SMM deep-dive analysis: will high-cost iron phosphate prices keep dropping amid a sluggish market?

In December 2023, LFP industry firms are busy negotiating next year's orders. Given the oversupply and sluggish demand for iron phosphate precursors, downstream firms are in a position to further drive down prices during procurement, giving LFP manufacturers strong negotiation leverage.

This scenario seems logical, for these key reasons:

(1) Market shrinkage: Integrated firms' self-sufficiency in iron phosphate reduces outsourcing, shrinking the customer base for independent suppliers.

(2) Competition necessity: With surplus capacity and less demand, iron phosphate firms must fight for market share, mainly via pricing, but also through flexible payments or schedules.

(3) Survival concessions: Iron phosphate firms must concede to stay in the game, with limited space to operate.

The survival of the fittest truly matters in market competition.

On the one hand, a business aims to profit or cut losses for eventual gain, its core purpose. If short-term profit fails, a company might halt operations or leave the market. Businesses aim for profit, not welfare.

On the other hand, LFP firms must ensure a stable supply chain and balance supply-demand, as their interdependence is crucial. When LFP companies engage in negotiations with downstream battery cell businesses, or as these battery manufacturers deal with automakers, they might succumb to a pressured logic of a shrinking market, where fierce competition necessitates concessions. This scenario begs the question: might consumers be willing to delay their vehicle purchases, opting not to spend at year's end, but to wait further price drops? If the industry engages in a race to the bottom, there will ultimately be no true victors.

Business operating costs differ by region, affected by energy prices (electricity, gas), decreasing from East/South China > Central > Southwest > Northwest. Provinces with phosphorus like Hubei, Guizhou, Sichuan, Yunnan have lower costs, mainly saving on transport. This pattern extends to other raw materials.

The three production processes have similar core costs, with phosphorus accounting for 50% of iron phosphate production costs. The iron method is pricier, and ferrous sulfate prices depend on the titanium dioxide market. Traditional phosphorus chemical industries with phosphorus access sell goods at market rates due to their industry's maturity and stability.

Phosphorus chemical enterprises allocate a significant portion of their profits from phosphorus sources to the production of iron phosphate under two scenarios: the first is to secure a larger share of phosphorus resources through the iron phosphate new energy industry or as mandated by local government requirements. The second is a combination of superior technology, lower costs and closer cooperation with downstream businesses. The first scenario is easier to be realized than the latter.

Solid cost support exists when iron phosphate costs 9,200 to 9,500 yuan/mt. Assuming constant phosphorus supply in 2024, other costs could rise due to events like the 2023 hydrogen peroxide price spike.

Iron phosphate cost might remain high in 2024, which could support its price. Current prices under cost are driven by new entrants aiming for market share and inventory reductions. Quality stability is yet to be market-tested, and price trends for 2024 are uncertain.