Lithium Battery 2025: Grasping the Turning Point from Cycle and Growth

The current global penetration rate of new energy vehicles varies significantly. Potential catalysts for the valuation of the battery industry include sustained high demand for energy storage exports from Asia, Africa, and Latin America; 25-year European carbon assessment policies that stimulate demand for electric vehicles; improved policy expectations in the United States; the conclusion of the downward cycle of capacity clearance; and the long-term trend of energy storage replacing traditional energy sources, which creates additional upward demand potential.

1. Valuation and Cycle Position

The valuation is at a historically low level. At present, the PB valuation of Shenwan battery secondary industry is 2.70, and the 10-year percentile value is 12.43. Since 2014, it has gone through two cycles and is currently at the bottom of the cycle. The estimated value of PB (LF) in Shenwan battery secondary industry reached the lowest value of 2.06 in the past 10 years in August, 2024, which was lower than the minimum value of PB at the bottom of the previous cycle of 2.28. This is related to the high penetration rate of new energy vehicles in China, strict overseas trade policies, staged overcapacity and other factors. The current global penetration rate of new energy vehicles is differentiated, and potential catalysts for the valuation of the battery industry include: sustained high prosperity in energy storage exports from Asia, Africa, and Latin America, 25 year European carbon assessment policies stimulating demand for electric vehicles, improved policy expectations in the United States, the end of the downward cycle of capacity clearance, and the long-term logic of energy storage replacing traditional energy sources opening up upward demand space. 

2. Cycle perspective: Supply contraction, profit bottom up

2.1 Capacity cycle: Capital expenditure contraction, 'hematopoietic' ability is the cornerstone of future expansion

We have compiled financial data from 57 listed companies in the upstream of the lithium battery industry, including lithium carbonate, positive and negative electrodes, separators, electrolytes, structural components, lithium batteries, equipment, and other links, to depict the industry's production capacity and profit cycle. Capital expenditures continues to shrink and accelerate its growth. The capital expenditure of the lithium battery industry in 24 H 1 was 64.6 billion yuan, a decrease of 20% compared to 23 H 1. After a slight decrease of 7% in 2023, capital expenditure has shown an accelerated contraction trend. The capital expenditure/depreciation and amortization index for 24 H 1 is 2.7, which is a historical low point. Compared to the high point in 2022, the index of projects under construction/fixed assets has shown a significant decline. From the perspective of quarterly capital expenditure changes, the production capacity cycle of the lithium battery industry has entered a contraction zone since Q 2 23. Except for a slight increase in Q 4 23 compared to the same period last year, capital expenditure has decreased for four quarters compared to the same period last year, mainly due to the tightening of financing channels for lithium battery  companies.  

Judging from the changes of capital expenditure in all links of the industrial chain, the contraction of materials in the middle reaches is deeper. The ternary cathode entered the capacity contraction zone earlier in Q 4,2022, and the capital expenditure of Ferrous lithium phosphate cathode decreased even more from 2024, while the capacity of lithium carbonate continued to expand in 2023. The total assets of the positive chain are shrinking. The total assets of the lithium battery industry have significantly expanded in this cycle, reaching 2 trillion yuan in H 1 2024. From 2021 to 2022, the added value of total asset increased rapidly, and it took off and landed at a speed of 23 year. The ternary positive electrode and Ferrous lithium phosphate positive electrode plate even showed a decrease in total assets. In the first half of 2024, the electrolyte and equipment sectors also began to shrink the balance sheet, and the order of total asset contraction was basically similar to that of industry expansion. The emphasis of capital expenditure is shifting to the upstream. The battery industry accounts for the main part of the increase in total assets of the industry, followed by upstream industries such as lithium carbonate and ternary precursors. The intensity of capital expenditure has the characteristics of "balance at both ends". From the structural changes of capital expenditure in the industrial chain, capital expenditure is gradually tilting towards upstream lithium carbonate and ternary precursors; From the changes in the total assets of various links in the lithium battery industry, it can be seen that the focus of the industry's total asset growth has also shown a trend of tilting upstream. 

