To compete in the China-dominated graphite market for electrical vehicles, would-be Canadian and U.S. producers must match prices on value-added products that are key to battery-making, industry experts said.

China accounts for all production of coated spherical graphite, or CSG, according to analysts. The product requires substantial upgrading to meet technical specifications for use in batteries.

Mined graphite of the right quality is processed into flake graphite concentrate and then into spheres, which are coated with a thin layer of other materials in a high-temperature and energy-intensive process. It is then used to make the bulk of anodes in the batteries of electric-vehicle power banks.

When it comes to automakers, industry players and experts say being competitive on price is critical for the sector to develop in North America. "It's clear that you need to be resilient against the Chinese producers," said Eric Desaulniers, president and CEO of Nouveau Monde Graphite Inc., referring to operating costs.

The graphite start-up has been developing plans and facilities to produce CSG in Quebec where hydroelectric energy prices are relatively cheap. Energy use is expected to account for about a quarter of projected operating costs, Desaulniers said, due to the energy-intensive nature of CSG processing.

Though China remains the dominant producer of CSG, there is increasing interest for alternative sources as EV manufacturing gains traction in the U.S. and Canada.

"There's going to be large interest in securing sources locally," said Casper Rawles, head of price assessments with Benchmark Mineral Intelligence.

Aside from the issue of demand growth, and the question of where all the materials needed for batteries will be sourced from in coming years, resilience in the supply chain has become a critical factor for manufacturers following disruptions caused by the pandemic and trade protectionism in the U.S. under the Trump administration. Still, for North American production of battery-grade graphite to grow, it will have to compete on price with China.

Chris Berry, president of House Mountain Partners, a firm that focuses on specialized metals like graphite, said buyers are not likely to pay more for a North American product simply because it is more local or hits higher marks on environmental, social and governance issues.

Likewise, Rawles does not expect a higher price for a North American product to materialize, though there will be significant interest for it as the EV sector expands.

"The reality is, it's not going to work in terms of a premium," Rawles said. "You just won't get qualified to supply the automaker if you don't meet their criteria."

Cheap renewables

Rawles also said the nascent industry in North America should not depend on low-carbon power as a long-term selling point. While Chinese manufacturers rely heavily on coal-fueled energy, the country is also a major investor in renewable power and has been relatively quick to develop infrastructure to capture market share.

"If anyone in the world is capable of installing renewable power at an alarming rate, it's China," Rawles said. China's solar capacity grew fivefold from 2015 to late 2020, according to a Reuters report, and solar installations in China are expected to increase in 2021.

Meanwhile, demand for flake graphite in China remains strong in part given growing EV battery production, according to Benchmark Mineral Intelligence analysts.

"Surging demand from each of these sectors has bolstered Chinese flake imports, which between January and April have risen by 198.1% on the same period during 2020, although the effects of COVID-19 have also played a role in augmenting part of this growth," the analysts said in a May overview of the graphite market.

S&P Global Ratings projected that global lithium-ion battery production will double or triple by 2025, up from 455 GWh in 2020.

As Nouveau Monde advances its CSG operations to commercial production, it will have to focus on containing costs, Desaulniers said. "If you want to be a successful coated spherical graphite producer and really compete with China, you need to own a large deposit and produce at low cost."

At the same time, public funding will be key to help the sector grow in terms of initial capital costs. Analysts see the situation as a matter of North America catching up to China, and to a lesser degree, Europe.

"It's difficult for the investment community to put their money in it because the industry doesn't really exist," Rawles said.