[SMM Analysis] VC Supply-Demand Tight Balance Persists in the Short Term, Huasheng's 60,000 mt Project Adjustment May Reshape the Industry's Long-Term Competitive Landscape

SMM July 16:

Key Points: On July 11, 2026, HSC New Energy Materials announced a major adjustment to the construction plan for its 60,000 mt/yr vinylene carbonate (VC) project in Yunmeng, Hubei: the original phased approach of 30,000 mt phase one and 30,000 mt phase two was canceled in favor of a one-time integrated build of 60,000 mt VC capacity, with total investment unchanged at 1.6 billion yuan and the construction site, investment entity, and overall timeline to reach full production unchanged.

I. Current Market Conditions

(1) Demand Side: Multi-dimensional Growth Resonance Driving a Sustained Rise in VC’s Medium- and Long-Term Demand Baseline

Since March 2026, China’s overall lithium battery cell production has entered a sustained upward trajectory, directly boosting demand for electrolyte. As a core film-forming additive in electrolyte, VC has simultaneously experienced a surge in demand. Structurally, the energy storage segment has become one of the core incremental sources of demand growth: LFP energy storage cells, due to cycle life considerations, use a significantly higher VC addition ratio than power battery cells. In H1 2026, China’s energy storage cell production growth rate exceeded 100% YoY, substantially lifting overall VC demand in the industry. At the same time, overseas wind and solar energy storage and AI computing-power supporting storage projects continue to be rolled out and scale up, coupled with the steady increase in vehicle battery capacity of passenger NEVs. These multiple incremental growth drivers are resonating, and electrolyte and VC demand is expected to sustain further growth in H2.

(2) Supply Side: Insufficient Capacity Flexibility, Short-Term Tight Supply-Demand Balance Hard to Ease

On the supply side, the industry’s effective capacity and rigid market demand have already approached a state of near-tight balance. Combined with inventories hitting low levels, there is limited buffer room, and tight spot supply has directly driven a new round of price increases in the VC market recently. In terms of new supply constraints, VC production involves highly hazardous chlorination reactions, with stringent environmental and safety assessment approvals. Additionally, process debugging and downstream battery factory product certification cycles are long, making the overall expansion barriers extremely high. Some companies’ previously planned new VC production lines have been delayed in commissioning due to factors like process ramp-up; the window for new capacity release is earliest at the end of Q3 to early Q4, and the incremental volume that can be quickly realized is limited, making it hard to fully offset the continuously expanding demand from downstream segments. The tight supply fundamentals for VC may therefore continue to support prices in the short term.

II. Multi-Dimensional Impact Analysis of the Plan Adjustment

(1) Impact on Company Operations

1. Accelerating Capacity Release Pace to Seize Market Opportunities

The market had previously expected the original 30,000 mt phase one to be commissioned and ramp up by the end of 2026; after the adjustment, the entire 60,000 mt is being built simultaneously, with limited incremental output in 2026 and unable to fully bridge the industry’s spot supply gap in the short term. However, after the entire project reaches full production, the one-time release of 60,000 mt in incremental capacity will provide significant scale advantages, with much greater earnings elasticity than a phased approach. It will also enable the company to quickly capture incremental market volumes that small and medium-sized producers cannot address during a high-demand upcycle, strengthening its scale-based moat.

2. Front-Loaded Capex Pace, Short-Term Cash Flow Pressure

Under the original plan, only 950 million yuan would have been invested in the first two years for phase one, with remaining funds deferred; a one-time build means a concentrated deployment of 1.6 billion yuan in investment, increasing the company’s short-term pressure from both internal and raised funds.

(2) Impact on VC Industry Supply-Demand Pattern

1. Limited Incremental VC Supply This Year, with Potential to Optimize Industry Supply Structure in the Long Term

The project has yet to be commissioned, and incremental effective output this year is expected to be relatively limited. In the traditional Q3 peak season for lithium batteries, power battery production schedules continue to ramp up, while energy storage cell demand remains strong, driving VC procurement demand higher. The pattern of tight spot supply and firm quotes is unlikely to see significant improvement. From a medium- and long-term perspective, the Yunmeng 60,000 mt large-scale VC project is a core source of industry incremental supply. Once the entire set of facilities completes production-line ramp-up and reaches stable operation, the overall effective supply scale of the market will undergo substantial expansion. With the reshaping of the supply landscape, the industry’s incremental dividends will continuously tilt toward top-tier players with large-scale, mature capacity and stable supply capabilities. The competitive disadvantages of small and medium-sized producers—insufficient capacity scale and weak supply flexibility—will become more pronounced.

2. Easing Supply Pressure, Significantly Suppressing New Entrant Intentions

The implementation of HSC’s one-time 60,000 mt large-scale integrated base will provide strong support for market supply once it reaches full production, potentially easing the tight supply-demand situation and thereby reducing the willingness of new players to enter the industry. The adjustment of HSC’s Yunmeng 60,000 mt integrated VC project from phased construction to one-time complete build will, after completion and full ramp-up, bring massive incremental supply to the domestic VC market, effectively alleviating the tight supply-demand pattern driven by energy storage and power battery demand. As market supply pressure is significantly relieved, the high premium for VC products may gradually weaken. The return space from high upfront investments—covering project construction, supporting hazardous chemical production facilities, and downstream battery certification—will narrow, and the industry’s investment appeal will correspondingly decline. The willingness of new enterprises to cross into this sector or expand new VC capacity may notably cool, further reinforcing the industry’s entry barriers and the scale moat of leading players.

III. Conclusion

HSC New Energy Materials’ adjustment of the 60,000 mt VC project construction plan—from a two-phase approach to a one-time complete build—is not intended to quickly deliver short-term capacity increments but represents a medium- and long-term development strategy formulated in light of the current tight VC supply-demand balance and the long-term upward trend in downstream lithium battery demand. Benefiting from continued volume growth in the energy storage and power battery sectors, VC’s long-term demand growth is highly assured, while industry expansion faces multiple rigid barriers in safety, environmental protection, and certification. A one-time integrated construction allows unified supporting infrastructure for all production and environmental protection utilities, rapidly forming large-scale capacity advantages.

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SMM New Energy Research Team

Wang Cong 021-51666838

Ma Rui 021-51595780

Feng Disheng 021-51666714

Lyu Yanlin 021-20707875

Zhang Haohan 021-51666752

Wang Zihan 021-51666914

Wang Jie 021-51595902

Xu Yang 021-51666760

Xu Mengqi 021-20707868

Hu Xuejie 021-20707858