In the continued interest of sharing information with other...

In the continued interest of sharing information with other holders here is reply I got from DC this week.

He always replies quickly and really takes the time to answer any question no matter how trivial.

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Hi XXX,

Thanks for your message.

The Fastmarkets article you quote from belowhighlights the issue that has been limiting ex-China supply chains since beforethe 25% import duties were put in place under the Trump administration.

China has a major advantage in the production ofanodes for a number of reasons, which include the economy of scale at alllevels of the graphite to anode to battery to EV supply chain and China’seconomic power (which includes continued investment in capacity and the abilityto operate at negative margins for extended periods of time).

The current impact on all of this is low pricesthroughout the supply chain – this includes flake graphite, graphitizationsupply and synthetic graphite, natural and synthetic anodes, battery cells andEVs.

Non-Chinese participants in the supply chain get ashort-term benefit from the current low prices by being able to buy cheapChinese inputs, thereby lowering their cost of production. This has beenthe situation over the last several years. However, the benefit islimited, as Chinese suppliers at all levels get even greater benefits from lowinput costs.

In any event, the current situation is notsustainable for a number of reasons. First, Chinese demand for naturalflake graphite will outstrip its own supply. Since China currentlycontrols ~70% of graphite supply and it has a ready substitute in syntheticgraphite, the impact of flake graphite prices is not as acute as we have seenfor other minerals like lithium. On the other hand, in late 2022, Chineseflake graphite prices for -100 mesh graphite were in the mid US$800s on theback of only a modest monthly net export balance. It wouldn’t take muchto revert to this.

Secondly, it is unlikely that China will continueinvesting in the supply chain as it has been without realising a return. The most obvious thing to happen will be a reversion to a normal marketequilibrium, which will result in higher prices.

The bigger risk for non-Chinese EV participants inthat China will simply no longer make its inputs available outside ofChina. This is unacceptable for the Western EV sector, at it wouldthreaten the economic viability of the entire industry. As a result,we’ve seen initiative like the IRA put in place to encourage non-Chinese supplychain.

The 25% export duty goes to the same thing andconsiders anti-competitive behaviour in trade practices. On a short-termbasis, a US EV maker may want to waive the export duty, but the longer-termrisk is that the cheap Chinese material will no longer be available.

Right now, we are experiencing the kind of graphiteand anode price volatility that is making it difficult for even efficientproducers ex-China to operate competitively.

As we move forward, I would expect even morepressure from governments to promote ex-China supply chains, whether throughsubsidies (grants and loans), enforcement of tariffs or requirements fornon-China supply.

Downstream participants are also aware that thecurrent situation is not tenable, and we are starting to see movement on theirside, including differential pricing.

Our challenge at Renascor is to manage the volatility in a positive manner andmake downstream commercial arrangements that get us into production as quicklyas possibly and allow us to see through the current low-price environment andbenefit from what we see as the inevitable increases in price as the marketmatures.

I hope this answers your question.

If you have any further queries, please let me know.

Kind regards,

David

Here is the article:

https://www.fastmarkets.com/insights/why-underinvestment-anode-supply-chains-could-make-graphite-exception-to-feoc-rules/


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