“The risks to relying on China have really been highlighted over the last year. (In December 2023), China announced export licenses for graphite products," James Willoughby, senior research analyst for graphite, energy transition and battery raw materials at Wood Mackenzie, explained to the Investing News Network (INN).
"While they didn’t amount to much overall, China has once again threatened to tighten export controls this year, which could prevent battery anode producers receiving the raw materials required."
The synthetic graphite market is less exposed to Chinese disruption as it is less geographically concentrated.
“Although synthetic graphite producers are better off, natural graphite anode producers are almost completely reliant on China, so there’s a lot of concern around this at the moment,” Willoughby added.
Even though the Wood Mackenzie expert doesn’t foresee China limiting exports, incoming rules on US imports are adding pressure on North America to grow its domestic supply chain. “While we expect China to continue to allow battery-related exports, companies are looking to diversify their supply to reduce the risk,” he said.
“On top of this, there is a need to shift away from China for the US battery supply chain. The Inflation Reduction Act (IRA) specifies that by 2027, any batteries that contain graphite from China won’t be eligible for substantial tax credits. While it’s not clear which of these will remain under the new administration, we expect the requirements for non-Chinese material to continue.”
Graphite market facing dual supply challenges
Natural graphite production ballooned in 2022, when global mine supply reached 1,680,000 metric tons, a 73.9 percent increase from 2020’s 966,000 metric tons. Global output then registered a small 4.6 percent decline in 2023, totaling 1,600,000 metric tons; however, the reduction was enough to send the market into deficit.
According to Tony Alderson, senior analyst for Benchmark Mineral Intelligence, the shortfall in the graphite sector has been attributed to rising demand from the battery anode segment.
“EV demand is set to rise by nearly 400 percent over the next decade. As such, the need for both natural and synthetic graphite is rising notably in line with this,” Alderson wrote in an email to INN.
“With regards to this increased demand, the natural graphite balance is already not holding up, with a 2024 deficit of nearly 150,000 metric tons per annum (tpa) emerging.”
Conversely, the synthetic graphite market is experiencing a supply glut.
“On the side of synthetic graphite, it is faring a little better when talking about the market balance as supply is stronger. The market is in a notable oversupply of 350,000 tpa, which is set to reach a deficit beyond the end of the decade,” Alderson commented. “One of the reasons for this chemistry disparity is due to the greater supply and ease of building a facility in a far (shorter) time period than with natural (graphite).”
Although the 2025 supply narrative is different, the future of both markets looks similar, Alderson noted.
“Despite this, the currently announced supply is simply not enough to meet the forecasted demand out to 2034, with both (segments) reaching deficits of over 600,000 tpa, which are only set to widen out to 2040,” he said.
In a 2022 report, Benchmark Mineral Intelligence notes that some 300 new mines are needed to support the energy transition, a percentage of which will need to be graphite mines.
“We forecast battery sector demand for raw material graphite to rise by more than 1,400 percent between 2020 and 2050,” it states. “By the end of the forecast period, total graphite demand could be three times the 2021 supply level.”
Shifting battery chemistries complicate forecast
Use in the EV sector is underpinning graphite demand; however, as battery chemistries continue to shift, experts believe supply and demand fundamentals for the commodity could change.
The rapid evolution of battery chemistries has posed significant challenges. While the shift in cathode materials from nickel-manganese-cobalt (NMC) to lithium-iron-phosphate (LFP) in China has garnered much attention, similar transformations are also occurring within the anode market, explained Willoughby.
“China now primarily uses synthetic graphite anode materials as it’s faster to build out new production and easier to get the raw materials,” he said. “However, that has led to a massive oversupply for synthetic due to the number of new companies in the market, and in the natural (graphite market) demand has really fallen away in the last year.”
While NMC cathodes and natural graphite anodes are still quite popular outside of China, slower demand growth in 2024 has seen many of the major anode producers cut back output, he added.
Looking longer term, Willoughby admitted that the market could become opaque.
“It’s been a challenge to keep the ever-evolving supply and demand dynamics in check, particularly when the market has to increasingly consider regional regulations like the IRA," the expert noted.
