CITIC Securities: LFP Profitability Improvement Breaks Deadlock, Optimistic on Sector Valuation Recovery

CITIC Securities Research Report states that on the demand side, lithium iron phosphate (LFP) cathodes are the only segment in the lithium battery midstream benefiting from an excess growth rate in energy storage. It is expected that this year’s demand will increase by over 50% year-on-year, with leading companies currently operating at full or over capacity. As large state-owned enterprises enter the energy storage market, the outlook for power applications is only upward (ground subsidies being implemented, consumer hesitation easing, new models unveiled at the April auto show), and production will continue to increase month by month. On the profitability side, LFP is the fastest to realize price increases and has the broadest coverage, with significant profit improvements expected from Q1 2026. LFP is currently undervalued in the lithium battery sector, and valuation recovery is optimistic.

Main points from CITIC Securities are as follows:

Demand Side: LFP is the only segment in the lithium battery midstream with “excess growth”

In energy storage, with the implementation of domestic policies No. 136 and No. 114, combined with overseas AI data center storage needs, the global energy storage market is entering a demand explosion phase. Since energy storage requires long cycle life, high safety, and high economic efficiency, LFP is the basic standard. The bank maintains a neutral/optimistic outlook, expecting global energy storage battery demand to reach 1005/1145 GWh in 2026, representing YoY increases of 52%/73%. In power applications, domestic LFP vehicle installations have reached 85%, and from January to November 2025, over 90% of new vehicle model announcements used LFP batteries. Therefore, LFP is expected to remain the main battery type in 2026. In Europe, LFP penetration is only 12.8%, still relatively low. It is expected that in 2026-2027, as Chinese automakers increase exports to Europe and more popular overseas models offer LFP options, European LFP penetration will rise to 19.5% and 31.2%, with sales of 1 million and 1.6 million vehicles respectively. In 2026, under neutral and optimistic scenarios, global demand for LFP cathodes will reach 5.89 and 6.26 million tons, respectively, YoY increases of 48% and 57%, significantly outpacing industry growth rates of 34% and 40%.

Supply Side: Capacity additions still significant in 2026, but demand can support it

Reviewing the expansion plans of various LFP producers in 2026, the following characteristics are noted: 1) Leading companies are only expanding existing capacity and have no plans to build new factories, demonstrating awareness that current low prices do not require further capacity expansion to avoid increasing industry competition; 2) Companies with battery plant investments and cross-industry LFP expansion plans are more aggressive, indirectly confirming that battery manufacturers also recognize the strong demand next year. The bank expects effective LFP cathode capacity to reach 7.29 million tons in 2026, up 43% YoY. Under neutral/optimistic scenarios, demand will be 5.895/6.255 million tons, with capacity utilization rates of 81%/86%, representing YoY increases of 3%/8%, indicating an overall improvement in supply and demand.

Price and Profitability: Price increases directly boost LFP margins, while higher high-pressure dense LFP demand drives structural optimization

In November 2025, the LFP Association released a cost-price index, and combined with the continuous three-year loss pressure faced by LFP companies, this has driven cathode prices up by 1,000-2,000 RMB per ton, making it the fastest-growing and most widely covered segment in the midstream. Additionally, with the increasing penetration of fast-charging power batteries and large energy storage cells, high-pressure dense LFP demand is expected to grow significantly, reaching 1.69 million tons in 2026, with a premium of 1,000-2,000 RMB per ton over regular LFP, further improving profitability.

Risk Analysis

1. Lower-than-expected downstream vehicle sales and production; 2) Unexpected fluctuations in raw material prices; 3) Delays in key company projects.