Chasing the Dragon: Competing with China in the Strategic Graphite Commodity Sector

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Figure 1: Mine production of graphite 1990-2025 illustrating relative dominance of Chinese producers, after Schodde (2016). Figures are taken as reported for 1990-2016, and projected from Roskill low-growth forward scenario for 2017-2025 (Roskill, 2017).

Despite the rapidly evolving nature of the nascent graphite market, the absence of a recent record of competition limits opportunities for direct analysis of tactics and strategy that may be adopted in seeking advantage through the full graphite commodity cycle (Sykes, Wright et al., 2016). In the absence of this insight, additional lessons on the drivers and effectiveness of Chinese competitiveness will be developed here through analogy with the experiences of global competitors in the rare earth elements market, which bears many structural and functional parallels to the graphite sector – including established dominance by China (Sykes, Wright et al., 2016).

Through both analyzing the structure of the natural graphite sector and examining Chinese tactics and responses to global competitors during the global ‘specialty metals’ boom around REE between 2010 and 2012 (Sykes, Wright et al., 2016), I will seek to identify strategic insights relevant to the question of how an open-market operator can best compete with the Chinese commodity sector. Specifically, can an operator reasonably hope to realise the rewards of an expanding global market in a strategic commodity dominated by the Chinese dragon? Or, to pursue the more colloquial meanings of this essay’s title, might the seductive promised returns from graphite in a high-tech, high-value supply chain ultimately prove as illusory and destructive as an addict’s pursuit of their high?

- Chinese dominance of the graphite market

The graphite industry is projected to undergo substantial transformation in the coming decade, transitioning from a recent history of slow growth and low prices to a regime of rapid demand growth and price recovery (Roskill, 2017). The chief driver of this change is the expected demand for high-quality graphite material in the lithium-ion battery industry underpinning modern high-density power storage – particularly in electric vehicles. Demand in the battery sector is projected to increase between 5 and 10-fold over the coming decade (Fig. 2), producing a rise in total graphite demand of 4-6% p.a. and becoming the dominant industrial application of the commodity by 2026 (Roskill, 2017) (Fig. 3).

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Figure 2: Projected growth in demand for graphite in the Li ion battery manufacturing sector 2016-2026. Modified from (Roskill, 2017). Base case scenario is based on a near-doubling of growth rates to 20.2% p.a. over the next decade, with graphite consumption in batteries reaching 957kt in 2026. High and low-growth scenarios range between 16.3% and 25.8% annual growth, depending primarily on forecast adoption rates of electric vehicles (Roskill, 2017).

The quality demands of the battery sector have traditionally seen it serviced primarily by synthetic graphite (Etacheri, Marom et al., 2011), but discovery of higher quality resources and advances in purification and processing technology have seen cheaper natural graphite increasingly able to meet the market needs of the industry (Ni, Ma et al., 2015). The projected booming demand in the sector is thus seen as offering a substantial opportunity for natural graphite producers (Roskill, 2017).

Supported by a central government focused on nation building and economic development, Chinese producers have dominated this market for the past 25 years. Beginning in 1981, Beijing’s so-called ‘Let Water Flow Rapidly’ policy framework in resource development saw authorities prioritizing rapid increases in the production of strategic resources to feed the country’s rapidly developing economy (Whoriskey, 2016), largely without considerations of environmental protection, safety and sector consolidation. Alongside the low wage environment of the time, this combination of state support and lax environmental controls allowed Chinese producers to assume a largely unassailable low-price market position (Whoriskey, 2016), rapidly rising to dominate the global market (Fig. 4). This market position was further strengthened through the 1990s as China accelerated commodity exports (and in the opinions of many analysts engaged in dumping practices) in a drive to increase its foreign exchange reserves (Wübbeke, 2013; Economy and Levi, 2014). These actions produced a strong decline in global graphite prices through the 90s, driving out many market competitors and producing a corresponding dependency on Chinese supply (Fig. 4).

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Figure 3: Global consumption of graphite by application – measured usage for 2016, projected for 2026. Modified from (Roskill, 2017).

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Figure 4: Chinese market share of global flake graphite production 1976-2016. Produced from data sourced in Roskill (2017).

Despite its success in meeting the key Government objective of stimulating production, some commentators suggest that this focus on production at all costs represented a notable policy failure over the longer term, with the lack of entrance standards and patent enforcement in the sector leading to a proliferation of small-scale and technologically backward mines and separation plants. More recently, the processing practices of the natural graphite industry in China have come under increasing environmental scrutiny, with the diversity of small inefficient operators substantially bought out and consolidated by state-owned companies into four natural graphite production bases, centred on Jixi and Luobei in Heilongjiang province, Yichang in Hubei province, and Chenzhou in Hunan province. By controlling production, the government aims to improve both the product quality of the industry and its working standards and pollution levels.

This industry rationalization has seen substantial volatility in Chinese graphite output, which has fallen by an average of 3.1% p.a. since 2006 (Roskill, 2017). Despite these falls however, Chinese production still accounted for 70% of global flake graphite output in 2016 (Fig. 4). While the ongoing rationalization taking place within the industry may represent an immediate opportunity for producers outside China, it may be premature to suggest that this decline will continue into the longer term.

Graphite is still classified by the Chinese state as a ‘mineral of strategic importance’ in the recently released