Despite being the single largest mineral component in an average electric vehicle battery by weight, the importance of graphite in the EV supply chain is often overlooked.
Perhaps that explains why the world’s largest automakers, including Elon Musk’s Tesla Inc (NASDAQ:TSLA), have been caught with their pants down as they race to secure product amid a looming supply-chain shortage.
In a sense, Tesla, Toyota, Mercedes et al only have themselves to blame.
Demand for the very EVs they produce has been cited as the main reason behind the supply stranglehold, with EV batteries set to account for 50% of all graphite demand by the end of 2023.
Though graphite stores have been sitting on a surplus for years, the inexorable rise of the EV industry had steadily been chipping away at this.
“Because graphite is an abundant mineral and there are many projects worldwide, there is an expectation supply will simply lift over time to meet this rising demand, and thus keep prices down. I am not so sure this is a correct assumption,” explained Mike Ralston, company director at Blencowe Resources PLC (LSE:BRES).
Ralson worries that the number of new graphite mines coming online will be slow, bogged down by restrictive capital expenditure requirements and bottlenecks in the predominantly China-based testing facilities.
Western markets including the US and the European Union are increasingly seeking a graphite supply chain for their own EV ambitions, thus further compounding supply-side issues.
EV sales kick into overdrive
Global EV sales crossed 10 million in 2022, up from six million in 2021. This year is expected to see another 50% growth rate in sales.
That’s 15 million EV batteries requiring around 60 kilograms of graphite each for a grand total of 900,000 tonnes of graphite that will have been used by the end of 2023.
Around half of this is synthetic, with 450,000 tonnes of natural graphite used.
But it’s not just EV manufacturers demanding more graphite. One company alone, the South Korean steelmaker Posco, has a requirement from 2028 that is almost as much as the entire market is demanding today.
None of this graphite is reusable in the way that aluminium, copper, and zinc are. Furthermore, the synthetic graphite market appears to have stalled and is not currently a growing market.
“We are reaching the inflection point,” stated Shishir Poddar, executive chairman and managing director of Tirupati Graphite PLC (LSE:TGR, OTCQX:TGRHF).
According to Poddar, “we will start seeing a shortfall of availability of graphite based on the current production established”.
Concerning news for the EV industry, particularly those automakers still in the early stages of entering the fully electric production chain (Britain’s Aston Martin Lagonda Global Holdings PLC (LSE:AML) springs to mind).
The number of new mines coming online will be slow, and as demand intensifies the supply will struggle to keep up.
The gap between demand and supply is set to widen exponentially – Source: Reuters
Anyone with a basic grip on economics will tell you that if demand outstrips supply in anything it leads to shortages and that usually leads to price increments, “especially if supply cannot pick up to meet this surging demand”, noted Ralson.
“I believe there is a profound impact coming like we have seen in lithium and other battery metals (cobalt, nickel, manganese) in the past,” Ralson theorised, continuing: “It is difficult to predict exactly when, as markets have many different moving parts, but the accelerating demand is real.
“There are over 200 battery megafactories in some stage of development and they will all require graphite ahead. The supply restraints discussed above are real.”
This could lead to a potential boon to pure-play graphite producers who will inevitably be able to realise a better price for the product, though the sector also has its own particular set of risks.
On top of the source risk of 60% to 70% of primary graphite or graphite concentrate still coming from China, “mining and processing graphite and delivering what the customer needs is itself a learning process”, according to Poddar.
“It is a material which has its own peculiarities, its own specialised methods of doing things, So there is a learning curve for new entrants.”
For the sake of the EV industry, let’s hope these new entrants make good students.