Chinese graphite competition sets the rules; global players out of the game

Graphite producers outside of China are struggling to sign offtake deals, with Chinese producers playing by their own rules, industry participants told S&P Global Commodity Insights.

Chinese producers are in an intense competition with one another over domestic market share. With the help of cheap energy, input substitution and government support, producers are pricing synthetic graphite at or below margins to see who can remain standing.

The bid to reduce the number of players in the Chinese market has impeded the budding natural and synthetic graphite industry outside of China, industry observers say. The industry cannot grow without offtake agreements, but using current prices in contracts fails to cover capital costs or appease investors.

"It's a depressed market right now because there is an oversupply in China. The prices are at rock bottom, and we believe [Chinese producers] are not making any profit this year," Patrice Boulanger, vice president of sales, marketing and business development at graphite producer Nouveau Monde Graphite Inc., told Commodity Insights. "How long can industry work without any profit? That's the problem. We're using a rock bottom price to define the offtakes."

China in charge

China dominates the graphite market, producing more than 60% of the world's flake graphite and more than 90% of the available anode material in 2023, data from Benchmark Mineral Intelligence shows.

Chinese synthetic graphite producers have been increasing capacity in a bid to take more market share, resulting in an oversupplied market and depressed prices, industry participants told Commodity Insights.

The market oversupply prompted the largest natural graphite producer outside of China, Australia-based Syrah Resources Ltd., to lower production at its Balama mine in Mozambique.

"The smaller operators are being kicked out of the market," Yuan Gu, senior graphite analyst at Benchmark, told Commodity Insights. "It's more of a survival story than trying to make bigger profits."

A diversified product portfolio has allowed big producers to price graphite at the "marginal cost level" without going under, the analyst said.

Chinese companies are already able to produce graphite at lesser cost as they spend less on power and labor, and they have strong industry know-how in input substitution for synthetic graphite, Gu said.

The Washington Post, citing a study by Sheffield Hallam University's Helena Kennedy Center for International Justice, reported in September on the existence of several graphite facilities in the Xinjiang region of China. The US government and the United Nations Human Rights Office have alleged that the Chinese government is using forced labor in industrial parks in Xinjiang; Beijing has consistently denied such reports.

Drowning in a flooded market

Producers outside of China told Commodity Insights that prices are too low to incentivize industry development. The average monthly price of synthetic graphite exported from China was $2,088 per metric ton in October, dropping by 41.7% year over year, data from S&P Global Market intelligence shows.

Natural graphite exported out of China averaged $1,099/t in October, decreasing by 28.4% year over year, the data shows. Natural graphite requires additional processing to achieve battery-grade status, adding to costs.

"With the US looking to move away from Chinese raw materials in its supply chain ... many producers are expecting there to be a premium for graphite that meets various legislative requirements," James Willoughby, a senior analyst focusing on graphite at Wood Mackenzie, told Commodity Insights.

The US Inflation Reduction Act of 2022 provides a tax credit of up to $7,500 to buyers of electric vehicles that have a certain amount of critical minerals or battery components sourced domestically or from allied countries. Industry participants told Commodity Insights in August that there would be a need for high premiums for North American material to be sustainable.

"You have to add on corporate costs, sustaining capital expenditure and royalties," David Christensen, managing director at Australian graphite producer Renascor Resources Ltd., told Commodity Insights.

Cash costs for many operating and planned graphite projects outside China are between $250/t and $700/t, and Talga Group Ltd.'s planned Vittangi mine in Sweden is expected to have cash costs exceeding $2,000/t, Market Intelligence data shows.

"Then if you add your cost of debt on top of that ... the advantage that a lot of the Chinese companies have is there's more risk capital available," Christensen said. "[Where] we have to say, 'If we're going to load this [project] up with the Australian government debt, we need to ensure that we can pay it back.'" Renascor Resources is developing the Siviour graphite project in South Australia.

"[Then] you need to be able to get a return for your investors. And that seems to be the difficult one right now," Christensen added.

Offtakes take center stage

Producers outside China are now struggling to get buyers to agree on a higher price amid an oversupplied market, making the signing of offtake agreements more difficult.

"The industry is not just going to build out all the infrastructure and spend hundreds of millions or billions of dollars without some assurances that there's going to be customers for that material," John DeMaio, CEO of natural graphite processor Graphex Technologies LLC, told Commodity Insights.

Offtake agreements give buyers supply security under a set pricing formula and, as the industry matures, industry participants expect offtakes to become increasingly central for project development.

DeMaio said offtakes signed with original equipment manufacturers, especially, are a "great start" to unlocking capital markets.

Offtakes with battery makers and automakers have already become central in the lithium industry, but not without a few hiccups.

"Sometimes [lithium] offtakes were signed in the past, which were not financeable. ... So, what we have learned from history, without naming any specific project, is that you can't do that," said Marc Jasmin, director of investment relations for Nouveau Monde Graphite.

Waiting game

Benchmark expects the recently announced graphite export controls in China to only cause a temporary jump in prices. Product is expected to continue flowing outward amid the domestic oversupply, while the competition within the Chinese market is expected to continue for the next "one to two years," Gu said.

Benchmark is predicting a long-term deficit starting in 2028 for both natural and synthetic graphite "to support the rapid growing EV market," Gu added.

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