Is graphite the gateway commodity for further easing of US raw material sourcing restrictions?

News Analysis




Is graphite the gateway commodity for further easing of US raw material sourcing restrictions?

The US Treasury and Internal Revenue Service (IRS) is going to push out the deadline for complying with sourcing restrictions for certain battery raw materials until 2027, easing the pressure on OEMs to meet criteria. The list included electrolyte salts, electrode additives and binders, but graphite stood at the forefront of headlines as it was the only primary mined mineral to be included. 

According to the IRS, for graphite the current nature of the battery material supply chains means that material origin is often difficult to trace, typically with heavy involvement from China-based producers across the entire graphite supply chain. 

Graphite’s role in the lithium-ion battery supply chain 

Graphite is the primary active anode material of choice for lithium-ion batteries globally due to its favourable cycling stability, reliable energy density and cost-effective nature. It contributes around 30% to the total mass of a typical lithium-ion battery and therefore plays a pivotal role when looking at the future of raw material sourcing and what is required to meet the growing demand from the EV and ESS sectors. 

In terms of global supply, China is the largest producer of both natural and synthetic graphite, including downstream refined production of natural graphite, for lithium-ion battery anodes. Outside China, Africa has become an essential part of the natural graphite supply chain including production from Mozambique and Madagascar. However, around 90% of its combined African supply is exported to China for processing and used in spherical graphite production. This concentration, therefore, poses a significant risk for any region that is looking to reduce reliance on China through policy and legislation.  

Current competitive landscape between natural and synthetic graphite 

Historically, the steel industry governed graphite market trends, where natural and synthetic graphite were generally consumed in independent applications, including refractories or high-purity electrodes. However, the growing demand for graphite in lithium-ion battery anodes for EVs has created an overlap and competitive landscape between the two in the anode industry. Spherical graphite, produced from natural graphite, has gained market share as the active anode material in LIBs due to lower pricing as the volumes required have grown. However, natural graphite supply could not keep pace with increasing demand, causing a surge in spherical graphite prices and an opportunity for synthetic graphite producers to capture battery market share. Since 2022, there has been a build-up of synthetic graphite battery anode projects in China with many projects coming online making the material much more widely available.  

With this new production entering the market, the anode market has been oversupplied with synthetic graphite. The competition between sellers has pushed prices of synthetic graphite down – which in turn, has placed downward pressure on spherical graphite prices. As a result, spherical graphite prices have been declining m-o-m reaching historical lows of US$1,650/t, a 50% fall from their peak of US$3,270/t in April 2022. This drop in prices has narrowed the gap between spherical and synthetic graphite prices, with Chinese anode producers reducing prices to maintain market share and as a result becoming more cost-competitive globally.  

Geopolitics and its impact on the graphite supply chain 

As demand grows for lithium-ion batteries, geopolitics is playing an ever-important role in shaping the future of battery supply chains. In the USA, the Inflation Reduction Act (IRA, introduced in August 2022) has stimulated growth in North America’s lithium-ion battery supply chain by offering electric vehicle (EV) tax credits for eligible EVs. With this, US$7,500 is offered for new EVs that meet the criteria for locally or Free Trade Agreement (FTA) sourced battery raw materials and battery components.  In addition, the legislation stipulates that sourcing raw materials and components from Foreign Entities of Concern (FEOC) such as China, Iran, Russia and North Korea, will prohibit an EV from receiving the tax credits. Subsequently, this has prompted OEMs to move away from using graphite sourced from China. This trend is supported by US trade data that indicates a 32% decline in coated purified spherical graphite (CPSG) imports from China in 2023. 

Furthermore, the implementation of Chinese export controls on certain graphite products in December 2023 has spurred interest in companies developing anode supply chains in North America.  Towards this goal, several graphite mining companies have entered into offtake agreements with ex-China OEMs with some receiving financial backing from the US government to develop battery-grade anode material plants in the USA.  

In 2022 the US Department of Energy awarded Syrah Resources a US$102M loan to expand its 11.25ktpy Active Anode Material (AAM) Vidalia facility in Louisiana, USA. Syrah commenced production in February 2024, becoming the first vertically integrated natural graphite AAM supplier outside China.  The company has also received a US$150M conditional loan from the US International Development Finance Corporation (DFC) to improve its Balama mine operation. In addition, several natural graphite projects are being developed in the USA, including projects owned by Graphite One and Westwater Resources. 

