How much longer will the lithium battery sector fall? When investors thought that the trend of lithium carbonate prices would reverse, they didn't expect it to be short-lived, and it continued to bottom out.

According to the Intelligent Finance and Economics APP, the price of lithium carbonate has rebounded in the past few days, with a rebound of 10% last week. Especially on September 11th, it soared, pulling the lithium battery sector, which had been declining, back to the investment hotspot. Several A-share individual stocks hit the limit-up that day, and Tianqi Lithium Corporation in the Hong Kong stock market rose by more than 10%. However, it was a farce of "The Boy Who Cried Wolf," and the four trading days of correction wiped out the rebound. Why is the lithium battery sector not favored by investors?

In fact, the price of lithium carbonate has fallen from 0.6 million yuan/ton to below 0.08 million yuan/ton. Although there has been a rebound in the past week, it is still in a downward trend. The market value of the lithium battery sector has been severely reduced due to the decline in the price of lithium carbonate. Taking industry leaders as an example, since 2021, Ganfeng Lithium (01772) has fallen from a high of HKD 130 to the current HKD 16, while Tianqi Lithium Corporation (09696) has fallen from HKD 84 to HKD 20, a decrease of 87.7% and 76.2%, respectively.

However, most investment banks believe that 0.08 million yuan/ton is the cost line for supply and demand balance in the lithium carbonate industry, and the recent performance of lithium carbonate prices seems to indicate a stabilization. So, has a turning point arrived for the lithium battery sector?

Caught in a "prisoner's dilemma", the supply and demand contradiction is temporarily difficult to resolve.

"Success and failure are both caused by the same person." Whether there is a turning point in the lithium battery sector still depends on whether the price of lithium carbonate can stabilize and rebound. In fact, the continuous new lows in the price of lithium carbonate ultimately stem from the supply and demand contradiction. There is a serious overcapacity, and the demand growth is far behind the speed of supply, so the improvement of the supply and demand structure is crucial for the industry's turning point.

From the supply side, the lithium battery industry is a policy-oriented industry. In the context of global "carbon neutrality", participants have been crazily and blindly expanding, leading to a doubling of production capacity. Since 2021, the industry has been caught in a contradiction of destocking and capacity expansion growth, with an average capacity utilization rate of only 57% in 2023, and over 600 GWh of capacity lying idle. In 2024, industry inventory is still high, with a total of over 0.12 million tons of lithium carbonate samples in September.

In recent years, although participants have slowed down in capacity expansion, no one is willing to stop production in the "prisoner's dilemma", resulting in a continuous decline in prices. It is worth noting that Contemporary Amperex Technology has taken the lead in opening the door in China. In September, the company planned to adjust the production arrangement of lithium carbonate in Yichun, deciding to suspend its lithium mica mining business in Jiangxi. Overseas, according to media reports, the US jewelry company Tiffany has halted the construction of a lithium processing production line at its Kemerton plant in Australia.

China is the core market for lithium batteries worldwide. Three smelters in the Jiaxiawo mining area of Contemporary Amperex Technology can achieve a monthly production capacity of about 8,000 tons of lithium carbonate equivalent at full capacity. If the overall production is stopped, it is estimated that the monthly production of lithium carbonate in China will be reduced by 7.5%. The impact on the industry is not small, and therefore, this news has stimulated price increases. However, the market is concerned about the problem of excess production capacity, and the sustainability of the rebound is in doubt as demand still cannot meet supply.

From the demand side, the main end users of lithium batteries are new energy vehicles and energy storage industries. In terms of battery types, they can be divided into power batteries and energy storage batteries. Demand remains in a high-growth trend, but there is a significant difference in the growth rates of power batteries and energy storage batteries. Power batteries are constrained by the slowdown in the growth of new energy vehicles, with the growth rate slowing down from doubling in 2021 to low-double digits. On the other hand, energy storage batteries have shown stable growth in the high-double digits.

According to incomplete statistics from CESA, the newly installed capacity of new energy storage has doubled in July, with a cumulative growth of over 70% from January to July. Among them, lithium battery energy storage accounted for over 90% of the newly installed capacity. In addition, the data shows that the cumulative bidding scale for lithium battery energy storage systems in China from January to August 2024 exceeded 36.8GWh, a year-on-year increase of 77.3%. The installed capacity of energy storage batteries accounts for less than 10% of the installed capacity of new energy, and vigorous development may reverse the current trend of excess production capacity.

Currently, the main price of lithium carbonate futures is about 0.076 million yuan per ton, falling below the market-recognized cost line of 0.08 million yuan per ton. Looking at the weekly candlestick chart, there was a large [pattern] last week, but the opening this week was not strong, and the trend is still unclear. From the spot market perspective, the weekly chart is mostly declining, and the confidence of the holders is seriously lacking. The release of demand for energy storage batteries takes time to settle, and in the medium term, inventory will continue to be digested. It is expected that the price of lithium carbonate will continue to fluctuate at a low level.CandlestickThe demand for lithium-ion batteries mainly comes from the new energy vehicle market and the energy storage industry. As for battery format, they are mainly divided into power batteries and energy storage batteries. The demand side maintains a high growth trend, but there is a clear differentiation in the growth rates of power batteries and energy storage batteries. Power batteries have been limited by the slowdown in new energy vehicle growth, with growth rates slowing from double digits in 2021 to medium to low double digits, while energy storage batteries have shown stable growth in the medium to high double digits.

The price may fluctuate at a low level, focusing on the turning point opportunities of the industry leaders.

