Price fluctuations could not stop supply clearance, and the lithium battery sector is embracing a layout opportunity.

Production cuts, maintenance, and spot price increases failed to suppress market expectations as the main funds pushed down the market, erasing a week's worth of gains in two trading days before surging again on November 19. The lithium battery sector saw a significant increase, with Ganfeng Lithium Group and Tianqi Lithium Corporation both hitting their daily limit up in A-shares, with gains of over 10% in Hong Kong stocks as funds poured in. It is understood that the price of lithium carbonate stabilized and rebounded after reaching a low of 71,000 yuan/ton on October 20, accelerating its rebound in early November due to production cuts and maintenance by Australian lithium miners, surpassing 86,000 yuan/ton. However, large funds are still concerned that the oversupply issue remains unresolved. After two consecutive days of selling on the 14th and 15th, the market rebounded again on the 16th and 17th. The fluctuation in lithium carbonate prices had a significant impact on the trading week in the Hong Kong A-share lithium battery sector, with Ganfeng Lithium Group (01772) emerging as the top leader. In fact, the lithium battery industry chain is facing a prisoner's dilemma, where disagreements may lead to excess capacity that cannot be effectively digested, resulting in sustained low prices, which is the core concern of the market. However, on November 15, the Ministry of Finance and the State Administration of Taxation issued an announcement adjusting the export tax rebate policy, reducing the export tax rebate rate from 13% to 9% for certain finished oil products, photovoltaics, batteries, and some non-metallic mineral products, starting from December 1, 2024. The reduction in export tax rebate rate will increase export costs, passively raising lithium carbonate prices, which is favorable for the recovery of lithium carbonate prices. As a leading player in the upstream lithium battery products, Ganfeng Lithium Group has always been an indicator for the industry and the market. Despite recent price fluctuations in lithium carbonate affecting its stock price, it has rebounded for five months on the monthly chart, with an increase of over 50%, but still more than 80% lower than the peak in September 2021. The darkest period for the lithium battery industry chain has passed, and the industry's ability to reverse the situation under cost support remains to be seen, as Ganfeng Lithium Group's ability to break the trend still needs further validation. Supply accelerating clearance, energy storage becoming the main driver of demand In fact, the lithium battery industry is not as bad as it seems. On the contrary, the situation is becoming more favorable, with inventory levels gradually decreasing and prices following suit. From observations, in August, Albemarle announced the suspension of construction of a lithium processing production line at the Kemerton plant in Australia. In September, Contemporary Amperex Technology halted lithium mining in Jiangxi, followed by a reduction in production and maintenance by Pilbara Minerals in November. These actions all indicate that the prisoner's dilemma hypothesis is gradually being broken, and the expectation of price recovery is becoming stronger. However, it should be noted that in the past few years, the industry has experienced accelerated expansion, leading to severe overcapacity. Even with high demand growth, it is unable to meet the consumption of excess capacity. The industry's capacity utilization rate has generally dropped to below 50%, while monthly production capacity continues to grow. Industry inventories remain high, and due to the slowdown in downstream new energy vehicles and the early stage of development of electrochemical energy storage, the inventory reduction rate is relatively slow. The actions such as mine closures, production halts, and maintenance are mainly aimed at reducing capacity utilization, reducing monthly production market supply, reducing inventories through demand consumption, and achieving market balance with the goal of price returning to normalcy. Currently, the cost price of lithium carbonate is between 70,000 and 80,000 yuan/ton, with the current price fluctuating around the cost line. Downstream material factories are cautious about the current price level, overall pulling the spot trading price of lithium carbonate up. In the fourth quarter, industry leaders intend to maintain the current price, still showing a significant destocking trend, which will provide support to the prices based on fundamentals. Although there are challenges on the demand side, the overall situation is still strong. New energy vehicles remain the mainstream demand industry downstream, with domestic new energy vehicles accounting for over 60% of the global market share, making it a major demand market. In October of this year, domestic sales of new energy vehicles maintained a high double-digit growth rate year-on-year, with a penetration rate increasing to 46.8%, and reaching 39.6% in the first ten months. However, there are still some variables overseas, such as when Trump came into power and planned to cancel the $7,500 tax credit for electric cars, which may hinder the penetration rate of overseas new energy vehicles. Energy storage is the second-largest industry in lithium demand. The Energy Law of the People's Republic of China explicitly states that it is necessary to reasonably layout, actively and orderly develop and construct pumped-storage electricity stations, and promote the high-quality development of new energy storage. According to data from the State Grid Corporation of China, as of the third quarter of 2024, China's newly commissioned