China Securities Co., Ltd. has released a research report stating that the profitability of the energy storage manufacturing sector remains at historically low levels, which is unsustainable amid surging demand. Currently, terminal IRR levels are high, allowing for a profit margin transfer of 10-15 fen/Wh. The report predicts that manufacturing sector prices will rise by 10-15 fen/Wh by 2026, increasing post-tax costs for terminal power stations by 12 fen/Wh. While this cost increase is manageable for downstream demand, midstream manufacturing profits are expected to expand significantly. The firm anticipates a synchronized rise in volume and pricing across the supply chain, benefiting all segments.
Key insights from the report include:
1. **Domestic Energy Storage’s High Price Tolerance** Driven by economic incentives, domestic energy storage demand remains strong, with project bidding volumes growing substantially year-over-year. Despite price increases in lithium battery components (cells, LiPF6, etc.), concerns about demand suppression are overstated. The report evaluates the acceptable price increase range for domestic energy storage projects and forecasts future profit distribution.
Taking provinces with high energy storage bidding activity (Hebei, Gansu, Inner Mongolia, Ningxia, Shanxi, Shandong, Xinjiang, etc.) as examples, the weighted average IRR is calculated. Assuming a system integration price of 0.5 yuan/Wh and an EPC price of 0.8 yuan/Wh, the weighted average all-investment IRR stands at 9.58%, while the equity IRR reaches 13.89%, making projects highly attractive to investors. Further improvements in capacity pricing policies and solar grid integration could push equity IRR even higher.
Sensitivity analysis shows that a 2 fen/Wh increase in EPC prices reduces all-investment IRR by ~0.35 ppts and equity IRR by ~0.6 ppts. Even with a 0.1-0.15 yuan/Wh rise in EPC costs, the weighted average all-investment IRR would remain at 7.3%-8%, and equity IRR at 10%-11.2%, maintaining sufficient appeal.
2. **Profit Expansion in Midstream Manufacturing** Currently, midstream manufacturing margins are severely compressed, but minor concessions from the terminal segment could significantly boost profitability. The report estimates that by next year, lithium carbonate, energy storage cells, and system integration prices may reach 175,000 yuan/ton, 0.4 yuan/Wh, and 0.58 yuan/Wh, respectively. Profit increases for LFP cathodes, anodes, LiPF6, solvents/additives, and lithium carbonate will likely exceed current market expectations.
The analysis suggests terminal power stations can absorb a 0.1-0.15 yuan/Wh increase in upstream EPC costs. Factoring in supply chain pricing pressures and steady-state profitability, this translates to additional margins of 0.5, 1.5, and 8.6 fen/Wh for integration, battery, and material segments, respectively—totaling 10.6 fen/Wh. Post-tax, this would raise terminal costs by 12 fen/Wh.
At 15-20x PE valuations, current stock prices reflect ~10% price increase expectations, with some undervalued leaders priced for <5%. However, projected profit transfers for LFP, anodes, LiPF6, solvents/additives, and lithium carbonate far exceed these expectations, while battery and aluminum foil margins align closely with 15x PE valuations.
3. **Policy and Economics Driving Demand Growth** Multiple provinces have announced long-term energy storage targets, reinforcing domestic growth prospects. For instance, Xinjiang aims for >20GW and >50GW of new energy storage capacity by 2025 and 2030, respectively; Henan targets 15GW by 2030; and Gansu plans for 10GW. These goals highlight policy prioritization of energy storage in China’s energy infrastructure.
Non-linear demand growth will accelerate supply-demand rebalancing in lithium battery midstream. On the demand side, global lithium battery demand is projected at 2,721GWh in 2026 (+30% YoY), with energy storage batteries growing 68%. Under optimistic scenarios (including AI-driven demand in China and North America), demand could reach 2,860GWh (+37% YoY).
On the supply side, LiPF6 and copper foil are expected to face the tightest constraints by 2026, followed by LFP cathodes, aluminum foil, anodes, and separators. With current industry capacity utilization >75%, pricing power is strengthening, and some segments have already implemented hikes. Utilization rates may exceed 80% by Q2 2026.
The report highlights investment opportunities in: - **Integration and Batteries**: Direct beneficiaries of terminal demand growth. - **Lithium Carbonate**: Sustained mid-to-long-term price increases. - **Materials**: LiPF6 (tight supply, concentrated market, prices up 2.3x to 180,000 yuan/ton) and LFP (fastest demand growth and anti-internalization measures). Copper foil, anodes, aluminum foil, and separators are also seeing price recoveries, with further hikes expected.
**Risk Factors**: 1. **Demand Risks**: Policy shifts affecting infrastructure investment; slower renewable capacity growth reducing flexibility needs; lagging energy storage deployment; declining electricity consumption; EV subsidy phase-outs impacting battery demand. 2. **Supply Risks**: Rising costs for lithium, copper, steel; power electronics shortages (e.g., IGBT); higher-than-expected salt cavern/digging costs; vanadium price surges. 3. **Policy Risks**: Weak energy storage incentives; low capacity pricing; delayed power market reforms; inadequate peak-valley price differentials. 4. **Global Risks**: Rapid energy crisis resolution lowering prices; trade barriers. 5. **Market Risks**: Intensifying competition squeezing margins; rising logistics costs. 6. **Tech Risks**: Slow cost reductions in electrochemical/compressed air/flow batteries; reliability stagnation. 7. **Regulatory Risks**: Delayed power market mechanisms; inadequate ancillary services/compensation; underdeveloped virtual power plant/demand-side management models.
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