The Settlement Mechanism for LFP: Moving Directly to the Ultimate "Lithium + Iron Phosphate" Dual-Factor Model

Recently, the industry has seen intense debate over the settlement methods for lithium iron phosphate (LFP). In particular, as prices of phosphorus and iron feedstocks have continued to fluctuate, some companies have begun incorporating the price of phosphoric acid into their settlement formulas. The market has offered varying interpretations of this move, and some institutions even argue that “phosphorus-based pricing” will completely rewrite the rules of the industry.

As a third-party organization that has long provided settlement benchmarks for key raw materials—such as lithium carbonate and iron phosphate—to the entire industry, SMM holds the view that the evolution of the LFP settlement mechanism should not stop at the half-way solution of "lithium + phosphoric acid," but should move directly to the ultimate "lithium + iron phosphate" model. This is not only the most complete path for cost pass-through, but also the optimal solution for industry efficiency and fairness.

I. The Current Mainstream: SMM Lithium Carbonate Linkage + Packaged Processing Fee Can No Longer Adapt to the New Reality

Over the past few years, the industry has widely adopted a settlement method based on "SMM lithium carbonate monthly average price × unit consumption + packaged base price." The packaged base price covered the cost of iron phosphate and all auxiliary materials, and was negotiated and locked in annually or semi-annually between cell manufacturers and cathode plants.

This model was effective when iron phosphate prices were relatively stable. However, since the second half of 2025, the surge in sulfur prices has transmitted through the supply chain, causing successive price increases in raw materials such as phosphoric acid, industrial-grade monoammonium phosphate (MAP), ferrous sulfate, and hydrogen peroxide. Consequently, iron phosphate prices have risen almost every month by hundreds to thousands of yuan per tonne.

Against this backdrop, the original "once-a-year" negotiated packaged price has completely broken down. Cathode plants are now forced to renegotiate price increases with cell manufacturers every single month. This process is difficult and inefficient, seriously threatening the stability of the supply chain.

II. Single-Factor Phosphoric Acid Linkage: A Beneficial Attempt, but with Three Structural Flaws

Recently, a cell manufacturer took the lead in breaking out the phosphoric acid price as an independent linkage factor, using the following formula:

LFP settlement price = SMM lithium carbonate monthly average × unit consumption + phosphoric acid monthly average × unit consumption + fixed processing fee

This change reflects a progressive awareness among downstream cell makers of cost-sharing and sets a commendable example. However, SMM believes that this approach is essentially an extension of "single-factor thinking" rather than true full-cost coverage, and it suffers from three major flaws:

1. Incomplete cost coverage: While phosphoric acid is indeed important in the production cost of iron phosphate, other items—such as ferrous sulfate, hydrogen peroxide, aqueous ammonia, and energy—collectively account for a significant 20%–30%. The volatility of these costs is completely uncovered. Cathode plants still face the predicament of having to "negotiate an increase in the remaining processing fee every month."

2. Process mismatch: The unit consumption of 85% phosphoric acid varies dramatically between different iron phosphate production processes. The ammonium-based process consumes only about 0.11 tonnes per tonne of iron phosphate, whereas the sodium-based and iron-based processes can consume as much as 0.8 tonnes. Currently, the ammonium-based process holds over 60% of the market. For the majority of ammonium-route enterprises, linking to the phosphoric acid price has a negligible impact on their actual costs, rendering the linkage nearly meaningless.

3. Lagging price reference: If the previous month’s average phosphoric acid price is used, cathode plants still face financial pressure during a rapid price upswing—their costs have already risen, but the settlement has not yet caught up.

In other words, this "half-baked" reform fails to truly address the core pain points of cathode plants.

III. The Ultimate Solution: Full-Factor Linkage with SMM Iron Phosphate, Solving All Problems at Once

The optimal long-term solution for the industry, and the direction SMM has been consistently advocating, is the dual-factor linkage of "SMM lithium carbonate + SMM iron phosphate":

LFP settlement price = SMM lithium carbonate monthly average × unit consumption × coefficient + SMM iron phosphate monthly average × unit consumption + fixed processing fee

Why is this the ultimate solution?

• Most complete cost coverage: The SMM iron phosphate price already internalizes the fluctuations of all production factors—phosphoric acid, ferrous sulfate, hydrogen peroxide, liquid ammonia, energy, and more. A single linkage covers everything, eliminating the need for cathode plants to separately negotiate for any auxiliary material.

• Most balanced process adaptation: The SMM iron phosphate quotation fully accounts for the market transaction prices of various processes, including ammonium-based, sodium-based, and iron-based methods. Regardless of which process route a cell manufacturer sources its LFP from, it can use this as a fair and universal benchmark.

• Highest settlement efficiency: There is no need to track multiple prices like phosphoric acid, industrial MAP, and ferrous sulfate simultaneously. Calculation is simple and transparent, significantly reducing the friction costs of monthly price negotiations.

IV. Why Must It Be SMM Iron Phosphate? — The Market-Recognized Settlement Benchmark

It is important to point out that the SMM iron phosphate price is already the de facto settlement benchmark for the entire industry. Currently, nearly all LFP cathode plants use the SMM monthly average price for iron phosphate in their procurement settlements with upstream iron phosphate producers. SMM’s pricing system closely reflects actual market transactions, with daily price assessments covering mainstream producers and consumers, truthfully capturing the outcome of supply-demand dynamics.

In the iron phosphate segment, the SMM price is already an industry-recognized settlement benchmark. Naturally extending this benchmark to the LFP segment to achieve "same raw material, same price" pass-through pricing is the inevitable path toward a mature industry cost-sharing mechanism.

For cell manufacturers, directly using the SMM average iron phosphate price for settlement with cathode plants is not about introducing an unfamiliar new index. Rather, it is the natural downstream extension of an already mature and well-functioning upstream pricing system. This represents the shortest cost pass-through chain, the least market friction, and the most readily acceptable solution for all parties. We understand that some small and medium-sized cell manufacturers have already taken the lead in using the SMM iron phosphate price to settle with cathode plants and have signed long-term contracts based on it. Their practice demonstrates that the SMM iron phosphate price has full feasibility and market acceptance for downstream extension.

V. Conclusion: Reject the Half-Way Detour and Adopt the Ultimate Solution Directly

The evolution of the LFP settlement mechanism is, in essence, a rebalancing of profit distribution and risk sharing across the industry chain. Moving from a "single lithium linkage" to a "phosphoric acid linkage" is a step forward, but the industry must not stop there.

SMM calls on the industry to skip the transitional "phosphoric acid single-factor" stage and directly adopt the "SMM lithium carbonate + SMM iron phosphate" dual-factor linkage model. This not only resolves all cost pass-through issues in one stroke but also greatly enhances the stability and efficiency of long-term cooperative agreements.

As a third-party organization deeply rooted in the pricing of metals and new energy materials, SMM will continue to serve the entire industry with a pricing system that most closely tracks market transactions, guiding it toward a new era of fairer and more efficient settlement.