Graphite producers' output decreases in Q1 2023 as Chinese consumption lags

Graphite miners' first-quarter earnings suffered headwinds from a decline in Chinese steelmaking and electric vehicle production, along with a shift to manufactured graphite by EV makers, executives said on earnings calls.

Prices for key battery metals including graphite, lithium and cobalt began to level off in the fourth quarter of 2022 before some steep drops, particularly as electric vehicle sales in China slowed. The result has been a buildup in inventories of graphite-based battery anodes in China, where battery production growth has outpaced consumption, according to graphite company executives. The subsequent downward pressure on graphite prices also drove down production in the first quarter.

But producers of graphite for automotive and heavy industry uses expect demand for the mineral to grow: Graphite is an important input for both EV batteries and steel produced using electric arc furnaces, one of the main low-carbon strategies by steelmakers, and both industries are expected to expand.

Shaun Verner, CEO and managing director of Australia-based graphite producer Syrah Resources Ltd., summarized the main first-quarter impediments during an April 26 earnings call: "EV sales growth, while still strong, slowed pace year on year and quarter on quarter; anode material inventory built up through 2022 [and has] consequently taken longer to clear; [and] anode material producers have been able to secure cheaper graphitization costs in artificial graphite."

Syrah Resources reported a 10.9% year-over-year decrease in graphite production from its Balama mine in Mozambique for the March quarter, with a 14.3% drop in graphite sold and shipped from the site.

Steel struggles

Producers of graphite for steel-related purposes faced their own inventory problems in the first quarter, as well as continued demand headwinds due to a slow resurgence in Chinese manufacturing as the country's economy recovers from the COVID-19 pandemic, executives said.

"The magnitude of the steel industry recovery remains constrained by global economic uncertainty, and ... current graphite electrode inventory levels at our customers exceed typical norms, reflecting the recent softness in steel utilization rates," Marcel Kessler, CEO and president of US-based GrafTech International Ltd., said April 28 on a first-quarter earnings call.

GrafTech reported a 65.7% drop in production volumes and a 62.1% decline in net sales for the March quarter, year over year. The company attributed most of the decrease in net sales to residual impacts from the suspension of its operations in Monterrey, Mexico, in the third quarter of 2022.

Rose-tinted future

Despite the weak quarterly performances, executives from both companies emphasized expectations that graphite demand will grow as steel decarbonization and vehicle electrification continue.

"We continue to expect the steel industry's efforts to decarbonize will drive a further shift to electric arc furnace steelmaking, supporting medium- to long-term demand growth for graphite electrodes," Kessler said.

Global sales of passenger plug-in EVs are forecast to increase 104.7% between 2023 and 2027 to reach 29.2 million units, according to an April report by Alice Yu, a mining analyst with S&P Global Commodity Insights.

"The major opportunity of medium- and long-term natural graphite anode material demand is clear," said Verner. "And within that, Syrah is the only major ex-China player this far progressed, both upstream and downstream."

Executives also pointed to shifts away from dependence on the recently volatile Chinese graphite market, incentivized by policies such as the US Inflation Reduction Act, as driving new opportunities. China is the largest global producer of graphite, accounting for 79% of global 2021 output, according to the US Geological Survey.

"The US Inflation Reduction Act means that anode material producers are accelerating plans to build capacity offshore in places, like Korea, the US and Indonesia, that require ex-China third-party feeds," said Verner.

Syrah subsidiary Syrah Technologies LLC received a $102.1 million loan from the US Department of Energy's Loan Programs Office in July 2022 to expand the company's Vidalia graphite plant in Louisiana. The same subsidiary was also awarded federal funds in October 2022, authorized under the Bipartisan Infrastructure Law for battery supply chain projects.

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