electrochemical energy storage stations totaled 6.81GW/15.50GWh, with great potential for new energy storage development. With policy support and the rapid expansion of electrochemical energy storage, it will gradually become the main consumer of lithium batteries. Industry profitability improves across the board, Ganfeng may receive favor from investors Ganfeng Lithium Group is a global leader in lithium salts, building a closed-loop industry chain of "lithium resources + lithium salts + battery production and recycling," with performance resilience relative to industry peers. In the first three quarters of 2024, its revenue decreased by 45.78% to 13.925 billion yuan, with a net loss of 640 million yuan to shareholders, much less than Tianqi's loss. More importantly, the company achieved a profit of 119 million yuan in Q3, turning positive for the first time in nearly four quarters. Tianqi Lithium Corporation also significantly reduced its Q3 losses, totaling only 700 million yuan, a significant improvement compared to the net losses of 38.9 billion yuan and 13.2 billion yuan in Q1 and Q2, respectively. From the performance of other small and medium-sized participants, there is also a trend of improvement in Q3. It can be seen that stabilizing prices first reflects the transmission of the leading indicator. With cost and scale support, Ganfeng Lithium Group will be the first to achieve industry profitability and, with demand guarantee, the prospect of price recovery is still promising to reverse the downward trend in revenue. Ganfeng Lithium Group, in terms of lithium ore resources, has strategically laid out lithium spodumene, brine, lithium mica, and lithium clay through acquisitions, controlling a total resource volume of 79.59 million tons of LCE, ranking first in China. With active overseas deployment, the Cauchari-Olaroz project in Argentina started production last year.In approximately 2023, the output of lithium carbonate is about 6,000 tons. In 2024, it is expected to produce around 20,000-25,000 tons of lithium carbonate. The Mali project construction has been basically completed, and pre-production preparations are underway. The company plans to achieve a total annual production capacity of lithium products of not less than 600,000 tons LCE by 2030 or earlier.In addition, the downstream battery business of the company is also progressing rapidly. The high energy density battery developed by the company has reached an energy density of 420Wh/kg and a cycle life of over 700 times. The technology is at the industry-leading level. In terms of production capacity, the company has a 13Gwh lithium battery project in Xinyu, and a total of 45GWh production capacity is planned in Dongguan, Chongqing Liangjiang New Area, Inner Mongolia Chifeng Ru Industry Development Zone, and Xiangyang Dongjin New Area in Hubei. In addition, the company is actively promoting the research and development of solid-state lithium batteries and has successfully produced ultra-thin oxide electrolyte ceramic membranes in the development of key materials for solid-state batteries. According to the current industry trend, the rebound in lithium carbonate prices is a high-probability event, with downstream demand steadily increasing, especially in the energy storage sector, which will support the development of lithium batteries. Ganfeng is a leading player in the lithium mining and lithium product capacity industry, with scale and cost advantages. The layout of downstream lithium batteries has created industrial chain advantages, and the company is expected to be the largest beneficiary of supply clearance and demand release. From an investment bank perspective, there are differing opinions, but many investment banks remain optimistic, generally believing that lithium carbonate prices will rebound after reaching a high, with fundamentals providing some price support. For example, EB SECURITIES published a research report stating that this round of mine shutdowns/reductions is more proactive, and lithium prices may bottom out below the theoretical cost support line, reaching the range of 60-70,000/ton. However, the price of lithium carbonate is already close to the bottom, and they predict that the sector may gradually increase its allocation as two rounds of clearance cycles replay. It is worth noting that on November 15, the China Securities Regulatory Commission issued the "Guidelines for the Supervision of Listed Companies No. 10 - Market Value Management," specifically requiring major index constituent stocks and long-term penny stocks to develop valuation improvement plans. Currently, Ganfeng Lithium Group's PB ratio hovers at around 1x, and the company may enhance its market value management level through continuous repurchases, shareholder increases, and dividends in accordance with policy guidance, driving the return of bottom valuations. In summary, the bottom of lithium carbonate prices is clear, with industry leaders consolidating under losses, actively accelerating supply clearance through mine shutdowns, reductions, and maintenance, while the demand side in the new energy vehicles and energy storage industries continues to contribute to steady growth. Market confidence is also gradually recovering. Ganfeng Lithium Group achieved its first quarter profit in the third quarter, and the entire industry is improving, reaching a turning point in fundamentals. It is expected that more targets will achieve profitability in the fourth quarter. With expectations of an improvement in industry fundamentals, as a leader in the lithium battery industry, Ganfeng Lithium Group has already achieved profitability, has low and stable valuations, and with the guidance of market value management policies, is expected to continue to attract favorable funding.