➤ Logistical issues with Chinese suppliers and geopolitical concerns from the Russia-Ukraine war have made electric vehicle-battery producers eager to localize their anode graphite supply chains.

➤ Foreign dependence will continue as demand outpaces supply, and Western graphite suppliers will need to vertically integrate to compete with Chinese graphite prices.

➤ Decarbonization will be difficult for most graphite producers.

As electric vehicle demand is set to jump in coming years, battery minerals suppliers are starting to feel the pressure of supply deficits. Major non-Chinese EV producers are looking to reduce their dependence on China, the leading global graphite supplier.

Canada-based Nouveau Monde Graphite Inc., which recently signed a nonbinding off-take agreement to supply battery anode graphite to Panasonic Holdings Corp. subsidiary Panasonic Energy, is one of few battery-grade graphite suppliers outside of China. The company also stands out for its reliance on renewable energy, which comes as many miners work to curb a reliance on fossil fuels in response to inflationary pressures and battery makers' decarbonization goals.

S&P Global Commodity Insights spoke with Eric Desaulniers, founder, president and CEO of Nouveau Monde Graphite, about the global push for new graphite supply chains as the appetite for EVs grows. The following conversation has been edited for clarity and length.

S&P Global Commodity Insights: Nouveau Monde recently announced a nonbinding off-take agreement with Panasonic Energy and Mitsui & Co. Ltd. for battery anode graphite. What does this mean for the company?

Eric Desaulniers: When you develop a project like ours, the material we're producing is very specific; it's not like a commodity yet, so every customer has different specs. What we have announced with Panasonic is more than the memorandum of understanding. It's defining the specifications, the quantity, and the specific timing they require.

The MOU is nonbinding, but what is binding is the $50 million investment that comes with it, made by Mitsui and our long-term investors. They will support the next phase of work on the project to redesign it for the specific request from Panasonic.

Some estimates put 2030 graphite demand at triple today's production levels, largely due to a surge in EV manufacturing. What changes have happened in the graphite market that could help producers meet future demands with new graphite supply chains?

First are the logistical issues. When [battery cell makers] operate a large battery plant, and require, like, over 50,000 tonnes of graphite per year and it's all coming from China and there are three-month delivery delays, they need to have big stockpiles. They don't want to stop their battery plant because they have no graphite because of logistical issues. Logistical issues [from Chinese suppliers] demonstrated to cell makers that they need to have local supply chains to shorten the supply chain and have "just in time" suppliers.

[Second], what happened recently with Ukraine is demonstrating that you cannot rely on a single country, especially when you have plants in the U.S. and you're relying 100% on China. That's not a geopolitically ideal situation.

On top of this, the [Inflation Reduction Act] and all the policy that was added recently is just confirming that [cell makers] need to move ahead.

The geopolitical issues, the logistics issues and all the policies are all aligned to make [new supply chains] happen.

Can graphite producers decarbonize their operations enough to meet emissions reduction goals from battery makers like Panasonic?

It's difficult when you don't start with the renewable source on your grid. We're lucky in Quebec, we do have almost 100% renewables as a grid.

We know it's not possible for all mining sites to be all electric. It depends where you are operating. For us, it makes a lot of sense [to decarbonize] because our hydroelectricity is very affordable. It's logical for us to switch to using hydro instead of diesel in our operations.

But it's not the case when you have coal-powered [grids] or you are on a genset in the middle of Africa. So we'll need to live with the fact that there are suppliers like Nouveau Monde that can be carbon neutral, but [for] other suppliers that are not as fortunate to have a deposit in the middle of a hydro-powered electricity grid, it will take a bit more time to get the infrastructure right to support their decarbonization.

What features of the graphite market have changed or become relevant in recent years as electric vehicle demand, and therefore graphite demand, has increased?

One thing that is overlooked when you develop graphite — and this is why Panasonic needs to work with a greenfield project like us — is that there are no major developments.

On the cathode side, there are spodumene or brine producers. They produce salt, either lithium carbonate or lithium hydroxide, and then a cathode manufacturer, usually a major company, can buy this from the miners and make the [cathode] product for the cell maker.

But on the anode side it is completely different. If you want to be successful, you need to be fully vertically integrated. So it makes it very challenging, but rewarding as well. [Nouveau Monde] needed to invest over $125 million in the demonstration plant to build infrastructure just to have the full vertical integration and demonstrate to the cell maker that they can get supply from us.

You need to do that full vertical [integration] to be competitive with what China is doing. So that's why it's making it even more challenging as an entry point for any startup projects; it will take many years for anybody else in the western world to catch up to us because of that difficult entry point.

The U.S. has both sought to move away from graphite sourced from places like China yet has also increased its graphite imports. Can the country and its allied nations get production up and running fast enough to compete with foreign producers?

I don't think it's possible. We are the largest and most advanced project, and we'll be in production, if everything goes well, in 2025. We will be able to supply for one large giga factory, but there are, I think, at least six that I know of that are getting built. And they all ask for the same amount [of graphite] by 2025. And they're all building at the same time. So I'm afraid that there won't be enough material produced in the western world to supply all those plans. So we will need to still purchase a lot from China.

Much of the discussion around battery metals supply chains to date has centered around lithium, nickel and cobalt, with almost none about graphite, yet it's a critical component of rechargeable batteries. Why is it so under the radar?

Maybe it's the fact that it's 100% coming from China, and there is no major company producing a graphite anode outside of China, so it's a bit more opaque as a market compared to the others.

Also [graphite] is not on the cathode. People are focused on the cathode side and they forget sometimes that there's another side to the battery.

Also the graphite price did not spike like the other commodities yet, so the graphite price did not make the cell maker worried about graphite that much until today. Now Benchmark Minerals is forecasting the supply deficit starts now, mid-2022 and onward.

At the same time, other suppliers, like from Africa, recently shut down their operations for war and safety risks. We know for a fact large cell makers are starting stockpiling programs in case China shuts down or the logistics become an issue again.

So there are a lot of geopolitical or macroeconomic factors that make us believe that, in the next six months, pricing for graphite should increase a lot, and maybe people will worry more, will talk about it more, and will realize that graphite is very important in the battery.

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