Industry Trend Analysis - Rising Auto Industry Demand To Shake Up Graphite Market - MAY 2014

BMI View : Firstly, Tesla's upcoming gigafactory in 2017 , as well as the bigger push by EV manufacturers to increase sales , will increase demand for graphite (an essential mineral for batteries) over the coming years. Secondly, with China clamping down on graphite mining operations within the country, we see greater opportunities for producers to open mines elsewhere in the world. Lastly, we see natural graphite playing a bigger role in batteries for mass market EVs compared with synthetic graphite due to the former's cost advantage.

An essential raw material to produce lithium-ion (li-ion) batteries is graphite. With hybrid and electric vehicles (EVs) mostly utilising li-ion batteries and our expectation that sales of these vehicles will grow in the coming years albeit at a low base, demand for graphite is inevitably going to rise as well. A pure EV contains about 50kg of graphite while a hybrid car contains 10kg.

The recent announcement by Tesla Motors to build a gigafactory in the US ( see 'Arizona And Nevada Best Placed To House Tesla's Gigafactory', March 26 ) will cause ripple effects in the commodities market due to the scale of battery production, especially after it comes online in 2017. However, we see the gigafactory throwing up opportunities for investors in essential materials required for the battery manufacturing process.

In 2013, annual global production of natural graphite hit 1,188,000 tonnes, of which 68% was mined in China. More than 40% of global demand for natural graphite comes from the steel industry (where the mineral has multiple uses such as a liner for crucibles and a refractory for blast furnaces).

Still In China's Hands
2013 Natural Graphite Mine Production By Country

Synthetic Graphite Preferred Despite Higher Cost

Although either natural or synthetic graphite can be used in li-ion batteries, it is important to note that natural graphite (which has to be mined first) is one of the raw materials required to produce synthetic graphite. Interestingly, many of the original equipment manufacturers (OEMs) at present prefer to use high-end synthetic graphite to produce the anodes in their car batteries due to the material's consistency. However, the material is more expensive than its natural graphite counterpart, costing some USD20,000 per tonne compared with battery-grade natural flake graphite, which costs roughly USD8,000 per tonne.

Indeed, Tesla too has revealed that it prefers the synthetic variety of graphite for its batteries. Additionally, the firm disclosed that it gets the majority of its synthetic graphite from Japan.

Slowdown In Graphite Mining

The accompanying chart shows the trend in global natural graphite production. The sharp drop experienced by the industry in 2009 was partly due to steel demand collapsing worldwide in the wake of the global financial crisis. However, as the chart also illustrates, growth in production has almost ground to a halt in 2012 and 2013, which is bad news for EV manufacturers, who intend to boost their sales in the coming years. If future production fails to pick up pace in line with demand, these firms will have to pay higher prices for the graphite they need for their batteries.

Not Music To Battery Makers' Ears
Global Natural Graphite Production Volume, tonnes

A possible reason for the sluggish growth in graphite mining in recent years is the polluting nature of its operations, which has resulted in domiciles with strict environmental laws to ban such activities. Furthermore, as China dominated the industry and began to flood the market with cheap exports, producers in other countries could not compete in a climate of depressed prices. As such, there have been no significant openings of new mines outside China since the 1980s.

China's Pullback Creates Opportunities For Producers Elsewhere

However, China's tolerance of the environment al debasement brought about by graphite mining is waning as the country is increasingly taking a pro-active stance to tackle its pollution woes. Indeed in recent months, Chinese authorities have suspended operations of more than 50 graphite operators in the Shandong province due to environmental breaches. This province accounts for 10% of the global supply of natural graphite.

We believe China's push towards clamping down on graphite mining creates opportunities for producers elsewhere in the world. It is almost certain that demand from the automotive industry is expected to strongly increase over the coming years, a view further reinforced by Tesla's recent gigafactory announcement. It is estimated that output from Tesla's gigafactory could increase global demand for natural graphite by 37% in six years.

With concerns about the diminished supply of graphite from China over the coming years, there has been a rush by producers in recent months to secure supplies of the mineral in other parts of the world. The Uley graphite mine in Australia recently re-opened after being closed for two decades.

Natural Graphite Will Play A Bigger Role For Mass Market EVs

In our opinion, the costly process of manufacturing synthetic graphite battery anodes will mean that natural graphite will play an increasingly greater role in the battery industry. Currently, the strongest demand for EVs comes from the premium segment, which has the ability to charge higher prices for its electric cars.

However, if automakers such as Tesla intend to bring down the cost of mass market EV models, they will need to embrace natural graphite as a potential substitute. Tesla intends to release its Model E in late 2016 or 2017, which will be targeted at the volume segment with a sticker price of below USD35,000. While the automaker aims to reduce current battery prices by 30% when the gigafactory opens in 2017, it will not make sense to negate the cost savings from cheaper batteries by continuing the use of the more expensive synthetic graphite. That said, we acknowledge that natural graphite needs to prove its consistency as a good quality battery anode and it will probably take further research and development in this space to achieve that.

Lastly, we see EV manufacturers moving to optimise their supply chain so as to reduce the shipping costs of materials. Transport costs can account for 30% of the graphite purchase price. On this front, we highlight the likely possibility of Tesla's gigafactory looking to the upcoming Canadian graphite mines in the coming years for its graphite needs after 2016.