SMM Interpretation on How China’s Imminent Export Curbs On Graphite Will Affect Global Industry And Market?

Starting from December 1, 2023, China will require exporters to apply for permits to ship two types of graphite.

On October 20th, an announcement pertaining to the "Optimization and Adjustment of Temporary Export Control Measures on Graphite Items" was co-released by the Ministry of Commerce and the General Administration of Customs (hereinafter referred to as the "Announcement"). The Announcement mandates that any export of the concerned items is prohibited without prior authorization.

The "Announcement" explicitly stipulates its official implementation starting from December 1, 2023. Concurrently, Announcement No. 50 of 2006, jointly issued by the Ministry of Commerce, National Defense Science, Technology and Industry Commission, and the General Administration of Customs, titled "Decision on Implementing Temporary Export Control Measures on Graphite-Related Items", will be rescinded.

The "Announcement" underscores that any exporter who engages in unauthorized exports, operates beyond the approved scope, or commits any other legal infringements, will be subjected to administrative sanctions as per the relevant laws and regulations, enforced by authorities such as the Ministry of Commerce or Customs. ; if any crime is committed, criminal liability shall be investigated in accordance with law.

What are the items under control and the associated measures?

The "Announcement" primarily imposes control over two principal items:

The first category encompasses artificial graphite materials and their related items that exhibit high purity (greater than 99.9%), substantial strength (flexural strength exceeding 30Mpa), and elevated density (more than 1.73 g/cm³) (refer to the corresponding customs commodity codes: 3801100030, 3801909010, 6815190020).

The second category pertains to natural flake graphite and its related items, including but not limited to spherical graphite and expanded graphite (refer to the corresponding customs commodity codes: 2504101000, 2504109100, 3801901000, 3801909010, 3824999940, 6815190020).

Domestic Experts Analysis

On October 20, Sun Qing, Honorary Chairman of the China Carbon Industry Association, spoke to the Global Times about the Ministry of Commerce's graphite export controls.

Chairman Sun Qing noted that the 2006 temporary export controls by the Ministry of Commerce and other national bodies covered all graphite products, including graphite electrodes for steel and carbon electrodes for industrial silicon. Domestic firms need approval to export these items.

As the world's largest graphite producer and exporter, China's export licensing requirement impacts the efficiency of firms expanding overseas and industry development. We've discussed this with the Ministry of Commerce. We believe that controls must be implemented concerning national security and interest, as well as the fulfillment of obligations to prevent proliferation. Beyond these essential limits, other controls could be considered for easing.

It was once thought that graphite could be processed into nuclear-grade graphite. But we now understand that nuclear-grade graphite has extremely high quality requirements not all graphite can meet.

Thus, the Ministry of Commerce's recent adjustment - formally controlling essential limits and de-controlling those for national economic use. This change benefits industry development and economic growth.

"Tri-high" graphite, used in ballistic missile nose cones due to its ability to withstand high temperatures and impacts, surpasses metals in these tasks, making it the optimal choice. It's also used in aerospace for rocket linings, as ordinary metals would melt at the intense heat of rocket launches.

This clarifies the Ministry of Commerce's commitment, as stated on the 20th, to "fulfill non-proliferation international obligations and adjust export controls for national security," justifying ongoing controls on "tri-high" graphite exports.

China, holding the world's largest and highest-quality natural flake graphite reserves, is in a similar position to its rare earth situation. We must avoid unregulated exploitation and low-price exports, learning from our rare earth experiences. Developed countries in Europe and America rarely exploit their graphite resources in order to protect these resources.

China's natural flake graphite, a precious non-renewable resource formed under unique geological conditions, requires export controls for protection. This aligns with the Ministry of Commerce's commitment to "uphold national interests".

SMM Analysis

The policy mainly concerns natural and artificial graphite, including spherical and expandable graphite. The high purity, strength, and density standards in the policy are not typical indicators for artificial graphite used in lithium batteries.

In the electronics market, the most demanded graphite products are high strength, density, and purity (containing 99.99% or more carbon), often known as "tri-high graphite". Falling under "special graphite", most of these products are made from artificial carbon graphite. Some reference customs codes are provided in the following chart.

From an application standpoint: "Tri-high graphite" is used in electronics for electrodes, high-performance thermal conductive materials, conductive materials, and high-temperature materials. In aerospace, its low weight, high fire resistance, and high thermal/electrical conductivity make it perfect for aerospace vehicle components and thermal protection materials. In manufacturing, it is used for high-temperature gas pipes, furnace linings, valve seals, composites, and mechanical parts like gears.

Natural graphite has diverse applications. Spherical graphite, created by modifying high-quality flake graphite's surface using advanced processes, yields variously fine, elliptical sphere-like products. It's mainly used as the anode material in electronic devices and lithium-ion batteries for new energy vehicles.