2.2 Profit cycle: Operating rate drives profits to bottom out, and the cost curve is steep

From a price point of view, according to the relationship between unit profit and lithium price, profit cycle can be divided into three categories, because the fluctuation of lithium carbonate prices in this cycle leads to significant fluctuations of industry units profitability. 

1) Reverse lithium price cycle type: changes in battery profitability

Battery: During the upward cycle of lithium price in 2021-2022, the unit profit of the battery sector was under pressure due to the sharp rise in raw materials. Due to differentiation and high value, it has shown good profitability in the stage of increasing volume and decreasing price of the industry. Due to the scale benefit of increasing the volume, the profitability of each battery factories has continued to improve. Since 23 years ago, the price of lithium has fallen sharply and the price of lithium carbonate has been adjusted to a low level. According to SMM report, on October 18th, 2024, the price of battery-grade lithium carbonate was 73500 yuan/ton. In the medium term, if we want to completely reverse the situation of falling lithium prices, we need a clear signal of capacity clearing. We expect that the price of lithium will fluctuate at a low level in the short to medium term, which has little impact on the profitability of lithium battery cells in the middle reaches. 24 H 2: the low price of lithium and the continuous recovery of capacity utilization rate in peak season are expected to drive profit improvement. 25 years: With low lithium prices, overseas demand is expected to recover, and domestic electric vehicle and battery products have high strength and cost-effectiveness, seizing the share of overseas battery factories, optimizing the pattern, and improving profitability 

2) Lithium price dominant profit cycle category: positive electrode, electrolyte, and 6F profit changes

The positive electrode and electrolyte links, which are greatly affected by the price of lithium carbonate, have their unit profits fluctuating with the lithium price cycle. In 2021-2022, when lithium prices are in a unilateral upward cycle, the unit profit is at the high point of the cycle due to inventory gains; Over the past 23 years, lithium prices have dropped from a high of nearly 600000 yuan/ton to below 80000 yuan/ton. Inventory impairment has led to significant losses for some companies, coupled with a decrease in processing fees, resulting in a significant decline in unit profits for positive electrodes and electrolytes. Lithium iron phosphate positive electrode: 24H2: The production capacity utilization rate of first and second tier enterprises is relatively high. At extremely low processing fee levels, only leading manufacturers in the industry make profits, while second tier and lower tier enterprises suffer from cash flow losses. The supply of high voltage and other products from leading enterprises is tight, and processing fees are expected to recover. 25 years: With the premium of high-voltage high-density products, the clearance of tail production capacity, and the layout of LFP by overseas battery companies, power type lithium iron is expected to increase profits, while energy storage type lithium iron still needs to clear production capacity. Triple positive pole: Due to the increasing proportion of plug-in hybrid vehicles in the domestic sales structure of new energy vehicles and the decline in power growth rates in Europe and America, both quantity and price have fallen. 24H2: the downward space for lithium prices has decreased, inventory impairment pressure has weakened, and unit profitability is expected to improve. 25 years: If overseas power demand recovers and the European new vehicle cycle begins, the demand for ternary vehicles may rebound. Electrolyte and 6F: Except for leading enterprises, all have incurred losses, and the production capacity of major top manufacturers is relatively surplus. They rely on other businesses to support cash flow. It is expected that with the clearance of small manufacturers, the supply and demand of 25H2 will improve. 24H2: the peak season in the second half of the year is approaching, and the capacity utilization rate has recovered, but there is still excess capacity. 25 years: Small production capacity at the tail end is expected to be cleared, and the recovery of profits depends on the expansion process of leading enterprises.

3) Supply and demand pattern dominant profit cycle category: negative electrode, separator, structural component profit changes