The downward trend of lithium carbonate prices has different impacts on different segments of the industry chain. The lithium mining industry at the upstream is most affected, followed by the lithium compound industry in the midstream. However, the midstream and upstream are integrated, and there is a widespread loss in 2024. The downstream lithium battery industry is highly differentiated, with a high concentration of industry. Leading companies like Contemporary Amperex Technology have pricing power and strong resilient performance, while small and medium-sized enterprises rely on low margins and high sales volume to counteract price transmission.

Based on the performance of the first half of 2024, Ganfeng Lithium and Tianqi Lithium, as leaders in lithium mining and lithium compounds, experienced a decrease of 47.4% and 74.2% in revenue, resulting in losses of 759 million yuan and 5.198 billion yuan respectively. In addition, major suppliers of positive and negative electrode materials for lithium batteries were also affected. Tianqi Lithium's revenue declined by 26.5%, while Ningbo Shanshan, due to its diversified business, saw only a 7% decline in revenue. The transmission of lithium battery prices in the downstream is weaker, resulting in relatively better performance.

The lithium battery industry has a high concentration and concentrated pricing power, which enables the industry to effectively absorb the risks of price transmission from the upstream. In the first half of the year, the top ten companies in terms of installed capacity of power batteries had a total installed capacity of approximately 193.6 GWh, accounting for 96.5% of the total installed capacity of power batteries. Among them, Contemporary Amperex Technology, BYD, Zhongchuan Innovation Energy Technology, Eve Energy, and Gotian High-Tech ranked among the top five, with market shares of 47.06%, 25.5%, 6.9%, 3.99%, and 3.4% respectively.

Contemporary Amperex Technology is a dominant player in the lithium battery industry, contributing nearly half of the installed capacity. In the first half of the year, its revenue reached 166.767 billion yuan, achieving a net profit of as high as 22.865 billion yuan under strong pricing power. This profit is higher than the revenue of Gotian High-Tech. While Gotian High-Tech and Zhongchuan Innovation Energy Technology achieved revenue growth during the period, their net profits were very low, with net margins of 1.61% and 2%, respectively, which were 12.09 and 11.7 percentage points lower than Contemporary Amperex Technology.

It is worth noting that the price transmission of lithium carbonate to the lithium battery sector is weaker, so its impact on the capital market is relatively small. The focus of the price rebound is on the upstream and midstream sectors of the lithium battery industry, with Ganfeng Lithium and Tianqi Lithium becoming the most attention-worthy investment targets in the sector.

Ganfeng Lithium has a comprehensive layout in the lithium battery industry chain, covering upstream lithium resource development, midstream lithium salt processing and metal lithium smelting, downstream lithium battery manufacturing, and comprehensive recycling and utilization of retired lithium batteries. The company's full-field layout of the industry chain disperses price risks, making it more resilient compared to other industry peers. In the first half of 2024, the company's revenue shares from metal lithium, lithium compounds, and lithium batteries were 70.4% and 28.4%, respectively.

The company also has a layout in the lithium mineral resources end, but mainly for self-sufficiency, with a small proportion of sales. It has laid out lithium spodumene, brine, lithium mica, and lithium clay through acquisitions, with a total controlled resource quantity of 79.59 million metric tons of LCE and an equity resource quantity of 48.14 million metric tons of LCE, ranking first in the domestic market. The stability of lithium carbonate prices mainly affects lithium products. The company has multiple production bases, including the under-construction Fencheng project in Jiangxi, with a total capacity exceeding 0.2 million metric tons. In addition, the company has downstream battery projects, including a 13 GWh lithium battery project in Xinyu and a total planned capacity of 45 GWh in Dongguan, Chongqing Liangjiang New Area, Inner Mongolia Chifeng Milk Industry Development Zone, and Hubei Xiangyang Dongjin New Area.

Due to its layout in the downstream of the industrial chain, Ganfeng Lithium has greater flexibility in terms of profits compared to Tianqi Lithium. Tianqi Lithium is also one of the global leaders in the integration of lithium salts upstream and midstream. In the first half of the year, the revenue share of lithium concentrate and lithium compounds was 40% and 59.9% respectively. However, these two areas are the hardest hit by the transmission of lithium carbonate prices. Among them, the revenue from lithium concentrate decreased by 84% year-on-year. However, this also brings more possibilities for the performance resilience of the company.

100% of the lithium concentrate used in Tianqi Lithium's salt production comes from Talison. The lithium concentrate production capacity is 1.62 million metric tons, and there is a planned chemical-grade production capacity of 0.52 million metric tons to be put into production in 2025, when the total chemical-grade production capacity will increase to 2 million metric tons. The company's wholly-owned subsidiary, Shenghe Lithium, introduced strategic investor Zijin Mining Group and plans to jointly develop the Terra Mine. In addition, the company's annual lithium salt production capacity is 0.0886 million metric tons, and with the planned capacity, the total lithium salt production capacity will reach 0.1436 million metric tons.

In general, after lithium carbonate prices fall below the cost line, they are expected to oscillate upward mainly at a low level in the short to medium term. On the one hand, the supply side is still affected by the "prisoner's dilemma", with production stoppages and expansions continuing to affect the supply. On the other hand, the demand side is also growing rapidly, especially in the development of energy storage batteries, which will greatly alleviate the dilemma of overcapacity and gradually improve the supply-demand structure. As industry leaders, Ganfeng Lithium and Tianqi Lithium can focus on the turning point opportunities after lithium carbonate prices reach a bottom.