Since 2025, surging energy storage orders have emerged as a key pillar of battery demand growth, while resource nationalism, permitting delays and shipping bottlenecks continue to drive structural cost inflation, fundamentally reshaping the battery value chain.
Interestingly, despite the sustained tightness of the battery metals market, prices have recently declined from their peak. Beyond changing expectations around supply disruptions, understanding this gap requires a closer look at shifting bargaining power across the value chain and at downstream inventory levels.
Ahead of Q2 corporate results, we reviewed how these market dynamics are impacting inventory strategies and margins across the sector.
Our key takeaways are:
- Negotiation power is shifting to raw material suppliers. LFP cathode producers have succeeded in raising prices and increasing profitability amid rising lithium prices.
- Robust battery energy storage (BESS) pipeline is driving active downstream restocking, further amplifying demand growth, while avoiding panic buying.
- BESS has higher sensitivity to battery prices compared to EVs. High lithium prices would bring many BESS projects close to their investment profitability threshold.
- Most cell producers face shrinking profitability, sandwiched between rising raw materials passthrough costs and customers resisting price increases.
BESS demand boom supports LFP capacity expansion
Policy and macro factors have slowed down EV sales in the US and China, but this is offset by growth in the EU and rising battery sizes in China. Meanwhile, strengthening policy and emerging use cases, such as data centres, are shoring up rampant BESS demand.
As presented in the chart below, taken from CRU’s Battery Value Chain Service, Chinese LFP cathode production increased by nearly 70% y/y in H1, with most producers operating at capacity utilisation rates over 85%. Surging demand is driving LFP producers to rapidly expand capacity, especially for high-compaction density products.
Robust BESS pipeline drives active downstream restocking
A strong BESS project pipeline has resulted in an expansion of the LFP inventory cycle. By contrast, LCO and ternary (NMC/A) cathodes are in a destocking period as demand weakens.
We expect this momentum to be sustained in H2. LFP production will rise by more than 50% y/y in 2026, partly driven by front-loaded export demand in Q4 before the export VAT rebate for battery cells is fully cancelled.
The active downstream restocking behaviour further amplifies the strong demand for raw materials, resulting in a tightening lithium market balance and declining refined inventories.
Prolonged lead times amplify burgeoning BESS inventories
Corporate financial results reflect a clear trend of inventories shifting from upstream to downstream participants over the past year.
Lithium producers all drew inventories, while BESS producers reported longer inventory turnover, exceeding 200 days. Market participants also report that overall carbonate inventories have shifted from miners, refiners and traders to cell producers’ warehouses.
Despite LFP cathode production outpacing demand, CAM producers’ inventories have hit a one-year low, reflecting that the majority of CAM and cell inventories are also held by battery and BESS producers as feedstock.
In its Q1 call, CATL attributed its production-sales gap to products-in-transit and prolonged BESS installation cycles. While overall inventory turnover remains stable at approximately three months, BESS revenue recognition can extend to six months or longer.
Higher downstream stockpiles limit panic buying
Previously built-up stockpiles have provided a cost buffer to cell manufacturers. During feedstock price spikes, they can reduce spot procurement demand, causing low market liquidity. This dampened price volatility, widened spot discounts during futures rallies, and built warrant inventories, which ultimately capped futures price increases.
Similarly, the cobalt market is experiencing a disconnect between critically-low cobalt hydroxide inventories and falling prices. LCO battery producers are prioritising consuming CAM and cell inventories amid supply disruptions and weakening end-use demand, effectively reducing raw material procurement demand.
Industry profitability shifts to raw material suppliers
Since 2025 Q4, rising lithium prices have been reshaping the battery value chain. This margin divergence stems from different pricing mechanisms across segments, restricting the ability of downstream players to pass on cost inflation.
- Raw material producers captured margin improvement, as supply disruptions and surging demand tighten market balances.
- Midstream profitability expanded significantly. While cathode pricing mechanisms linked closely to lithium benchmarks helped protect margins, earnings were additionally supported by upstream investments, inventory valuation gains and higher LFP tolling fees.
- Cell producers reported shrinking profitability, sandwiched between raw materials’ cost pass-through and resistance from EV and BESS clients. CATL remains the notable exception.
CAM makers must share rising costs with customers
LFP CAM producers, who have long suffered from poor profitability, raised tolling fees at the start of 2026, and since May have been negotiating to pass rising phosphoric acid costs onto battery producers.
The traditional methods of making the iron phosphate precursor for LFP CAM are under cost pressure from rising sulphur prices, impacting the cost of phosphate chemicals and iron sulphate. Therefore, there have been calls to incorporate the iron phosphate value into the LFP price to share costs inflation.
On 15 July, local news reported the largest LFP producer, Hunan Yuneng, issued a price adjustment letter, stating all LFP prices will be raised by another RMB2,000 /t starting from August.
Standalone BESS margins are sensitive to rising lithium prices
Based on CRU’s Energy Storage Technology and Costs Service, certain domestic ESS projects will fall below their incentive levels if Li prices rise too high. Using a 100 MW/200 MWh standalone BESS project in Gansu as a baseline, even with capacity pricing subsidies, a sustained lithium carbonate price of $25 /kg could drop the Internal Rate of Return (IRR)below 6.5% – which the industry has generally accepted as the threshold for new investment viability.
Before tangible ESS production cuts materialise, news of shrinking tenders, delays or cancellations will weigh on market sentiment, putting downward pressure on prices. The impact on lithium demand will lag due to inventory and pricing buffers. While battery manufacturers often absorb a portion of rising costs into their own margins to protect market share, top producers may slow down output growth and stockpiling pace to gain leverage in price renegotiations.
China intensifies anti-involution campaign on cell-making
To avoid overcapacity and price competition, Chinese regulators are intensifyingoversight of battery production capacity expansion within the context of the ‘anti-involution campaign’. The measures include:
- Removing export VAT rebates and consumption tax exemptions for Li-ion batteries, while keeping it for new technologies such as Na-ion batteries.
- Requiring battery producers to shorten payment terms to 60 days for small-scale suppliers.
Since June, battery producers reported that high plant utilisation has become critical for new project approvals. As regulation tightens, the industry is likely to consolidate rather than contract, further separating Tier-1 manufacturers with technology and cost advantages from underutilised lower-tier producers.
While regulatory measures focus on ‘quality over quantity’ and phasing out low-quality, uncompetitive producers, battery manufacturers may face a further margin squeeze in the short term, driving a heightened focus on cost control. Therefore, we expect to see a continued disconnect between strong battery demand and manufacturers' resistance to higher raw material prices. Over the long term, downside risks remain if demand growth moderates against a higher baseline and burgeoning inventories.
For more in-depth global battery value chain analysis, consult our CRU’s Battery Value Chain Service or directly request a demo here.
