[Bojo, Battery] Can China's Control of 'Graphite' Be Overcome Like Japan's Semiconductor Materials?

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Graphite material of POSCO Future M. [Image source=Yonhap News]

China is tightening exports of graphite, a raw material for battery anode materials. China's graphite export controls recall the 2019 Japanese government's restrictions on semiconductor material exports to South Korea. The strategy of neighboring countries to shake our core industries is repeating itself.

The Chinese government has decided to control exports starting December 1 this year for ▲high-purity, high-strength, high-density artificial graphite materials and products ▲natural flake graphite and related products. A spokesperson for China's Ministry of Commerce stated, "(Graphite products, etc.) can be converted for military use, so they have been designated as controlled items for reasons of national security, and this is not targeted at any specific country." However, damage to South Korea's industrial sector, which depends on China for over 90% of its graphite imports, is inevitable.

China Controls Graphite Supply Chain... South Korea Particularly Vulnerable

Graphite has a structure where carbon atoms are stacked in thin plate-like layers. It can store or release lithium ions between these layers, making it a raw material for anode materials. Anode materials account for 10-15% of the cost of lithium batteries. Anode materials are broadly divided into natural graphite-based and artificial graphite-based types depending on the graphite used.

Natural graphite is mined directly from mines and is price-competitive, but batteries using it have lower charging efficiency and shorter lifespans. Artificial graphite is produced using coke (a solid fuel made by processing coal) generated during steelmaking. It is processed at high temperatures requiring significant electricity, making it more expensive. However, it offers higher charging efficiency. Since it does not require mining, raw material procurement is freer than natural graphite. The graphite China intends to control exports of includes natural graphite, artificial graphite products, and their raw materials.

China recognized the importance of graphite in the battery industry early on and developed mines and smelting plants. Thanks to relatively low electricity and labor costs, it gained price competitiveness over other countries. As a result, it was able to dominate the global graphite supply chain. Last year, China accounted for 82% of the world's graphite production (mining volume). China's share of graphite processing was 70.4% as of last year. China controls both production and processing. Geographically close South Korea is especially dependent on Chinese graphite. From January to September this year, 97.7% of natural graphite and 94.3% of artificial graphite were imported from China (data from Korea Customs Service and Korea International Trade Association).

China Targets Gaps Before Expanding Anode Material Supply Chain... Battery Hegemony Strategy

Can South Korea's industry overcome China's graphite export controls? Let's look at the 2019 case of Japan's export restrictions. In July 2019, the Japanese government began restricting exports to South Korea of three items with high Japanese dependency: hydrogen fluoride (41.9% in 2018), photoresist (93.2%), and fluorinated polyimide (44.7%). At the time, there were concerns that semiconductor production would be impossible without these materials.

However, domestic companies succeeded one after another in domesticating these materials, and American and Chinese companies' products also replaced the void left by Japanese firms. The Japanese government only made export procedures more stringent but did not impose a full export ban, as it could negatively affect its own material suppliers. China's graphite export controls should also be examined in terms of internalizing the graphite supply chain, searching for substitutes, and the effectiveness of export controls to assess future impacts.

What our industry should ultimately pursue is internalizing the graphite (anode material) supply chain. The domestic battery industry aims to reduce dependence on Chinese imports by using artificial graphite anode materials and silicon anode materials, which improve energy density and charging speed, instead of natural graphite mined and processed from mines. Artificial graphite and silicon have easier raw material procurement.

The only company mass-producing anode materials domestically is POSCO Future M. It processes graphite imported from China into anode materials and supplies them to battery companies such as LG Energy Solution, SK On, and Samsung SDI, but it has not expanded supply enough to fill the gap left by Chinese products. POSCO Future M plans to increase graphite production from the current 82,000 tons per year (74,000 tons natural graphite, 8,000 tons artificial graphite) to 370,000 tons by 2030. Daejoo Electronic Materials (3,000 tons) and SK Materials (2,000 tons) have started producing silicon anode materials, and LG Chem, Lotte Energy Materials, and SKC are also planning mass production of silicon anode materials through research and investment.

However, domestic companies plan to increase anode material production only in 2-3 years, coinciding with the start of large-scale factories operating in the North American market. China's current export control move is seen as a strategy to preempt 'battery hegemony' before South Korea, the U.S., and others secure anode material supply chains. If export controls become full-fledged, short-term shocks are inevitable. Supply instability could lead to price increases for graphite. Amid a decline in battery prices due to oversupply of Chinese batteries, increased battery production costs pose a burden to domestic battery companies.

Could Production Disruptions Occur... Export Controls May Lose Effectiveness Like Japan

What must be guarded against is battery production disruptions caused by China's measures. Professor Lee Ho-geun of Daeduk College's Department of Automotive Engineering said, "Out of 45 graphite mines worldwide, China controls 30," and added, "Ultimately, China is holding onto graphite and reducing overseas supply to lower the operating rates of battery factories in other countries while increasing its own operating rates." He continued, "Battery companies that cannot secure raw materials are in a difficult situation. Although somewhat late, they have no choice but to work hard to diversify battery supply chains."

There is also a possibility that production disruptions like those caused by Japan's semiconductor material export controls may not occur. There are alternative countries and substitutes for Chinese graphite. If the semiconductor case was China, this time it is Japan. Hitachi and Mitsubishi produce natural and artificial graphite anode materials. The three domestic battery companies, including POSCO Future M, also procure Japanese and Chinese anode materials. Because supply has been diversified, the impact may be somewhat mitigated.

China's export controls may ultimately become ineffective. For Chinese companies accelerating exports of electric vehicles and batteries, controlling exports of all graphite products could become a negative factor. If exports of all graphite products are not permitted, the U.S. and Europe may build new trade barriers. There is also a possibility of a complaint to the World Trade Organization (WTO). Just as Japanese semiconductor material companies' exports eventually decreased, such measures could be self-damaging.

This content was produced with the assistance of AI translation services.