graphite supply more challenging,” they told INN via email. “Graphite processing is the major bottleneck geographically, as China dominates the process, rather than gaining access to say natural graphite production which is relatively geographically diverse.”

Project Blue sees the potential for increased graphite supply outside of China from African countries, specifically Mozambique, Madagascar, Tanzania and Namibia, though the majority of the material these countries produced has been exported to China.

Another factor to consider is that the majority of spherical graphite, which is the intermediate produced from natural flake for use in anodes, is created with processing methods that use large amounts of hydrofluoric acid (HF), which comes with a range of potential environmental issues.

“This makes production more challenging and costly,” analysts at Project Blue said. “Therefore, it would be in automakers' interests if any secured raw material feed comes together with investment in graphite processing infrastructure to reduce their dependence on China for the battery supply chain.”

As demand for electric vehicles continues to increase, Wood Mackenzie is forecasting graphite will be in short-supply ― particularly for natural, battery-grade material.

“The supply chain is now starting to become aware of this and is looking to secure the material ahead of potential shortages,” Willoughby said.

As the race to secure long term supply of battery raw materials heats up, how much and how far up the graphite supply chain OEMs and EV makers get involved is a catalyst to watch out for.

“EV manufacturers themselves are unlikely to get personally involved in the graphite sector, but we do see offtake deals between junior miners/spherical graphite producers and anode/battery manufacturers becoming more common,” Willoughby said.

Analysts at Project Blue are expecting to see greater involvement from OEMs in securing their graphite supply chains.

“EV makers now also have the option to choose between natural and synthetic graphite supply to increase anode efficiency and meet consumer preferences,” analysts said.

Legislation is another driving force behind OEMs and EV makers looking into their supply chains. The US’ Inflation Reduction Act, for example, requires automakers to have 50 percent of critical minerals used in EV batteries come from North America or US allies by 2024.

“The IRA legislation will push anode/battery manufacturers to shift their supply chains to take on a bigger proportion of ex-China anode material, particularly for those involved with US-based EV manufacturers,” Willoughby said.

For Project Blue there is potential for increases in natural graphite supply to follow the growth in graphite demand for EVs.

“(But this) needs to be accompanied by investment in spherical graphite processing facilities, and the development of new processing technologies away from the HF route largely used in China at present,” analysts said. “This industry is in its infancy outside China."

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

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