The Eroding Margin: A Look into the Lithium Battery Main Material Supply Chain in H1 2023 – Insights on Cathode 

During the first half of 2023, a weakened demand in the lithium battery end-market triggered a broad-scale de-stocking across the entire supply chain. This scenario, amplified by the severe price volatility of upstream raw materials, established a trend of across-the-board price reductions in the market. Amid these conditions, the economic efficiency of supply chain management within lithium battery enterprises started to significantly outpace that of production management. SMM, by monitoring the purchase price and the cyclical shifts in pricing mechanisms of the lithium battery's key constituent - the cathode material, noted that the timing of these shifts has a substantial impact on the procurement and sales of materials and battery cell enterprises, consequently causing a ripple effect on their business management capabilities.

Cathode Materials - Insights on NCM

Facing a slackening industry demand and an oversupply resulting from excessive production capabilities, the industry is witnessing an intensification of competitive pressures. The decrease in lithium prices has instigated a change in the NCM procurement pricing mechanism. The pricing of battery-grade lithium carbonate, previously based on the cost of the preceding month (M-1), has now been updated to reflect the current month's cost (M). This forward-looking adjustment by half a month allows battery cell purchasing companies to realize an estimated 2.5% profit on raw material procurement. Simultaneously, it decreases the materials companies' product sales profits by an approximate 4%.

As tracked by SMM, the pricing mechanism for NCM procurement in January 2023 is defined as:

【battery-grade nickel sulphate(M-1)price*Unit Consumption +Battery-grade Cobalt Sulphate(M-1)price*Unit Consumption+ Battery-grade Manganese Sulphate(M-1)price*Unit Consumption）】*Precursor Discount Coefficient+battery-grade lithium carbonate(M-1)price*Unit Consumption*Lithium Salt Discount Coefficient；

During the first quarter, amid weakening end-user demand from EV and energy storage sectors, growing competition from gasoline-fuelled vehicles whose prices were cut, as well as cases of lithium carbonate prices falling to 200,000 yuan/mt, lithium carbonate prices saw a dramatic plunge. As early as February, top-tier battery cell manufacturers began negotiations to shift the pricing of battery-grade lithium carbonate from the previous month's (M-1) price to the current month's (M) price. This transition was successfully implemented in late February. However, a comprehensive change in the market pricing mechanism was not fully adopted until early March. SMM estimates that this forward-looking adjustment of roughly half a month in the pricing mechanism will result in a 2.5% reduction in the procurement cost of battery cell raw materials. Concurrently, it's anticipated that the gross profit for material companies will decrease by 4%.

During the second quarter, the market sentiment triggered an increased demand for inventory replenishment, driving a recovery in lithium prices which stabilized around 300,000 yuan/mt. The negotiation focal point between ternary material manufacturers and battery cell companies pivoted towards discount rates and processing fees. At present, the prevailing discount rate for precursor materials in the market is approximately 95%, while for lithium salts, it stands close to 93%.

Cathode Materials - Insights on LFP

The price of lithium carbonate has witnessed significant volatility, with the reference price for battery-grade lithium carbonate transitioning from the preceding month (M-1) to the current month (M). This transition point has influenced the procurement profit margins of battery cell manufacturers by up to 6%, and has affected the profit margins from product sales for material companies by up to 10%.

According to tracking by SMM, the pricing strategy for LFP purchases in the market for January 2023 is as follows:
【battery-grade lithium carbonate(M-1)price*Unit Consumption *Lithium Salt Discount Coefficient】

In the first quarter, concurrent with the precipitous decline in lithium carbonate prices, leading battery cell manufacturers initiated negotiations from February. They proposed to material suppliers a shift in the reference price of battery-grade lithium carbonate from the preceding month's (M-1) price to the current month's (M) price. This transition was successfully effected by mid-February. The market-wide shift in pricing mechanisms transpired in the latter half of March. SMM estimates that this proactive adjustment in the pricing mechanism, which was nearly a month in advance, will result in a 6% reduction in raw material procurement costs for battery cells. However, this is also expected to lead to a 10% contraction in the gross profit margin for material companies.

During the second quarter, as lithium prices staged a recovery and achieved relative stability, the negotiation emphasis between LFP material enterprises and battery cell companies pivoted towards the discount rates and processing fees. The dominant discount coefficient for lithium salts in the market hovered around ~98%.