Production plant inspections and temporary closures look set to continue through 2018, impacting the Chinese natural flake graphite supply chain. The latest round of closures occurred in late May 2018, focused, as usual, on Shandong province – the centre for flake graphite and spherical graphite processing in China. The May closures are believed to have occurred before a government summit was held in the region at Qingdao in June. By early July, many plants remained closed as producers try to meet increasingly strict environmental targets.
Previous closures in 2017 resulted in price increases, as a sudden curtail to flake graphite supply combined with rapidly rising demand from the lithium-ion battery market and recovery in the traditional refractory sector. Producers were then forced to draw down on stockpiles. In 2018, however, the market appears to have been more prepared and, by early July, prices had yet to increase following the latest round of closures.
Plant inspections have been ongoing in the natural graphite industry throughout the 2010s but have become more frequent and more rigorous to meet strengthening environmental policy. Previously, inspections were carried out by local government, which was often more concerned with keeping companies in operation (and paying tax) than on making sure environmental targets were properly met. Since the mid-2010s, however, inspections have come under control of the central government, which has prioritised pollution control in graphite and many other industries.
The spherical graphite sector in particular has been hard hit. Production of spherical graphite involves the use of strong acids and other harsh chemical reagents, as well as the grinding of graphite which can produce air-borne particulate matter.
Roskill view: Although both flake and spherical graphite have been in a state of considerable overcapacity in China, sudden and continued closures have left producers unprepared in recent years. In 2016, Chinese flake graphite production fell by around 30% on the previous year as a result of widespread closures. Production recovered in early 2017 but fell back again with a new round of closures in mid-2017. This pattern appears to have repeated in 2018 with some recovery early in the year followed by closures in May.
Although prices had yet to rise again by July 2018, it must be noted that there was a significant lag time between the mid-2017 closures and the first price increases in October that year. If low production levels continue to sustain through 2018, we could still see price increases later this year.
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