The dilemma of the prisoner in the lithium battery sector.

The lithium battery sector will continue to fall for how long? When investors thought that the trend of lithium carbonate prices had reversed, they did not expect it to be just a flash in the pan, and after a brief revival, it continued to decline. It was observed that in recent days, lithium carbonate prices have rebounded, with a 10% increase last week, especially a sharp rise on September 11, bringing the declining lithium battery sector back to the investment spotlight. Several A-share stocks hit limit up that day, with Tianqi Lithium Corporation in Hong Kong rising by over 10%. However, this turned out to be a false dawn, as a four-day pullback erased the rebound. Why is the lithium battery sector not popular among investors? In fact, the price of lithium carbonate has dropped from 60,000 yuan/ton to below 80,000 yuan/ton. Although there has been a slight rebound in the past week, it is still in a downward trend. The market value of the lithium battery sector has shrunk significantly due to the decline in lithium carbonate prices. For example, since 2021, Ganfeng Lithium Group (01772) has fallen from a high of 130 Hong Kong dollars to the current 16 Hong Kong dollars, and Tianqi Lithium Corporation (09696) has fallen from 84 Hong Kong dollars to 20 Hong Kong dollars, with reductions of 87.7% and 76.2% respectively. However, most investment banks believe that 80,000 yuan/ton is the cost balance point for the lithium carbonate industry. The recent stabilization of lithium carbonate prices seems to indicate a trend towards stabilization. So, has the lithium battery sector reached a turning point? Stuck in a "prisoner's dilemma," the supply-demand contradiction is temporarily difficult to resolve. "Success is failure, failure is also success." Whether the lithium battery sector has reached a turning point depends on whether lithium carbonate prices can stabilize and rise. In fact, the continuous record lows of lithium carbonate prices are ultimately due to the supply-demand contradiction. There is a severe overcapacity, with demand growth far exceeding the speed of supply. Therefore, the improvement of the supply-demand structure is crucial for the industry's turning point. From the supply side, the lithium battery industry is a policy-driven industry. Against the backdrop of global "carbon neutrality," participants are blindly expanding, leading to a doubling of production capacity. Since 2021, the industry has been caught in a contradiction between destocking and capacity expansion. By 2023, the industry's average capacity utilization rate will only be 57%, with over 600GWh of capacity idle. By 2024, industry inventories will remain high, with total lithium carbonate samples from September exceeding 120,000 tons. Although participants slowed down their capacity expansion in the past few years, under the "prisoner's dilemma," nobody wants to stop production, leading to sustained low prices. It is worth noting that Contemporary Amperex Technology took the lead in China by adjusting its arrangement for lithium carbonate production in Yichun, Jiangxi, in September, deciding to suspend its lithium mica mining business there. Overseas, according to media reports, the American company Albemarle has halted the construction of a lithium processing production line at its Kemerton plant in Australia. China is the core market for the global lithium battery industry, and Contemporary Amperex Technology's three smelters in Jiaxingguodi can produce about 8,000 tons of lithium carbonate equivalent per month at full capacity. If production is halted altogether, the monthly lithium carbonate production in China is expected to decrease by 7.5%, which will have a significant impact on the industry. Therefore, this news has stimulated prices to rise. However, the market is concerned about the problem of oversupply, as the rebound may not be sustainable as demand still cannot keep up with supply. From the demand side, the main end-users of lithium batteries are the new energy vehicle and energy storage industries. In terms of battery types, they are mainly divided into power batteries and energy storage batteries. Demand remains strong, but there is a significant differentiation in the growth rates of power batteries and energy storage batteries. Power batteries are restricted by the slowdown in the growth of new energy vehicles, going from a doubling growth rate in 2021 to mid-to-low double digits, while energy storage batteries have shown stable, high double-digit growth. According to incomplete statistics from CESA, the installation of new energy storage systems in China doubled in July, with a cumulative growth of over 70% from January to July, with lithium battery energy storage accounting for over 90% of the new installations. In addition, data shows that from January to August 2024, the cumulative capacity of lithium battery energy storage systems that have won bids in China exceeded 36.8GWh, a year-on-year increase of 77.3%. The proportion of energy storage battery installations compared to new energy installations is less than 10%, and vigorous development may help reverse the current trend of oversupply. Currently, the main price of lithium carbonate futures is around 76,000 yuan/ton, below the market-recognized cost line of 80,000 yuan/ton. Looking at the weekly K-line chart, there was a large bullish candlestick last week, but the opening this week was not strong, and the trend remains unclear. In terms of spot prices, the weekly charts are mostly declining, with holders lacking confidence. The release of demand for energy