China strengthens LFP investments in 2023 but structural surplus looms

China has continued to step up investments in the lithium-iron-phosphate (LFP) material sector this year, led on by the domestic electric vehicle sector's preference toward the LFP battery chemistry over more expensive nickel-manganese-cobalt (NMC) batteries. However, as LFP capacity expands and other players outside of the LFP sector invest in it, the LFP industry is expected to run into oversupply risks in 2023.

As a key component for lithium-ion battery, LFP battery has a huge market with advantages of higher safety and lower costs. Improving technology has also raised the life of LFP batteries, a concern that loomed large over the EV sector some years back.

Earlier, Chinese EV sector used to prefer NMC battery, given its high density that leads to higher mileage, but also makes EV costlier.

China's LFP battery output outpaced NMC output in May 2021, according to China Automobile Battery Innovation Alliance (CABIA).

LFP output's ratio to NMC output has largely stayed above 60% since then, CABIA said.

Lithium-ion battery also accounts for 94.5% of China's new energy storage installations in 2022, latest data from the National Energy Administration showed.

LFP battery accounted for more than 90% of the lithium-ion battery used in new energy storage sectors, industry sources said.

Structural surplus

There were more than 40 new LFP materials projects with a total capacity of more than 5.25 million mt/year planned in 2022, with the premise built on a soaring EV demand seen since 2020, which has attracted a bulk of investors, research firm Gaogong Industry Institute said recently.

Typically, about 2,200-2500 mt of LFP material is used for 1 GWh of LFP battery production, cathode material producer Shenzhen Dynanonic said.

Based on this fact, it would take about 2.1-2.4 TWh LFP battery output to consume the capacity that was planned in 2022, S&P Global Commodity Insights calculations showed.

Accelerated investments have left LFP sector facing a structural imbalance between high- and low-end material, with capacity utilization rates for high-end products plants staying elevated but low-end players severely underutilized, according to Hunan Yuneng New Energy Battery, China's leading LFP material producer.

The required technology for producing LFP material is simpler and the barrier to entry is lower compared to the upstream and downstream products, which is one of the reasons the sector is so attractive to investors.

Leading LFP producers with advanced technology, lower cost and loyal customers would be able to further expand their market share, sources said.

LFP producers that lack these competitive advantages would gradually be washed out, sources added. These producers would face margin pressures, as already it was observed that declining raw material prices weighed on LFP prices, according to sources.

Lower prices may help demand

Prices of lithium carbonate, a critical material that gets further processed into the making of lithium batteries, have been on a steady decline since late 2022, after posting a sharp rise for about two years.

As prices fall, this would lower production costs for both electric vehicle and energy storage enterprises, which, conversely, could boost demand from these sectors, industry sources said.

Lithium carbonate prices dropping to a reasonable range would pitch EV as a better vehicle in terms of costs compared to fuel vehicles and encourage more widespread application of lithium-ion battery in the energy storage system, the sources said.

In addition, reasonable lithium carbonate prices could help the LFP industry, as LFP material prices are directly impacted by lithium prices. About 0.25 mt of lithium carbonate is used for LFP material production.

Lithium price trend

Platts assessed battery-grade lithium carbonate at Yuan 205,000/mt ($29,638/mt) DDP China May 8, up Yuan 25,000/mt week on week, S&P Global data showed.

Chinese lithium carbonate prices have retreated from an all-time high of Yuan 578,000/mt on Nov. 21, 2022, led by weaker midstream and downstream demand from the EV sector and inventory pileups.

However, prices have staged a rebound since April 17 after a five-month downtrend, led by improving market sentiment, sources said.

Market sources expected lithium carbonate prices to rise in May, as downstream battery producers and EV makers were on the brink of using up their inventories.

EVE Energy -- one of China's leading battery makers -- recently said the company's production is set rise from May.

Overall battery production in the second quarter will be higher than the first quarter, the company said, setting a bullish tone for market sentiment.

US EV maker Tesla, the second-largest EV seller in China, also bumped up its car prices, leading to improved market sentiment to some extent, according to sources.