GCG 2023-12-01
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China’s Graphite Export Control Measures

China’s Graphite Export Control Measures


Following the rise of export controls as an important form of economic coercion in foreign policies worldwide, China has continued to impose export restrictions on important critical minerals in a move to gain dominance in the global tech war, causing great ramifications for global industrial supply chains.

On October 17, 2022, the U.S. announced comprehensive export controls on advanced semiconductor manufacturing equipment and artificial intelligence chips that limit their sale to China. A year later, on October 17, 2023, the U.S. updated these rules to encompass less-sophisticated chips. In response, China imposed export curbs on germanium and gallium in August 2023 and further announced graphite export restrictions on October 20, 2023. 

This new set of export restrictions seem to denote China’s intention to reinforce and weaponize its dominance of critical minerals and raw materials supply chain in response to the expanded economic security policies of the U.S. and European countries. 

Overview of China’s Graphite Export Control Measures

On October 20, 2023. the Chinese Ministry of Commerce announced graphite export control measures to take effect on December 2023. More specifically, starting December 2023, exporting companies must confirm whether their products are considered dual-use items (items designed for civilian use, but can also be used for military purposes) and receive export permits if they wish to export natural graphite (HS Code: 250410) or synthetic graphite (HS Code: 380110) as anode materials for rechargeable batteries. China had already imposed graphite export control for seven graphite-related items since September 2006. With this announcement, these measures will be expanded to a total of nine graphite items.

China has stated that the purpose of this decision is “to safeguard national security and interests.” While these export regulations do not specifically target certain countries, they are expected to impact countries with high reliance on Chinese graphite imports, such as Japan, the U.S., India, and South Korea. 

An export permit system works on a different principle from an outright export ban as products may still be exported by exporters who obtain permission from the Ministry of Commerce. The process to receive export permits is as follows: (i) Exporters submit application for export permits; (ii) the Ministry of Commerce reviews export application documents (approval by State Council is required for items with a significant impact on national security); (iii) the Ministry of Commerce issues export permits to the exporters; (iv) Exporters submit export permits to customs supervision and proceed with customs procedures; and (v) Customs inspects the export permits and grants approval. Only exporters who go through this process shall be permitted to export graphite.

Impact on EV Battery Supply Chain

If graphite exports are restricted like the above, delays in procuring graphite may cause substantial damage to supply chains that encompass both Korean and U.S. EV and battery industries.

Graphite is a critical item in the battery supply chain, as it is a critical material used as the anode material of lithium-ion batteries, which is one of the four main components (cathode, anode, electrolyte, separator) in rechargeable batteries. In fact, an average of 50-100kg of graphite is used as the anode of a single electric vehicle's battery pack, which is about twice the amount of lithium used in a battery.  

According to the International Energy Agency (IEA)’s Global Supply Chains of EV Batteries report, although natural graphite mining has become more diversified with many ongoing greenfield graphite mining projects in countries such as Tanzania, Mozambique, Canada, and Madagascar, China still makes up around 80% of the global production. China also accounts for 70% of the global production capacity of synthetic graphite, making China an industry heavyweight in graphite supply. 

According to the Korea International Trade Association (KITA), Korea’s reliance on China for graphite imports were 97.7% for natural graphite and 94.3% for synthetic graphite as of September 2023. In actuality, it can be said that Korea currently imports all of its graphite from China. Considering Korea’s heavy graphite reliance on China, if China’s new export regulations cause delays in procuring graphite, Korea will inevitably suffer difficulties in expanding its EV battery industry. 

The U.S. also has an extremely high dependency on China for graphite. According to the annual Critical Minerals Review by the U.S. Geological Survey, around 95 U.S. companies consumed a total of 72,000 tons of graphite in 2022, despite the fact that the U.S. did not mine any natural graphite in the same year. Additionally, the Congressional Resource Service (CRS) Report issued in 2022 by the U.S. Congress pointed out the U.S.’ high susceptibility to disruptions in graphite supply chains, observing that the U.S. neither has any active domestic graphite mines, nor any plans to develop such mines. Currently, one-third of the graphite consumed in the U.S. is imported from China. This means that disturbances in the graphite supply chain can also cause great damage to the U.S. EV and battery industry

Government Response Measures

The Korean government is working with domestic battery makers to secure consistent supplies of graphite in response to China’s new export restrictions. The government has launched a “Graphite Supply Task Force” in collaboration with agencies like the Korea Trade-Investment Promotion Agency (KOTRA) to ensure companies a stable supply of graphite. Furthermore, the government plans to actively facilitate domestic graphite sourcing by accelerating plans, originally set to begin next year, to produce synthetic graphite in domestic factories. The government has also announced plans to increase its contingency response capabilities by securing supplies from alternative graphite-rich countries, such as Tanzania, Mozambique, etc., developing substitute materials like silicon anode materials, expanding domestic graphite production, and diversifying graphite import sources. Finally, the government emphasized the need to promote joint responses to export controls measures through supply chain agreements between U.S.-led IPEF (Indo-Pacific Economic Framework) countries.

The Biden Administration has called for cooperation among allies to build a stable, sustainable, and resilient supply chain for critical materials. This can be interpreted as an expression of the U.S.’ intention to utilize the IPEF Agreement to strengthen supply chain cooperation with its partners. Moreover, on November 15, 2023, pursuant to the Bipartisan Infrastructure Law signed by President Biden in 2021, the U.S. Department of Energy announced up to 3.5 billion U.S. dollars in funding to bolster the domestic production of advanced batteries and battery materials.

DR & AJU’s Comments

While China may appear to have merely implemented a permit system rather than explicitly prohibit graphite exports, if China uses such export curbs as a retaliatory measure against the U.S., it may become difficult for Korean battery makers with U.S.-based companies to receive export permits. Moreover, if China does indeed reinforce export control or ban exports in the future, Korean companies with a high reliance on China will suffer greater damages. Therefore, it is crucial for relevant industry players to amend the current battery supply chain, which is excessively reliant on China. 

For short-term measures, domestic companies must first obtain a sufficient stockpile of graphite before the December deadline to minimize supply disruptions, then transition to an alternative graphite supply. A few countries to consider as natural graphite sources are African countries such as Mozambique, Tanzania, and Madagascar. For synthetic graphite, countries like Japan, Spain, and Germany are possible candidates as graphite import sources. In a long-term perspective, companies shall have to closely monitor the policies, agreements, programs, etc., that the Korean government will implement to respond to such export controls. 

DR & AJU’s Global Compliance Group, Washington, D.C. Liaison Office and D&A Advisory, Inc. deliver accurate and crucial information to help domestic companies effectively and promptly respond to changes in China’s trade policies and establish tailored strategies to ensure compliance with applicable laws by providing comprehensive advisory on internal control strategies.

DR & AJU will continue to closely monitor the developments in international trade policies to respond expeditiously through close cooperation with businesses when necessary.

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DR & AJU’s Global Compliance Group (the “GCG”) was founded with the purpose to prevent and minimize corporate risks for companies in Korea. GCG's goal is to create a favorable business environment by providing strategic solutions to prevent, manage, and minimize various risks a corporate entity may face doing business domestically or globally.

DR & AJU GCG provides various risk management services from pre-transaction investigation, strategic research, and field investigation to review of a potential dispute, monitoring, and representing in litigations and post-litigation follow-up work. Furthermore, GCG aims to be a strategic partner to our clients in their creative management by predicting and preparing political and regulatory risks due to changes in global dynamics or political landscape that our clients may face in or out of Korea.

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