Expandable graphite, a porous, worm-like substance derived from natural flake graphite through intercalation, washing, drying, and high-temperature expansion, maintains properties like high-temperature resistance, corrosion resistance, radiation resistance, and electrical conductivity. It also offers unique features like flexibility, resilience, self-adhesiveness, impermeability, adsorption, and low density. Primarily used as an adsorbent, sealing material, biomaterial, phase-change thermal storage material, high-energy battery material, fireproof material, and more, it finds extensive use in industries like petroleum, chemicals, nuclear energy, electricity, and pharmaceuticals.

Reviewing the industries impacted by this policy: lithium battery anodes are mainly made of artificial and natural graphite. In China, batteries predominantly use artificial graphite, whereas overseas technologies lean towards natural graphite. Product-wise, the impact on artificial graphite used in lithium batteries is relatively mild, but the natural graphite anode industry chain involves spherical graphite as a raw material.

Looking at the upstream raw material, flake graphite mines for natural graphite anodes, about 99.91% of graphite resources are concentrated in nine countries: Turkey, China, Brazil, Madagascar, Mozambique, Tanzania, India, Uzbekistan, and Mexico, with combined reserves of 319.7 million mt. These countries span all continents except Antarctica. Remaining known reserves are mainly in Vietnam, the Czech Republic, North Korea, Sri Lanka, Norway, Russia, Ukraine, and others.

In terms of graphite mining, as of 2021, China led global natural graphite production, contributing 67.05% of total output. Brazil accounted for 7.77%, Madagascar 7.20%, Mozambique 5.89%, India 3.29%, Russia 1.25%, and Turkey 1.24% of global natural graphite production. Globally, spherical graphite production is primarily controlled by China. Despite numerous overseas anode companies establishing natural graphite anodes, they still heavily depend on China for importing raw spherical graphite.

The current change in export policy for key materials might somewhat benefit overseas businesses. However, as most relevant domestic firms have export qualifications, and many overseas battery cell companies are shifting from natural to artificial graphite, this policy change's short-term impact on the lithium battery industry may be minimal. Observing subsequent enterprise approvals and export conditions remains critical.

Overseas Market Analysis

After China's policy announcement, major buyers like South Korea and Japan started evaluating potential impacts on their domestic companies, while intensifying dialogue with China to seek solutions.

"China regulates graphite exports, Korean government vows to enhance communication with China, Korean enterprises are anxious." The Kyung Hyang Daily News published an article on the 21st stating, in response to China's decision to enforce export controls on highly sensitive graphite, a crucial battery production raw material, the Korean government has called an emergency meeting.

South Korea's graphite industry heavily relies on China. In 2022, South Korea imported $241 million worth of artificial and natural graphite, with 93.7% from China. Officials told Kyung Hyang Daily News that this policy isn't an export ban, but adds highly sensitive graphite to the export control list. While South Korea can use stockpiles in the short term, future tightening of China's export conditions could impact relevant South Korean industries.

'Korea Economy' reports that the domestic battery industry, particularly POSCO Future M, a Korean battery material manufacturer, will be affected. This company imports natural graphite from China, processes it into batteries at its Sejong City factory in South Korea, and supplies to customers like LG Energy Solution, Samsung SDI, and Hyundai. A senior executive at POSCO Future M stated that acquiring export licenses might take longer than anticipated, so they're closely watching the situation. A Seoul Hyundai Securities analyst told Deutsche Welle that Korean companies, or even Korea as a whole, heavily reliant on Chinese graphite imports, may need to seek alternatives from the US or Australia, potentially increasing many companies' costs.

Data from the Japan Oil, Gas and Metals National Corporation indicates that about 90% of Japan's graphite is imported from China. Industry insiders told Nikkei that Japanese companies also manufacture electric vehicle batteries, with over half of the graphite raw materials imported from China. The immediate challenge is to find new procurement sources. A manager at a Japanese car company told Asahi TV that China's restriction on graphite exports has impacted them to some degree, and they are assessing the extent of the impact.

On the 21st, Reuters UK analyzed that some Japanese and South Korean battery manufacturers are concerned that export licenses may not be approved, or that approval may take time, potentially triggering short-term panic buying. "The battery accounts for most of a car's cost. So, if non-Chinese car manufacturers can't access these materials, or are forced to use very expensive materials, business costs will significantly rise," said Stefan Bernstein, CEO of UK mining company GreenRoc Mining. A senior executive at Northern Graphite in Canada mentioned that since China's export control on graphite news emerged, they have been continually receiving inquiries from factories about battery and other electronic device supplies.