“We see China continuing to operate at a surplus over the next decade because of its existing capacity, but the rest of the world still looks to need more capacity for both natural and synthetic anodes if it wants to meet its own demand.”
This position was reiterated by Benchmark Mineral Intelligence’s Alderson, who referenced the mounting geopolitical tensions between the east and west as a pain point in the long-term ex-China market buildout.
“China dominates not only natural graphite production (76 percent), but also downstream markets, controlling 79 percent of natural graphite anode and 98 percent of synthetic graphite anode supply globally," he said.
“This highlights that the deeper into the supply chain you go, the more entrenched China’s dominance becomes. They form the backbone of the anode supply chain, and it will be a challenge for the west to break.”
Alderson pointed to China’s December 3, 2024, implementation of an immediate ban on dual-use exports intended for US military applications, along with heightened end-use reviews for exports like graphite to the US.
Building a North American supply pipeline
To offset Chinese control, the US has taken notable steps to create onshore supply.
“Since the US IRA’s announcement in August 2022, over 500,000 tpa of anode capacity has been added, (which is) over a 200 percent+ increase,” said Alderson.
This move has been supported by government funding.
In November, 2023 South Star Battery Metals (TSXV:STS,OTCQB:STSBF), received a US$3.2 million grant from the Department of Defense (DoD) under the IRA to advance its flagship BamaStar graphite project in Alabama.
Similarly, Graphite One’s (TSXV:GPH,OTCQX:GPHOF) Alaska-focused subsidiary received a US$37.5 million DoD grant in July 2023 to cover costs associated with an accelerated feasibility study on the Graphite Creek project.
In September of the same year, Graphite One penned a US$4.7 million contract with the DoD’s Logistics Agency to develop a graphite- and graphene-based foam fire suppressant.
“Private companies are also ramping up onshoring efforts by inking offtake agreements with US anode producers, setting a record in 2024 for such deals,” Alderson explained to INN. “Despite these advancements, North America faces a 200,000 tpa market deficit in 2024, expected to grow as EV demand accelerates. As such, notable investment will be required to drive growth and achieve any form of self-sufficiency,” he added.
As new North American supply becomes imperative, the sole continental producer, Northern Graphite (TSXV:NGC,OTCQB), faced challenges in the low-price environment of 2024.
“While we are also moving forward to open a new pit at LDI and restart the plant at a higher throughput in January to meet rising demand, unless we can see our way through to higher prices, long-term supply agreements with battery makers and support from governments in Ontario, Quebec, Canada and/or the United States, the Company will continue to struggle whilst these challenging market conditions prevail for ourselves and the rest of the industry,” CEO Hugues Jacquemin said in a third quarter update released by the company in late November.
To aid in offsetting these pressures, Northern Graphite was able to negotiate a price increase with its customers in early January 2025 to mitigate inflation and higher production costs.
What trends will drive graphite in 2025?
As 2025 progresses, both market experts offered insight on which trends could be the most impactful.
“We’re expecting more bifurcation of the China and ex-China markets,” Wood Mackenzie’s Willoughby said.
“In 2024, we saw domestic Chinese prices sink much more rapidly and to a greater extent than export prices,” he said. “We expect them to remain low in 2025, but for US and European benchmarks to begin to climb again as the shift away from China as their major supplier creates tightness in that market.”
The volume needed in North America is likely to provide price insulation for graphite produced outside of China.
“Given the relative lack of ex-China mines, new production isn’t expected to dent this outlook too much,” he added.
For Alderson, volatility will reign supreme in the first half of 2025.
“Excess inventory overhang of battery-grade -100 mesh is expected to sustain high supply levels through 2025 despite forecasted reduction in production costs within the Chinese market,” he said. “Consequently, prices are forecasted to decline further in H1 2025, averaging US$413 per metric ton, down 22 percent year-over-year.”
He sees more stability materializing in the latter half of the year.
“In H2 2025, prices are set to recover moderately as inventories shrink and stock levels normalize, with China's overall production experiencing a gradual recovery,” he said. “However, ongoing competition from synthetic graphite for battery end-use applications will likely cap price growth.”
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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.
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