Industry group calls for curb on LFP overcapacity, price war

In response to the national call for "anti-involution" and to jointly promote the high-quality development of the industry, the China Industrial Association of Power Sources (CIAPS) issued the Initiative on Maintaining the Healthy and Orderly Development of the Lithium Iron Phosphate Cathode Industry (Draft for Solicitation of Comments) on August 27, 2025, calling on industry enterprises to jointly safeguard the overall interests of the industry and foster a healthy and sustainable ecosystem.

 

The Draft proposes the establishment of a "Lithium Iron Phosphate (LFP) Product Cost Index" and entrusts qualified third-party institutions to regularly conduct cost research, compile, and publish the index, providing an objective reference for enterprises to set reasonable prices. It firmly opposes any form of unfair competition, such as selling below cost or abusing a dominant market position.

 

At the enterprise level, the Draft also suggests that when the annual capacity utilization rate falls below 70%, companies should voluntarily postpone plans for new capacity and formulate timelines for phasing out outdated capacity. Priority should be given to eliminating early-generation production lines (such as first and second generations) that are energy-intensive, inefficient, and underperform.

 

 

At the industry level, it is advised that when the overall capacity utilization rate falls below 60%, all enterprises in the industry should collectively postpone new rounds of capacity expansion and focus on technological transformation and management optimization of existing capacity. This includes improving capacity utilization efficiency through intelligent upgrades and process improvements.

 

According to Mysteel's research, there are approximately 10 LFP cathode manufacturers capable of stably supplying 3.5th and 4th generation products. However, 80% of manufacturers still primarily produce second and third-generation products. Although the demand for LFP cathode continues to increase month by month, new orders are mostly secured by leading manufacturers, with the top five (CR5) holding a market share of 58.9% and the top ten (CR10) holding 78.7%.

 

Currently, except for leading manufacturers who profit from fourth-generation products, most companies face the dilemma of "producing at a loss." The mid-grade products have weak bargaining power, and with the continuous increase in third-generation capacity, the cross-industry enterprises or third and fourth-tier manufacturers are entering the supply chain with lower commercial terms. This intensifies pressure on processing fees for products of the same generation, causing third-generation prices to gradually approach those of second-generation products.

 

More importantly, the industry ecosystem has forced the LFP cathode manufacturers to accept long-term fixed-price contracts or contracts with delayed price adjustment mechanisms when securing orders from major downstream customers, often due to competitive pressure or customer demands. When upstream lithium prices deviate from the benchmark level set at the time of contract signing, especially during sustained and significant price hikes, the cathode manufacturers find themselves trapped between "rising costs and fixed selling prices." This rapidly compresses profit margins and directly leads to the predicament of producing at a loss.

 

To tackle this dilemma, the manufacturers try to break the deadlock by mitigating the losses in the short term and seeking transition in the long term.

 

Looking at the short-term resolutions, the lithium carbonate futures contract has been an important hedging tool to lock in the costs. From a supply chain perspective, it is advisable to execute buying hedging when prices are low to mitigate the risk of rising spot procurement costs. From a strategic enterprise standpoint, greater emphasis is placed on the risk of inventory depreciation, with a preference for selling hedging when futures prices are high.

 

Some manufacturers would adopt a combined pricing method of floating pricing and share of tolling. The mainstream pricing model is lithium carbonate price × consumption coefficient + base processing fee. Manufacturers can negotiate lithium carbonate price ranges, for example, fixing prices within a range and adjusting them according to an agreed formula when prices exceed the range.

 

Apart from the abovementioned methods, the manufacturers have started to sign long-term agreements with overseas miners on a monthly basis to reduce risks caused by pricing delays. Alternatively, they will jointly establish lithium salt processing bases with strategic customers through joint ventures. A typical equity structure involves the manufacturer holding 51% and the resource provider holding 49%, ensuring priority supply rights for lithium carbonate and reducing procurement costs by approximately 20% compared to spot purchases.

 

In the long-term, technological upgrading and model restructuring are among the ways to ensure survival.

 

First, high energy density and fast charging are long-term trends for LFP batteries. There is significant demand gap for such products, with only two leading enterprises currently achieving mass production. Technological barriers result in a premium of Yuan 3,000 - 4,000/tonne for fourth-generation products, which remain in short supply. R&D investment by LFP enterprises has significantly increased, intensifying the R&D arms race. Fifth-generation LFP cathode is entering the laboratory stage, while more inefficient production lines are gradually being shut down.

 

From announcements by leading LFP manufacturers in 2025, it is evident that companies are focusing on deeply securing long-term orders with major battery manufacturers. The core model involves signing agreements ranging three to five years, supported by "advance payment + floating processing fee" mechanisms and funding for capacity expansion.

 

As industry concentration (CR5) continues to increase, the long-term order has become a key lever for leading enterprises to navigate cycles and ensure R&D investment, while accelerating the exit of small and medium-sized manufacturers due to cash flow pressures.

 

Faced with intense domestic market competition, leading LFP enterprises are accelerating their global positioning. The core strategy involves moving capacity overseas, with advantages lying in low costs and high premiums.

 

The survival rule has shifted from competing on scale to competing on technology (high compaction density products) and business models (long-term order binding/global capacity expansion). That is, the short-term measures involve hedging and price adjustment negotiations to reduce losses. Mid-term strategies rely on premiums from high-end products and capacity phase-outs to alleviate burdens. Long-term strategies require global positioning and technological iteration.

 

It is believed that the industry has entered an elimination phase, with capacity potentially reduced by 30% in the next two years.