From surviving to thriving: Strategic moves by China's battery midstream producers

The 'squeezed middle' of China’s battery supply chain – encompassing precursor, cathode and anode active materials (pCAM, CAM, AAM) – is facing profound challenges to their profitability and current business models.

To address these issues, producers are adjusting their strategic focus to diversification of their product offerings, technical innovation and overseas expansion.

Key challenges for Chinese midstream producers

Intensifying domestic competition and declining export orders

The slowdown in the growth of EV sales, especially in Europe and North America, has prompted legacy automakers to pull back their sales targets, product plans and investments.

This has rippled up the supply chain to their wider suppliers, notably Asian midstream companies. This, coupled with rising regional protectionism hindering exports, has resulted in burgeoning inventory levels and subdued orders for battery materials.

This, in turn, has led midstream producers to operate at low capacity utilisation rates and face intense domestic competition this year.

Due to tighter profit margins and a sluggish demand outlook, many producers have postponed or cancelled their ambitious domestic expansion plans. Nevertheless, we anticipate the overcapacity issue will persist as there are still new players joining and new projects with technical innovations being announced. Consolidation trends are already emerging, as producers with cost and technology advantages are taking more market share.

Limited bargaining power dictated by market structure

China’s battery cell market is an oligopoly – highly concentrated among a handful top producers, whose procurement strategies can significantly influence production volumes and margins in the midstream.

This year, their market speculation on demand recovery and prices, front-loading of orders, and inventory management tactics have led to unprecedented volatility in monthly p/CAM production.

Major battery producers have also accelerated their vertical integration plans by acquiring equity stakes in lithium, nickel and cobalt resources and refineries, reducing the impact of price volatility on costs.

Taking the lithium industry for example, leading Chinese battery manufacturers such as CATL and BYD have either obtained equity stakes or secured long-term supply agreements with lithium producers.

One of the main impacts is that midstream producers are increasingly relegated to tolling arrangements, with margins set by battery makers. In this situation, non-vertically-integrated midstream producers face serious profitability challenges. Integrated p/CAM producers can leverage profits from mining and refining to reduce p/CAM prices, and can source feedstock materials at cost price.

Notably, non-integrated LFP CAM producers are suffering the highest losses due to the intense competition and strong bargaining power of battery producers.

Technical innovation and commercial diversification

Enhancing existing products with high-voltage technology

Innovation remains a top priority for cathode manufacturers to enhance their competitive edge. In the post-subsidy era of the Chinese EV market, consumer preferences are shifting, with fast-charging capabilities and cost-effectiveness now taking precedence over longer ranges.

This shift is driving increased demand for low-cost materials, such as LFP and medium-nickel high voltage technology. The main advantage of the latter is higher energy density while maintaining a cost lower than high-nickel NMC. This has already seen mass roll-out in popular EV models in China.

Meanwhile, LFP producers are also continuously improving their products through technical innovation, such as high-compaction-density CAM, which is priced at a premium.

NMC hold-outs finally venturing into LFP

Although LFP offers lower margins than NMC, producers are increasingly entering this market to tap into rising overseas demand and the booming energy storage sector, where virtually all batteries are LFP-based. Diversifying into LFP helps mitigate NCM market volatility and enables producers to cater to the growing preference for lower-cost, fast-charging energy solutions.

Some integrated pCAM producers are diversifying into refined metals to mitigate oversupply and enhance liquidity, as their burgeoning raw material supply can no longer be absorbed by the battery sector. They are using LME warehouses as a last resort to avoid stock overhang and cashflow issues.

pCAM producers expanding into refined metals production

To tackle oversupply risks and improve liquidity, some pCAM producers are diversifying into refined metals. This helps them generate alternative revenue streams and manage surplus raw materials, which can no longer be fully absorbed by the battery sector. With excess stock, producers use LME warehouses as a contingency to avoid overhang and cashflow challenges. 

Overseas expansion with a risk-averse strategy

Chinese p/CAM and AAM producers are accelerating their overseas projects, leveraging their cost and technical advantages, seeking higher profit margins and working to meet the urgent demand from Western and Asian overseas customers for co-located supply. This is being driven by:

• The relative lack of competition outside China due to the shortfall of midstream capacity in Europe and North America
• Rising trade barriers targeting direct imports from China
• Policy incentives, such as the US IRA (Inflation Reduction Act) tax credit sourcing requirements and Indonesia’s push to capture more midstream value

However, risk factors and production costs are higher outside China. This includes energy, labour and import tariffs on feedstock chemicals. They are also being held back by environmental permitting, bureaucratic difficulties and rising policy uncertainty.

Manufacturers have started to weigh these risks more carefully before making investments. Securing local supply contracts is a key precondition, and brownfield sites are being sought as a fast-track option, given the existing regulatory permits.