US dependency on natural graphite shows an uphill battle 

However, the USA has not produced natural graphite since 1990 when United Minerals suspended its graphite mine operation in Montana, due to economic factors and competition from cheaper imports. The cost of mining and processing natural graphite domestically became less competitive compared to graphite imported from countries with lower production costs, such as China. According to the USGS, in 2023 the USA consumed 76kt of natural graphite valued at ~US$180M, which was used in primary applications such as batteries, refractories, lubricants, castings, and brake linings. In line with this data, the US imported 72kt natural graphite concentrate of which ~40% was sourced from China, followed by Mozambique (26%), Canada (10%) and Madagascar (10%). Interestingly, the country’s battery-grade natural graphite imports have increased significantly over the past years owing largely to growth in lithium-ion battery anode production. These have exhibited a 514% and 65% y-o-y growth, respectively, for uncoated and coated purified spherical graphite in 2022, before the introduction of the IRA. 

For perspective on the new rules, the US and FTA countries are expected to produce 16% of natural graphite global supply by 2030, which falls to 4% when looking at the US alone. Project Blue forecasts that the US will require up to 450ktpy of graphite by 2030 specifically for lithium-ion battery manufacture, which may result in a wide supply gap to develop. This shortfall could present a major risk for the US battery landscape. Although the value of graphite is often far lower than many of the other battery raw materials, it nevertheless contributes a sizeable portion to a cell’s intrinsic value and will be a key target for OEMs to meet sourcing requirements. 

As a result, this move by the IRS is seen as an acceptance that much of the graphite in the US lithium-ion battery supply chain at one point originated in China, whilst simultaneously providing a nudge to stimulate further investment and growth within the domestic anode supply chain. It then begs the question of how the US government will respond closer to the 2027 deadline. Whether a further extension or easing will be implemented is unknown, but given the anticipated lack of domestic supply, hard restrictions on locally sourced graphite production will go some way to impede tax credit eligibility for many EVs. It perhaps also opens the door for the easing of restrictions for other raw materials, many of which have at least one processing step in China.  

Are other battery raw materials at risk in the USA? 

The global supply of refined graphite is dominated by China, however, this narrative holds for many, if not all, battery materials. Much of the lithium, manganese, cobalt, nickel, and other cathode materials present in modern lithium-ion batteries have likely had at least one processing step in, or investment from, China. For example, a considerable amount of nickel supply growth has come from Indonesian HPAL plants which are largely owned by Chinese producers (more than 25% ownership). Given that Indonesia has no free trade agreement (FTA) with the US, nickel produced in the country does not currently qualify for US subsidies.  As a result, OEMs are forced to choose between a limited supply of eligible material from FTA countries or easy access to large volumes of non-compliant nickel. In turn, pCAM/CAM producers are forced to set up joint ventures (JVs) with South Korean partners to navigate around sourcing requirements and compliance. 

Nickel supply is relatively constrained by its supply origin, and significant feedstock volumes will come from Indonesia.  Similarly, cobalt feedstock also has a localised origin and is primarily sourced as a byproduct of copper and nickel, respectively,  from the DRC and Indonesia. Both countries are non-FTA partners, and therefore material would also be considered non-compliant and not qualify for US subsidies.  For both raw materials, global refined production outside of China is expected to grow but not all will be sold into the US market and US demand is likely to exceed domestic or FTA availability. However, investments and developments within the midstream sector may be able to provide alternative cobalt sourcing for the US. In 2023, Managem received financial backing from the US to develop a cobalt sulphate facility in Morrocco (FTA partner). 

For manganese, the US primarily imports all of its manganese from Brazil, Australia, Gabon and South Africa. Several US deposits have been explored since the introduction of the IRA, however, these are still in the feasibility phase and would take many years to come online. As the supply of these raw materials is geographically constrained in a handful of locations, any extension of IRA sourcing rules may have a reduced effect on growth stimulation, with often only a small number of companies benefitting from the extension. 

For mined lithium, a slightly different narrative could prevail, in which large volumes could be sourced from multiple FTA countries including Chile and Australia. An extension of sourcing requirements for lithium could allow larger volumes of eligible supply to manifest before the rules change. In turn, this could allow for better supply chain planning for CAM manufacturers looking to invest in the USA. Notably, a sufficient downstream production capacity would need to be available, as idle capacity or inventory build-up would negatively impact costs. 

An extension of sourcing rules for other battery raw materials is therefore not completely out of the question because it could allow additional time for supply chain planning in the US. However, the impact of this would depend heavily on the raw material in question and the feasibility of meaningful domestic and FTA supply in the short to medium term. Any extensions would no doubt have to be paired with guidelines for how this supply chain growth should develop, as moving the goalposts could shift mid and downstream attention further towards South Korean partners as a means to circumvent supply chain requirements and material compliance.