storage batteries will take time to settle, and in the short to medium term, inventory digestion is expected to continue. It is predicted that lithium carbonate prices will continue to fluctuate at low levels. Whether the prices are bottoming out or fluctuating at low levels, attention should be focused on the potential turning point opportunities for industry leaders. The downward trend in lithium carbonate prices has different impacts on different segments of the industry chain. The lithium mining industry at the upstream has the greatest impact, followed by the lithium compound industry in the midstream. However, both the midstream and upstream industries are expected to suffer losses in 2024. At the downstream end, the lithium battery industry is highly concentrated. Industry leaders such as Contemporary Amperex Technology have pricing power and strong resistance to pressure, while small and medium-sized enterprises focus on thin margins and high sales volumes to resist price transmission. In terms of performance in the first half of 2024, Ganfeng Lithium Group and Tianqi Lithium Corporation, as leaders in lithium mining and lithium compounds, saw their revenues decrease by 47.4% and 74.2% respectively, resulting in losses of 759 million yuan and 5.198 billion yuan. The suppliers of lithium battery anode and cathode materials were also affected, with Xinxiang Tianli Energy seeing a revenue decline of 26.5%, while Ningbo Shanshan, due to business diversification, only saw a 7% drop in revenue. Price transmission to the downstream lithium battery sector is weaker, resulting in relatively better performance. The high concentration of the lithium battery industry and the concentration of pricing chips allow the industry to digest the risks of price transmission from the upstream effectively. In the first half of the year, the top ten companies in terms of power battery installations accounted for approximately 193.6GWh of installations, representing a large portion of the total installations in the entire industry.The installation capacity of power batteries is 96.5%, with Contemporary Amperex Technology, BYD Company Limited, CALB, Eve Energy Co., Ltd., and Gotion High-tech ranking in the top five, with market shares of 47.06%, 25.5%, 6.9%, 3.99%, and 3.4% respectively.Contemporary Amperex Technology is the giant of the lithium battery industry, contributing nearly half of the installed capacity, with a revenue of 166.767 billion yuan in the first half of the year, achieving a net profit of as high as 22.865 billion yuan under strong pricing power, which is higher than the revenue of Gotion High-tech. Gotion High-tech and CALB both saw revenue growth during this period, but their net profits were very low, with net profit 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 weak, so its impact on the capital market is relatively small. The focus of price rebound is on the upstream sectors of the lithium battery, with Ganfeng Lithium Group and Tianqi Lithium Corporation becoming the two most watched investment targets in the sector. Ganfeng Lithium Group has a comprehensive layout in the lithium battery industry chain, with operations spanning lithium resource development upstream, lithium salt processing and lithium metal smelting midstream, lithium battery manufacturing downstream, and comprehensive recycling of retired lithium batteries. This full-chain layout of the industry disperses price risks, making the company more resilient compared to its industry peers. In the first half of 2024, the company's revenue shares from lithium metal and lithium compounds, and lithium batteries were 70.4% and 28.4% respectively. The company also has a layout in the lithium mineral resources sector, but mainly for self-sufficiency, with a very small proportion for sale. Through acquisitions, it has laid out lithium spodumene, brine, lithium mica, and lithium clay, with a total controlled resource volume of 79.59 million tons of LCE and an equity resource volume of 48.14 million tons of LCE, ranking first domestically. The stabilization of lithium carbonate prices mainly affects lithium products. The company has multiple production bases, including the under-construction project in Fengcheng, Jiangxi, with a total capacity exceeding 200,000 tons. In addition, the company has a total planned capacity of 45GWh in the battery sector, with projects in Xinyu, Fengcheng, Chongqing, Inner Mongolia, and Xiangyang, Hubei. Due to its downstream layout in the industry chain, Ganfeng Lithium Group has greater profit resilience compared to Tianqi Lithium Corporation. Tianqi Lithium Corporation is also one of the leading integrated lithium salt producers globally, with its revenue shares from lithium concentrates and lithium compounds at 40% and 59.9% respectively in the first half of the year. These two areas are heavily impacted by the transmission of lithium carbonate prices, with a significant 84% year-on-year decrease in revenue from lithium concentrates. All in all, after lithium carbonate prices fall below the cost line, in the medium to short term, they are expected to fluctuate at low levels. This is mainly because supply is still affected by a "prisoner's dilemma," with shutdowns and expansions continuing to affect supply levels, while demand is also growing rapidly, especially in the development of energy storage batteries, which will greatly alleviate the overcapacity situation and gradually improve the supply-demand structure. As industry leaders, Ganfeng Lithium Group and Tianqi Lithium Corporation can focus on the turning point opportunity after lithium carbonate prices hit bottom.