The price of products is not affected by the price of lithium carbonate, but mainly depends on the supply and demand pattern of its own links. Therefore, it mainly tracks the price/processing fee trends of these links, the price war strategies of leading enterprises and the clearing of production capacity. Negative electrode: 24 H 2: the production capacity is still surplus, the degree of product differentiation is reduced, the profit difference between enterprise units is smoothed out, and the competition for comprehensive scale and cost is changed. 25 years: gradually step out of the production cycle, completing the low-cost production capacity transfer, and improving profitability. Top manufacturers are expected to maintain their profit advantage with the premium of fast charging products and new energy storage products. Diaphragm: 24 H 2: Supply exceeds demand, leading enterprises launch price wars, prices have room to fall, and production capacity needs to be cleared. 25 years: Excellent leading edge, clear production capacity after price war and expected to increase profits. Structural composition: the fluctuation of profit cycle is weak, and the beta logic of the industry is strong. Unit profits is affected by aluminum prices, and the profits of leading enterprises are stable, while the profits of second-tier enterprises are improved. 24 H 2: reduce costs and increase efficiency, digest and reduce price and maintain profitability. 25 years: Due to the change of bidding method from annual decline to electronic bidding, it is expected that prices will be under pressure in 25 years, but it can still be digested by reducing costs and increasing efficiency. 

2.2.2 The cost curve becomes steeper, and the profit difference depends on the operating rate and new technologies

In terms of procurement cost, capacity utilization rate and output, there is a significant cost advantages between leading lithium battery manufacturers and the second-and third-tier manufacturers. When the price of lithium carbonate is 80000 yuan/ton, the cost of lithium iron phosphate batteries from leading manufacturers is estimated to be 0.31 yuan/Wh, which is about 0.05 yuan/Wh lower than the cost of second tier manufacturers and 0.02 yuan/Wh lower than the cash cost of second tier manufacturers. We speculate that the current capacity utilization rate of third - and fourth tier battery manufacturers in the industry is only 50% -60%, and the yield rate is relatively low. The estimated cost exceeds 0.4 yuan/Wh, resulting in a loss of cash costs. It is expected that the third - and fourth tier production capacity will gradually be cleared. 

At present, the price of lithium carbonate has fallen to a low level, weakening the marginal impact on the unit cost of batteries. If the capacity utilization rate of second-tier enterprises is maintained at 60%, the price of lithium carbonate will drop from the current 70000-80000 RMB/ton to 50000 RMB/ton, and the cash cost will only drop by 0.01 RMB /Wh. The cost difference between first and second tier manufacturers will remain basically unchanged. 

Therefore, looking forward to the trend of unit profits of battery enterprises in the future, we believe that the key lies in the sustainability of demand and incremental space (determining the level of capacity utilization, the higher the level, the smaller the gap), and whether the degree of product differentiation of first-and second-tier battery enterprises will expand (determining the price difference). We will explain this in detail in the following. 

3. Growth perspective: European carbon policies and energy storage capacity are the core of demand growth

3.1 Demand Expectation Difference 1: Carbon policy implementation is the core, and carbon assessment can only be completed with a 40% growth rate of new energy vehicles by 2025

Europe's policy of encouraging new energy sources has weakened, and there is insufficient motivation to pass subsidies. Since the peak of subsidies in 2021, major countries in the European Union have gradually reduced subsidies, especially Germany, which has the strongest subsidy. In December last year, Germany officially cancelled the subsidy policies due to budget cuts, which had a considerable impact on the sales of new energy vehicles in Europe. And some European countries are facing financial difficulties, with limited incentive effects and sustainability of subsidies. 

The implementation of carbon policies has become the key to the return to growth of new energy vehicles in Europe. 25 years is the time point for the new round of carbon emission assessment in the European Union. The EU stipulates that by 2025, car manufacturers should sell cars with an average carbon dioxide emissions of 93.6 grams per kilometer or lower. If car manufacturers fail to meet the standards, they may be required to pay a fine of 95 euros/gram for each car's excessive carbon dioxide emissions.

3.2 Demand Expectation Difference 2: The parity of photovoltaic energy storage drives the sustained growth of energy storage batteries

Economic improvement will become the core driving force for the future development of solar energy storage. Looking at the overall development of new energy, there are three core driving forces: energy independence, carbon emission reduction and economic promotion. The economic feasibility of new energy sources is improving. Before reaching "parity", due to energy independence, carbon emission reduction and other factors, photovoltaics in China, the European Union, the United States and other regions have made some progress. Since the second half of 2023, with the significant decline in the integration prices of photovoltaic modules and energy storage systems, the economy of photovoltaic storage has greatly improved, becoming the core driving force for demand growth. At present, globally, the "photovoltaic parity" has been achieved, and many regions have also reached the "photovoltaic storage parity" under certain conditions. In regions that place greater emphasis on the economic viability of power generation, the development of the energy storage industry will further accelerate. 

