CITIC Construction Investment: LFP Profitability Improvement Breaks Deadlock, Optimistic on Valuation Repair of Sector

China Securities Construction Investment released a research report stating that on the demand side, lithium iron phosphate cathodes are the only link in the lithium battery midstream that benefits from high growth in energy storage, with an expected demand growth rate of over 50% this year. Currently, leading companies are operating at full or over capacity. As large state-owned enterprises enter the energy storage market, the outlook for power is only upward (ground subsidies implemented, consumer sentiment turning cautious, new models at the April auto show), and production will continue to increase month by month. On the profitability side, iron lithium is the fastest to realize price increases and has the broadest coverage, with significant profit improvements expected from Q1 2026. Iron lithium is currently undervalued in the lithium battery sector, and valuation recovery is anticipated.

Main points from China Securities Construction Investment are as follows:

Demand side: Iron lithium is the only link in the lithium battery midstream with “excessive growth”

In terms of energy storage, with the implementation of domestic policies No. 136 and No. 114, combined with overseas AI data center storage needs, global energy storage is entering a demand explosion phase. Since energy storage requires long cycle life, high safety, and high economic efficiency, iron lithium is the basic configuration. The bank’s neutral/optimistic forecasts for 2026 are global energy storage battery demand of 1005/1145 GWh, representing year-on-year increases of 52%/73%. In terms of power, domestic iron lithium power installation penetration has reached 85%, and from January to November 2025, iron lithium batteries accounted for over 90% of new vehicle model announcements, so it is expected that in 2026, iron lithium will remain the main type; European iron lithium penetration is still at a low 12.8%, but it is expected to increase to 19.5%/31.2% in 2026-2027 as: 1) Chinese automakers increase exports to Europe; 2) more popular overseas models add iron lithium battery options. It is estimated that in 2026, global demand for lithium iron phosphate cathodes will be 5.89/6.26 million tons under neutral/optimistic scenarios, with year-on-year increases of 48%/57%, significantly higher than the industry growth rates of 34%/40%.

Supply side: Many capacities will still come online in 2026, but demand is sufficient to support

Reviewing the expansion plans of various iron lithium producers in the industry for 2026, the following characteristics are noted: 1) Leading companies are only expanding existing factories and have no plans to build new ones, demonstrating a strong understanding that there is no need to expand capacity at current low prices, which could intensify industry competition; 2) Companies with battery plant stakes and cross-industry expansion plans are more aggressive, indirectly confirming that battery manufacturers also recognize the strong demand next year. The bank estimates effective capacity of 7.29 million tons in 2026, up 43% year-on-year. Under neutral/optimistic expectations, demand will be 5.895/6.255 million tons, with capacity utilization rates of 81%/86%, up 3/8 percentage points year-on-year, indicating continued improvement in supply and demand.

Price and profit side: Price increases directly boost iron lithium profits, and the higher proportion of high-voltage dense iron lithium drives structural optimization

In November 2025, the Iron Lithium Association released the cost price index first, and combined with the continuous three-year loss pressure faced by iron lithium companies, this has driven cathode prices up by 1,000-2,000 yuan/ton, making it the fastest and most widely covered link in the midstream price increase. Additionally, with the rapid penetration of fast-charging and large energy storage batteries, demand for high-voltage dense iron lithium is increasing significantly. It is estimated that in 2026, demand for high-voltage dense iron lithium will reach 1.69 million tons, priced 1,000-2,000 yuan/ton higher than ordinary iron lithium, further optimizing profitability.

Risk analysis:

1. Downstream new energy vehicle production and sales fall short of expectations; 2) Raw material prices fluctuate more than expected; 3) Key project progress of companies does not meet expectations.