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

Chasing the Dragon

Competing with China in the strategic graphite commodity sector

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Geoff Batt – 22163348

A report submitted for MGMT5502 – Strategic Analysis and Consulting, at the University of Western Australia

Modified from (Buxton, Sebastian et al., 2011)

Table of Contents

1. Executive Summary

The natural graphite sector is projected to enjoy a boom in demand over the coming decade, driven primarily by growth in the manufacture of Li-ion batteries. This growth and the corresponding opportunity it offers to new entrants is focused principally at the high-quality flake graphite end of the market, and is predicated on current market participants – notably the Chinese state-run graphite sector – being unable (or unwilling) to meet the forecast levels of demand.

China has dominated the global supply of natural flake graphite for 30 years, and currently provides around 70% of the market supply. This figure has been decreasing over the past decade, however, as the state sector goes through a period of consolidation and transition driven by changing economic and environmental policy drivers emanating from the central government in Beijing.

This ongoing rationalization means that China would likely to be unable to scale up its production dramatically from current levels to meet an increase in demand – thus offering a potential window of opportunity to external market participants. This opportunity should be approached with caution, however. Although mineral resource output is not the national economic imperative it was for the Chinese government in the late 20th and early 21st centuries, Beijing has shown a recent willingness to use its influence to manipulate commodity markets to favour domestic economic and political objectives – including the attraction of high-tech manufacturing industries to the country. The basis of the forecast graphite boom on use of the mineral in the high-tech electronics industry may make the graphite sector more strategically attractive to the Chinese than its commodity value alone would dictate.

In view of potential market manipulation and price volatility, the safest route to competing with Chinese suppliers in the graphite market may be to focus on differentiation of product, in particular with respect to reducing existing commercial risks in battery production.  A clear and transparent supply chain offering graphite produced and processed to high standards of quality by environmentally sustainable methods could capitalize on a nascent desire in the market for environmentally differentiated product, and be difficult for the state-controlled and opaque Chinese sector to compete with.

Having been alerted to the risks of Chinese monopolization of commodities in an era of that nations increasingly open geopolitical ambitiont, some users – particularly in Asian nations party to ongoing territorial and political disputes with China in the South China Sea, for example – may also be prepared to pay a premium to insulate their supply chains from Chinese influence.

1. Introduction

Increasingly optimistic projections of a future global car market dominated by electric vehicles have driven a boom of interest in high-quality natural graphite plays (Roskill, 2017). Accompanying investment has supported an array of exploration and early stage development projects around the globe (Schodde, 2016). An additional 536 Mt of natural graphite resources have been defined over the past decade, expanding known resources more than 5-fold (Schodde, 2016). With a number of substantial high-quality mine projects under construction – and in some cases nearing production – the face of the sector promises to change dramatically in coming years.

Underlying the considerable technical and project risk inherent in advancing a mine development in this sector however (Sykes, Wright et al., 2016), a fundamental issue needs to be addressed. The projections of demand growth and opportunity on which this boom is based are predicated on the key assumption that the current market leader in graphite production, China, will be willing to yield its market share to global competitors (Schodde, 2016) (Fig. 1).

As its economy has grown in size and sophistication over recent decades, China has adopted an ambitious and at times Machiavellian approach to securing long-term dominance of what it considers to be strategic resources (Hoskisson, Eden et al., 2000; Friedberg, 2006). Alongside its multi-pronged trade, investment, and political engagement towards this end (Friedberg, 2006), some commentators contend that the rising Asian powerhouse has shown a ready willingness to distort markets as a means of achieving industrial policy and strategic objectives (Alves, 2012; Wilson, 2012; Gourdon, Monjon et al., 2016). Against this background, any entity considering entering the graphite market could be forgiven for expressing concern at the prospect of taking on Chinese competition. This is particularly true in the context of the attractive demand projections for graphite riding on the back of exactly the kind of high-tech value-adding industry sector China openly covets (Walsh, 2007) – and has gone to substantial lengths to capture – to support its own developing manufacturing base.