China Securities Co., Ltd: The price trend of the rigid link in lithium battery production capacity is clear. It is recommended to prioritize scarce bottleneck links.

China Securities Co., Ltd. released a research report stating that the expected increase in lithium carbonate supply in the market by 2026 is consistent at 30-50 thousand tons. It is estimated that the price of lithium carbonate may reach equilibrium between 15-30 thousand yuan/ton, depending on the specific increase in supply, the cumulative inventory effect in the intermediate links, and whether demand exceeds expectations. At the stock price level, after the valuation of the bottom rises, the market may have doubts about demand, leading to a temporary dilemma in the sector. However, ultimately, as prices rise along the industry chain, stock prices will follow suit. The segments with high price elasticity will perform the best. The company recommends focusing on bottleneck segments in short supply and allocating to core leading companies. Key points from China Securities Co., Ltd.: Review of the 2020 photovoltaic cycle: There was talk of price increases affecting demand, but in reality, it never did. More often than not, there was a simultaneous increase in both quantity and price, with bottleneck segments taking away most of the industry's profits. The current lithium battery cycle driven by energy storage is highly similar to the previous photovoltaic cycle. After the "grid parity," the excess profits from downstream power plants drove non-linear demand growth. Power plant links transitioned from "subsidy-driven engineering projects" to "economically driven power assets," attracting a large amount of state-owned enterprises and social capital. Concurrently, with the start of a domestic interest rate decline cycle, quantity and price rose together, leading to pressure on bottleneck segments. The inflexible photovoltaic silicon materials and glass essentially took away most of the industry's profits (illustrated using silicon materials from 2021-2022 as an example), and prices showed no signs of stopping. During this process, there were concerns in the market about price increases affecting demand, but in reality, it never did. Prices continued to rise for two years, and the eventual price decline was due to capacity releases, not a decline in demand. A new energy storage cycle: The turning point in economic viability has arrived, replicating the script of the photovoltaic cycle, triggering industry-wide inflation. Over the past three years, lithium battery prices have dropped by 70%-80%, nearing losses for the entire industry at the bottom of the lithium carbonate cycle. The combined profits of leading companies in all segments of the industry were just 0.18 yuan/Wh, which was highly unreasonable and against common sense. People had grown accustomed to this during the long downturn. Reversals are inevitable. After the electricity spot market became more market-oriented, energy storage stations reached an economic turning point, transforming into reliable and stable income-generating power assets. In some regions, energy storage stations may even achieve significant excess returns. Driven by economic factors, energy storage is driving the start of a new lithium battery cycle. The lithium battery industry chain has been at the bottom of the cycle for many years, with minimal supply increases in the industry. Due to its zero inventory nature and inflexible capacity, lithium hexafluorophosphate increased prices before lithium carbonate. In 2026-2028, the explosion of energy storage demand will lead to a comprehensive reversal in lithium battery supply and demand, triggering an industry-wide price inflation cycle. The majority of profits will flow from power plant links into the upstream manufacturing and mining sectors, with the rigid capacity release in the lithium carbonate segment being a potential replication of the silicon materials market in the photovoltaic sector. Other segments will similarly benefit from mild industry-wide inflation and price leadership, gradually restoring profits. It is expected that the price of lithium carbonate at 150 thousand will be the bottom of this cycle. Predicting the upper limit is more challenging, as price increases may affect some domestic energy storage demand in certain regions. However, this demand represents those with the lowest price tolerance, as higher price tolerance electric vehicles and overseas energy storage will take over. Estimating that for every 5000 yuan/ton increase in lithium carbonate price, the overall return on investment for domestic energy storage power stations may decrease by approximately 0.5%. Assuming a 5% target as the minimum acceptable return rate, when the price of lithium carbonate is 15, 20, 25, 30, 35 thousand yuan/ton respectively, the incremental demand for lithium carbonate in 2026 will correspond to 520,000, 470,000, 370,000, 280,000, and 270,000 tons (excluding the cumulative inventory in intermediate links). Considering that the expected increase in lithium carbonate supply in the 2026 market is consistent at 30-50 thousand tons, it is anticipated that the price of lithium carbonate may reach equilibrium between 15-30 thousand yuan/ton, depending on the specific increase in supply, the cumulative inventory effect in the intermediate links, and whether demand exceeds expectations. Investment recommendation: Focus on bottleneck segments in short supply and allocate to core leading companies. Related targets: 1) Lithium carbonate segment: Long-term price increases are expected, focusing on Ganfeng Lithium Group, Tianqi Lithium Corporation, Chengxin Lithium Group, Sichuan Yahua Industrial Group, etc. 2) Material segment: Hubei Wanrun New Energy Technology, Guangzhou Tinci Materials Technology, Do-Fluoride New Materials, Tonze New Energy Technology, Jiangsu HSC New Energy Materials, Shijiazhuang Shangtai Technology, Fspg Hi-Tech, Yunnan Energy New Material, Jiujiang Defu Technology, Jiangsu Dingsheng New Materials Joint-Stock, etc. 3) Integration and battery segments: Contemporary Amperex Technology, Sungrow Power Supply, Eve Energy Co., Ltd., Beijing HyperStrong Technology, Guangzhou Great Power Energy and Technology, CALB, etc.