Since July, demand across the LFP industry chain has continued to rise, but the supply-side response has lagged. The most notable feature of the current market is that supply tightness is rapidly transmitting from downstream to upstream, creating a cascading inversion of "battery cell production schedule > LFP cathode production schedule > iron phosphate production schedule." The slow release of LFP capacity and iron phosphate approaching full production have become the most prominent bottlenecks in the entire chain.
I. LFP Cathode: Robust Demand Meets Capacity Ceiling
In July, LFP cathode production reached 538,000 mt, up 7% MoM, basically flat with expectations from the previous month. Demand growth came mainly from two sources: battery orders driven by the accelerating electrification of commercial vehicles, and steady, sustained expansion in the ESS sector.
Heading into August, cathode makers have set production schedules at about 565,000 mt, up 5.1% MoM, a slower pace than in July. The core reason for the slowdown is not weakening demand but effective capacity having hit its ceiling. Leading cathode makers generally report that the orders they are receiving far exceed their actual delivery capability. Enterprises are largely in a state of passive destocking, with salable inventory continuously compressed. Meanwhile, new production lines are in the early stage of equipment commissioning and ramp-up after startup. The pace of volume release is far slower than planned expectations, making it difficult to form effective supply in the short term. It can be said that the limited growth in August is essentially a case of "insufficient capacity, not insufficient orders."
Operating rate data directly confirms this judgment. The overall operating rate of the LFP industry reached 78% in July and is expected to rise to 80% in August. It is particularly worth noting that there is a considerable amount of tail-end capacity in the industry. Such production lines, due to insufficient technical capability, poor product consistency, or lack of customer certification, find it difficult to secure bulk orders from downstream and have actually been idle or operating at low efficiency for a long time. Therefore, after excluding such ineffective capacity, the 80% operating rate fully corresponds to full production of deliverable effective capacity. High-quality production lines are almost all operating at full capacity, and marginal new supply is extremely limited. The supply rigidity of LFP cathodes is now clear.
II. Upstream Iron Phosphate: Widening Deficit Becomes Key Bottleneck Constraining the Entire Chain
The crux of the problem is that the tight situation has not stopped at the LFP cathode, but has further spread upstream to iron phosphate.
In July, LFP cathode production schedules rose about 7% MoM, and in August they are expected to rise about 5% MoM. However, the upstream iron phosphate material increased only about 3.6% and 3% MoM respectively, and the iron phosphate industry’s operating rate has climbed to 85%. The mismatch in supply-demand growth has directly led some LFP cathode plants to curtail their production schedules because they could not procure sufficient iron phosphate. A few enterprises have even shifted orders to other process routes or to cathode plants with surplus iron phosphate supply. This means that the effective supply of iron phosphate has already had a certain impact on LFP cathode shipments.
This supply-demand gap has ultimately manifested as an “inversion” across the entire industry chain: battery cell enterprises’ production schedules are higher than those of LFP cathode, and LFP cathode production schedules are in turn higher than those of iron phosphate. Every link is in a state of tight balance or even shortage, and iron phosphate is the weakest link in this inverted chain. The iron phosphate segment also faces the predicament of slow progress in new capacity completion and insufficient effective capacity. Amid sustained influx of LFP demand, the supply deficit continues to widen.
III. Outlook: Peak Season Growth Is Certain, Supply Constraints Hard to Fundamentally Alleviate
Looking ahead, LFP cathode production schedules in August are expected to see another roughly 5% MoM increase. The market will enter the traditional “September-October peak season” for auto sales, providing certain support for power demand, while some new capacity is expected to come online and begin ramping up production. However, constrained by the objective cycle of new production lines from commissioning to stable volume output, actual output in September will still be capped by the pace of capacity ramp-up, resulting in extremely low supply elasticity. Order demand reported by enterprises remains very robust, and the undersupply situation is likely to persist.
Against the backdrop of unresolved supply constraints and sustained demand rise, industry chain profits will continue to concentrate in the upstream tight segments. Whether iron phosphate supply can be released as scheduled will become the key variable determining the upper limit of LFP cathode production and the direction of processing fees in Q3 and Q4. At the same time, it is necessary to continuously monitor lithium carbonate price fluctuations and procurement strategy adjustments by leading downstream battery cell enterprises. These factors will further influence the market pace against the tightly balanced supply-demand backdrop.
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