Huafu Fund Deng Xiang: The lithium carbonate allocation window may close early, and the chemical sector enters a recovery phase

Against the backdrop of accelerating differentiation within the upstream resource sector, Hua Fu Fund manager Deng Xiang further narrows his investment focus to lithium carbonate and the chemical industry.

Deng Xiang pointed out that the marginal changes in the current supply and demand landscape are reshaping the allocation logic of the resource sector. On one hand, the lithium resource expansion cycle is locked in, industry capital expenditures remain low, and energy storage demand is rapidly increasing once profit models are established, giving lithium carbonate a basis for a temporarily tight supply and demand situation. On the other hand, capital expenditure growth in the chemical sector has significantly slowed, industry cleanup is gradually completing, and the logic of supply-side recovery is entering a phase of realization.

Lithium Carbonate Becomes the Core Allocation Focus

“By Q4 2025, Hua Fu’s strategic selection will be more concentrated on lithium carbonate.” When discussing product structure adjustments, Deng Xiang said this decision is not a short-term trading gamble but based on a systematic judgment of changes in supply and demand structures.

Previously, Hua Fu’s strategic selection maintained a relatively balanced allocation in upstream resources. But in Q3 2025, he noticed that supply-side capital expenditures in the lithium industry were entering a trough. The lithium resource expansion cycle generally exceeds two years, and at that time, overall industry capacity utilization was close to 80%. He believes that with demand maintaining a high growth rate, limited new supply will be added over the next two years, making the formation of supply-demand gaps more certain.

A key variable on the demand side is energy storage. Deng Xiang believes that with the domestic cancellation of mandatory storage policies and the introduction of capacity electricity price compensation mechanisms, independent energy storage projects are gradually establishing profitable models. After the promotion of electricity market reform, intraday price fluctuations have expanded, creating space for energy storage development. His research found that some operational projects have internal rates of return higher than market estimates, and the scale of projects under construction has also increased significantly.

“The market’s expectation of a tight lithium carbonate supply in 2027 is already quite consistent, but we believe this may start to be reflected as early as 2026.” Deng Xiang said. In his view, the locking of supply and the acceleration of demand (especially energy storage demand) resonate, rapidly increasing the importance of lithium carbonate in its upstream resource allocation sequence, making it a key strategic focus. Based on his assessment of industry prosperity from 2026 to 2027, he believes this period will be a critical window for observing and allocating lithium carbonate.

Chemical Sector Enters a Recovery Phase

Besides lithium carbonate, Deng Xiang’s other managed product—Hua Fu Growth Enterprise Selected Stocks—focuses on the chemical sector. He believes that compared to short-term demand fluctuations, the more noteworthy aspect currently is the marginal changes on the supply side.

“The industry turning point signals are already evident in capital expenditure data,” Deng Xiang said. Reflecting on the last cycle, he analyzed that 2021 was a peak for chemical product prices and stock prices, but during the subsequent price decline, industry capital expenditures remained high, preventing timely supply clearance. After 2025, the growth rate of capital expenditure has significantly slowed, with some sub-sectors even showing negative year-over-year growth, which he views as a sign that industry capacity is gradually being cleared.

He sees the current stage of the chemical sector as closer to the “early stage of supply recovery.” On one hand, capacity eliminations and profit pressures over the past years have driven industry consolidation; on the other hand, leading companies have completed structural optimization during low-profit periods, enhancing resilience. As supply constraints gradually emerge, any marginal improvement in demand could accelerate profit elasticity.

“In the chemical industry, stock prices often lead to actual product price increases,” Deng Xiang pointed out. He believes that if this cycle is driven mainly by supply contraction, its duration could be longer. Compared to short-term rallies relying on single commodities, the sector’s recovery is more likely to be a trend-based process—through orderly rotation across different subfields within the industry, gradually rebalancing valuation and profitability.

Cautiously Approaching Left-Side Positioning

When explaining his investment methodology, Deng Xiang said that the core of cyclical investing is not about precisely “bottom-fishing,” but about keenly identifying and grasping substantive changes in industry supply and demand structures.

“I’m not a typical left-side investor,” Deng Xiang said. His experience with multiple cycles has made him realize that relying solely on valuation or price levels for left-side positioning often requires enduring long periods of bottoming and uncertainty. Instead, he focuses more on whether internal industry variables are enough to change the supply-demand landscape. Once such changes are established, even if stock prices have already risen, the trend may still be in its early stages.

This framework is also reflected in Deng Xiang’s position management. For sectors supported by medium- to long-term logic, he tends to increase focus and continuously monitor fundamentals on a quarterly basis; when prices deviate from reasonable ranges or trading becomes overly crowded, he adjusts positions dynamically to control drawdowns. “The key is whether the logic is intact, not short-term volatility,” he said.

From a broader macro perspective, he believes that global liquidity remains relatively loose, countries continue to emphasize resource security and energy systems, and the strategic importance of commodities is increasing. Against this backdrop, a new commodity cycle may exhibit structural characteristics, with different sub-sectors taking turns to perform at different stages.