China’s continued crackdown on industrial pollution has had a widespread effect on the graphite industry, restricting supply and increasing prices of both natural and synthetic graphite through 2018 and H1 2019, as well as changing demand dynamics as a result of environmentally led improvements to Chinese steelmaking. Now we see supply closures beginning to happen in India too. Looking forward, the introduction of stricter controls on pollution from global shipping is also expected to affect the availability of raw material for synthetic production over the next decade. And China isn’t yet done with its industry overhauls.
Flake graphite processing under major scrutiny
The most direct effect on graphite has been in the natural graphite industry, where mined material undergoes high levels of processing to produce highly purified products such as spherical graphite for use in the rapidly growing market of lithium-ion battery anodes, as well as expendable/expanded graphite for use in fire retardants and other applications. Such processing has come under major scrutiny in recent years because of its use of large quantities of hydrofluoric acid and other strong reagents.
There were four major rounds of processing plant inspections between 2016 and 2017, followed by two ‘look back’ rounds in June and October 2018 to check progress, focused mainly on Heilongjiang and Shandong – the centres for flake and spherical graphite production. In 2016, Chinese flake graphite production fell back by as much as a third, and supply growth has continued to be constrained in more recent years by on-going closures.
When combined with increasing demand from batteries, prices for natural flake graphite (averaged across flake sizes for 94-97% C grades) increased by an average of 45% between September 2017 and February 2018, and still averaged 17% higher in May 2019 despite several rounds of downwards price readjustment as plants re-opened. Batteries accounted for around 14% of natural graphite demand and 7% of total graphite demand in 2018 but are growing such that they could account for 45% of natural demand and 25% of total demand by 2028.
Synthetic graphite price hikes
For synthetic graphite, closures have come further upstream, with availability constraints in the supply of raw material needle coke translating to a shortage in synthetic graphite and price rises through 2017 and 2018. Prices for synthetic graphite electrodes increased by more than 800% between January and October 2017 and, although prices have fallen significantly in recent months, by May 2019 they were still 135% higher than they were in early-2017. Prices have been kept high by rapidly increasing demand from the synthetic graphite electrode industry, as China shifts to higher levels of crude steel production via electric arc furnace (EAF) – a technology which replies on graphite electrodes.
Sea change for Chinese steel
Graphite electrodes, used mainly in EAF steelmaking related to the use of high levels of steel scrap, accounted for around more than a third of synthetic graphite demand in 2018 and more than half of total graphite demand. China began switching much of its steel production to EAF from 2017 in a move to increase its levels of steel scrap recycling. It followed a sudden nation-wide closure of all poor-quality steel by induction furnace. China is expected to increase the rate of this change as more end-of-life steel becomes available and it aims for even higher recycling rates. Currently, 10% of Chinese crude steel is produced in EAFs, but this could double to 20% over the next decade.
Pollution controls rising outside of China?
So far, pollution controls have been focused mainly on the Chinese industry but, in February 2019, a court ruled the closure of Graphite India’s graphite electrode plant in Bangalore following concerns over pollution. Graphite India is a major international manufacturer of graphite electrodes. Could we see further shutdowns take place in India and/or other countries?
No sign of pollution controls slowing
The Chinese government has not lost its appetite for industry improvement. It will continue its programme of environmental inspections and the closure of plants that fail to meet standards across all industrial sectors, especially in the lead-up to 2021 – the year which marks the first of China’s “two centenary goals” which represent the 100th anniversaries of both the CCP and the People’s Republic of China – goals which were made by the 18th Party Congress in 2012, the same Party Congress that saw Xi Jinping assume his leadership position. The Ministry of Environmental Protection has recently stated that environmental protection ‘would only be strengthened with the deepening of the reform and would not be weakened’. Roskill’s research in China suggests that the government believes environmental protection not to be at odds with economic development. In fact, a large number of Chinese producers are now reporting higher profits, especially the loss-making SOEs.
On a global scale, stricter marine pollution (MARPOL) regulations are being brought into play from 2020 that could impact synthetic graphite industry and bolster further price rises, as competition increases for the low-sulphur fuels traditionally used in petroleum-based needle coke production. Demand for needle coke is also rising with increased use in lithium-ion battery anodes.
With ongoing constraints to supply and rapidly rising demand, price development in the graphite industry will depend on the ability of new supply, increasingly that from outside of China, to meet the market’s needs.