China has revealed plans to consolidate operations in the world's most prolific flake graphite producing region - the Heilongjiang province, where most of the world's battery raw material comes from - that could significantly alter the global supply structure of the industry, UK-based analyst Industrial Minerals Data (IM Data) manager Simon Moores said on Thursday.

China had officially announced plans to crack down on polluting flake graphite operations and start consolidation of the mines within the next 18 months.

Moores told Mining Weekly Online that he had been speculating about such a move for several years, adding that the news that broke late on Wednesday night could be the biggest shift in graphite supply in a generation.

This has put a question mark over the future of the world's largest flake graphite producing region, with the province accounting for 45% of Chinese production and 29% of global output in 2013. It will also come as a major boost to every new graphite exploration project looking to enter the market in the next three years.

"In fact, it could see China take a big step back from the global marketplace in favour for using the raw material to make higher-value goods.

"It's my estimation that with this plan and what's happening in Shandong, 90 000 t [of supply] could be under threat. That is 24% of global supply on 2013 production levels - the equivalent of one Brazil," he said in an email.

IM Data said that move followed high-profile graphite dust and wastewater problems in Pingdu City, Shandong province - the country's third-largest producing region - which led to the ongoing blanket closure of all processing operations in December.

The majority of the world's medium flake graphite - used in variety of applications from refractories and lubricants to lithium-ion batteries - comes from Heilongjiang. This includes the industry's most widely used product, -100 mesh, 94% C (-194).

CLEANING UP THE ACT

Heilongjiang's Provincial Department of Environmental Protection has announced six steps to turn what is mass-scale mining into a more efficient and responsible operation and eventually create higher value-added products.

The provincial government plans to consolidate 36 mining rights into 30 by 2015, and into 25 by 2020.

As well as having areas dedicated to key mining operations and exploration, the government plans to identify areas in which mining is explicitly encouraged or discouraged. It hopes to develop these more concentrated and controlled areas of operation to shift away from the sprawling mining activity seen today.

"This will also allow the ministry to establish greater control over the area's mining rights and limit illegal operations," IM Data said.

Much like in Pingdu, a significant focus of Heilongjiang's clean-up is controlling the amount of dust produced through graphite mining and processing.

Dust emissions have become a major issue in China's flake graphite industry and while the mineral is inert and not harmful, air pollution has become a problem for local residents and farmers, who have coined the term 'graphite rain' to describe the thick pollution.

Getting a grip on the dust problem through the introduction of stricter regulation and more modern equipment will be a cornerstone of the plan.

"The government has issued all producers with a dictat to upgrade their equipment for inspection from September this year. Those that fail this inspection will be forced to stop production," the firm said.

The government also wants to establish high-technology industrial parks to produce value-added graphite products and move the province away from its role as a concentrate supplier.

The local towns of Jixi and Hegang (Luobei) have been identified as initial locations for the parks, which would replicate what has been achieved in Inner Mongolia and Hubei's graphite industries.

The Ministry of Industry and Information Technology would tightly enforce graphite industry entrance standards; rules that would limit new capacity and control expansions.

"Newly built graphite plants will not be allowed to have a capacity of less than 20 000 t/y, with individual production lines required to process at least 5 000 t/y."

Another significant environmental issue surrounding the country's graphite production is how wastewater is disposed of.

Subsequently, the Department of Safety and Inspection would now review the safety of the province's graphite tailing ponds, approve and distribute certificates, and shut down illegal ponds or those beyond rectification.

The initiatives were all designed to establish what China calls 'green mines'. "Heilongjiang aims not only improve the ecological environment from these measures but will also try to bring all graphite mines in the area up to provincial and national green mine standards over the next five years," IM Data said.

MARKET IMPACT

London-based Moores said that it really depends how seriously the Heilongjiang government takes this plan.

"On the face of it, the plan looks extensive, more so than any in recent history for the graphite industry. But we will only know the seriousness of the situation by September when the government begins its inspections.

"The industry could be hit with a double whammy whereby the majority of production in Pingdu, Shandong does not come back on stream in June/July and then further closures come into place in Heilongjiang in September. Our estimations are that this could put at least 50% of flake graphite supply from both provinces under threat throughout 2014," Moores said.

Depending on how demand plays out in 2014 and 2015, the impact on prices could also be significant.

Moores noted that the supply and demand dynamics for flake graphite is finely balanced. The last time demand rebounded from a slump was in 2010/11 when prices rocketed to all-time highs off the back of limited supply and an unforeseen demand surge.

At that time there were no real supply restrictions in place.

"We could be entering a similar period for the industry now. Demand has been low for the last 18 months, which has seen prices erode and capacity come off-stream around the world. We are yet to see any significant demand upturn, but should any rebound coincide with supply cuts in China then prices could once again increase significantly," Moores said.