Previously, based on carbon emission reduction in the United States, and energy independence in China and Europe, the solar storage industry had developed significantly. In addition, where the economic level is relatively low, the sensitivity to economic factors is higher. Therefore, the demand growth driven by this round of significant decline in optical storage LCOE will be more flexible in emerging markets such as Asia, Africa and Latin America. In addition to economic factors, there are also factors such as power systems instability, policy incentives and rising electricity prices, which have jointly stimulated the demand in emerging markets in Asia, Africa and Latin America. 

Considering the economic level, lighting conditions, power structure and electricity price level, we think that the demand in emerging markets in Asia, Africa and Latin America will continue to grow. In addition to India, Brazil, Pakistan and other countries with high market attention, Mexico, Turkey, Thailand, Malaysia, the Philippines, Colombia and other countries also have broad demand space for optical storage, which supports the sustained high growth of energy storage demand. 

3.3 Supply and demand balance forecast

1) Power

China: The number and penetration rate of new energy vehicle models have significantly increased, with the 24 year increase coming from the high-speed growth of PHEVs. It is predicted that the stimulating effect of the subsidy trade policy will be sustainable, and the growth in 25 year will come from the continuous sales of PHEVs and the decline of the market. It is expected that the sales of new energy vehicles in the year 24/25 will be 12.44 million and 15.14 million respectively, with year-on-year growth rates of 32% and 22%, and penetration rates of 47% and 54%. Europe: the cycle of new energy vehicle is low, subsidy are reduced, and it is expected that sales will remain stable in 24 years; 25 years is the node of carbon emission assessment. Considering the possibility of insufficient constraints in the evaluation, assuming conservative, neutral and optimistic scenarios, the sales growth rate in the past 25 years is 20%, 25% and 30% respectively, and the penetration rate can reach 25%, 26% and 27% respectively. United States: The uncertainty of the US election results is high. Suppose the growth rate is 10% in 2024, and interest rate cuts will be considered to stimulate automobile consumption in 2025. Suppose the sales growth rate is 15%. In 2024, the sales of new energy vehicles will be 1.51 million and 1.74 million respectively, with penetration rates of 11% and 12% respectively. Other regions: Southeast Asia, Brazil, the Middle East and other emerging markets have a relatively high growth rates. It is estimated that the sales of new energy vehicles will increase by 40% /30% in 24/25. Assuming that the capacity of a single vehicle increases steadily, it is estimated that the global demand for power batteries will be 891 and 1106 GWh in a neutral scenario in 24/25, with growth rates of 26% and 24% respectively. 

2) Energy storage

The sharp drop of LCOE in this round of photovoltaic energy storage has led to the rapid growth in energy storage demand, and the elasticity in emerging markets such as Asia, Africa and Latin America is more obvious. These markets are relatively low in economic levels and more sensitive to economic factors. The global energy storage demand is sustainable, and it is estimated that the demand for energy storage batteries will be 197 GWh in the next 24 years, with a growth rate of 67%; Assuming that conservative, neutral and optimistic scenarios last for 25 years, the growth rate of energy storage is 30%, 40% and 50% respectively. 

3) Other

Assuming that the growth rate of battery demand in fields such as 3C and others remains at 5% and 20%, respectively. Overall, it is expected that the global demand for lithium batteries in the neutral scenario will be 1228 GWh and 1531 GWh respectively in the 24th and 25th years, with growth rates of 27% and 25%. In 2024: Energy storage (67%)>Chinese electric vehicles (32%)>American electric vehicles (10%)>European electric vehicles (0%). By 2025: Energy storage (40%)>European electric vehicles (25%)>Chinese electric vehicles (22%)>American electric vehicles (15%).

Considering the inventory factor of lithium batteries and materials in the process of production, sale and installation, it is assumed that the proportion of battery installation and sales to material production and sales is around 80%. According to the above, it is expected that the supply contraction will continue, and it is expected that the expansion of the lithium battery industry will further slow down in the next 25 years.