US graphite producers are locked in a battle with battery producers and automakers over whether a tariff exemption for graphite made in China should be allowed to expire, which would impose a 25% duty.

Graphite producers say the tariff will help stand up a US industry that consists of one operating graphite plant, while automakers say US graphite cannot meet their specifications.

President Joe Biden is in a bind. His administration just set tough emissions standards for vehicles aimed at accelerating the growth of electric vehicles, for which it will want to ensure low-cost raw materials. But the administration has also set policy to extract the battery supply chain from China, which as of 2022 controlled 70% of global natural graphite production, according to a 2023 report by the International Energy Agency. And it must keep in mind the potential for China to impose its own measures: The country recently set new export controls on graphite, though it has not yet restricted any product.

The administration is coming up against the May 31 expiration of a list of graphite products excluded from the tariffs set during the Trump administration under Section 301 of the Trade Act to combat alleged unfair trade practices by China, and domestic producers want the duty imposed.

"China has the ability to continue to oversupply the market and drive the price down, then it's going to inhibit the investments here locally, which ... pushes out the date for when we can start to have enough material here in the US to support local demand," Chris Burns, CEO of NOVONIX Ltd., a North American producer of synthetic graphite, told S&P Global Commodity Insights.

"Policies like the tariffs, which are going to impact commercial discussions of direct supply agreements, become almost more impactful than capital injections through things like the Inflation Reduction Act," Burns said.

Price parity

Graphite producers say the tariffs are necessary to bring Chinese graphite prices in line with North American prices.

"The overall cost of EVs arguably needs to come down for adoption to grow and for people to embrace them, so I understand the automakers' perspective," Jon Jacobs, chief commercial officer at Westwater Resources Inc., a US-based natural graphite producer, said in an interview.

"On the other hand, if you want materials to be made in the US, [companies] need some support ... to compete with incumbents making 20 times the amount of volume, in places like China," Jacobs said. "Anything that basically raises the price of these Chinese materials is going to absolutely support the domestic industry."

Domestic producers accuse China of artificially lowering the price of synthetic graphite to take market share from smaller producers. Natural graphite prices are said to be falling in tandem.

The average price for spherical graphite, which is used in batteries, exported from China was $1,990 per metric ton in December 2023, a 48.1% drop from a year earlier, S&P Global Market Intelligence data shows. Graphite producers told Commodity Insights in August 2023 that North American product would require a premium of about 30% to 50% as producers pay off capital costs and deal with higher operating costs.

"China's iron grip on the global graphite market has created such a scenario, which holds many national security ramifications," the North American Graphite Alliance (NAGA), a trade association, said in a Feb. 21 letter to the trade agency.

Government support from the Inflation Reduction Act and grants and loans from the Department of Energy, including a $102 million loan to Syrah Resources Ltd. subsidiary Syrah Technologies LLC and a $100 million grant to Novonix, will not drive demand like tariffs will, graphite producers said.

"You're not going to garner investment unless you have the offtakes," Novonix's Burns said, adding that the cost to set up new synthetic graphite plants is $500 million to $1 billion.

Automakers call for more time

In May 2020, the US Trade Representative created a tariff exemption for three synthetic and natural graphite products at the request of EV manufacturers. The trade agency has extended the exemption at least four times since then, and EV manufacturers are asking it to do so again.

Tesla requested that the exclusions be extended until the end of 2025, as it waits for new supply to come online. BlueOval SK LLC, a JV between Ford Motor Co. and SK Battery America Inc., requested more time to qualify new suppliers, as did several other EV manufacturers. The companies say domestic graphite supply is not ready.

"There is no single manufacturer outside of China that currently meets Tesla Inc.'s specifications and additional capacity requirements," the company said in comments filed with the Trade Representative during the latest comment period, from Jan. 22 to Feb. 21.

LG Energy Solutions Michigan Inc. said in its comment that it has "exhaustively explored options to source from the US and/or third countries" but has not found a supplier to meet its needs.

The US and Canada each have one active graphite mine, Empire State and Lac des Iles, respectively. Syrah, the largest natural graphite producer outside China, began operations at the first US natural graphite processing facility, Vidalia in Louisiana, this quarter. At least another seven graphite facilities are under various stages of development in the US and at least 15 are in development in Canada, according to Market Intelligence data.

China not standing pat

The Biden administration is likely also weighing the effect of China's December enactment of export controls on graphite, a move players interpret as a threat to supply.

"I don't view the tariffs as being used as a 'response' to the export controls but simply another tool that the government has in order to help support and incentivize the buildout of the local supply chain in the face of the increased risk with the existence of these export controls," said Burns.

Tariffs and the possibility of the Chinese government moving to cut supply could squeeze EV manufacturers.

"The decision could also be a strategic preemptive move to reduce the need and thereby likelihood of the US enforcing the 301 tariffs on battery graphite," Jacobs said in an email. "If China self-inflicts a little pain now (pain means extra costs ... automakers will likely communicate that pain to DC), it might enable them to avoid a much bigger 25% tariff via 301."