china-lfp-evolving-route-per-tannery-lithium-development

Hello Yesa, can you explain to me how is the current Chinese lithium Iron Phosphate -LFP battery will evolve per history route of Ternary lithium?

Alright, I'm happy to answer your question. The ternary material industry has gone through two major cycles: first expanding due to policy-driven growth, then experiencing a collapse in capacity bubble, followed by technological iteration and stratification, integration of the industrial chain, solidification of customer barriers, and ultimately diversifying technical routes for risk mitigation. Currently, the LFP (lithium iron phosphate) industry is at the stage that the ternary material sector experienced between 2018 and 2020—characterized by overcapacity and intense price wars. By reviewing the rise and fall of the ternary industry, we can precisely extract the core strategies that enable LFP companies to survive the brutal market consolidation.

Let's review the three-stage development history of the ternary cathode industry (comparing it to the current stage of lithium iron phosphate):

Stage 1: Expansion by all players under policy incentives, with low-end capacity flooding in (2016–2018)

Subsidy policies favored high energy density, triggering a boom in demand for ternary materials. High profits attracted hundreds of companies from other industries to enter the market and build factories. Numerous small and medium-sized manufacturers focused solely on producing low-end, conventional polycrystalline NCM523 products, characterized by simple processes and severe homogenization. Industry capacity tripled within three years, with many light-asset processing plants merely profiting from raw material price differences, without accumulating any technological expertise.

Benchmarking the current state of LFP: From 2021 to 2025, a surge of capital from phosphorus chemical, titanium dioxide, and cross-sector investors led to an uncontrolled explosion in conventional power-type LFP capacity. Industry entry barriers were artificially lowered, resulting in severe overcapacity in low-end production.

Phase Two: Subsidy Phase-Out and Concentrated Capacity Commissioning Lead to the Industry's First Major Shakeout (2019–2021)

Downstream installation growth plummeted sharply, while newly built capacity was released en masse, causing industry capacity utilization to drop below 40%. Prices for ternary materials fell nearly 50%. Outcomes were highly divergent:

1. Small-to-medium material manufacturers lacking technology, raw material supply chains, or major customer relationships went bankrupt in large numbers;

2. Companies relying solely on contract manufacturing or speculative raw material trading continued to incur losses;

3. Leading players with high-nickel product lines, mid-nickel high-voltage technologies, integrated precursor production, and partnerships with overseas battery giants successfully navigated the downturn.

Looking ahead 2–3 years at LFP: low-end conventional LFP products will continue price wars, leading to mass shutdowns and market exit of small-scale producers without cost advantages or premium offerings.

Phase III: Technological Segmentation + Oligopoly Formation + Diversified Pathways (2022–Present)

After total capacity reached saturation, the industry has fully moved beyond scale-based competition:

1. Product Segmentation: Low-end polycrystalline ternary materials have become commodities, with profits compressed to minimal processing fees; high-nickel single-crystal and medium-nickel high-voltage products maintain premium pricing through performance advantages.

2. Market Consolidation: Industry CR10 has risen to 87%, with the market shrinking to a few dominant players—such as Rui Xiang, ,WuKuang, Rongbai, Dengsheng, and Huayou—while small and medium-sized manufacturers face continuous pressure to survive.

3. Route Diversification: Pure ternary producers are increasingly investing in lithium iron manganese phosphate (LMFP) and sodium-ion cathodes to hedge against risks associated with overreliance on a single technology path and avoid demand contraction due to concentration on one product line.

4. Integrated Supply Chain: Surviving companies have all established vertical integration across "mining – precursor – cathode," effectively hedging against volatile raw material prices for nickel, cobalt, and lithium.

Core Conclusion: The ultimate competitive logic of the ternary battery industry is short-term focus on order acquisition, mid-term emphasis on integrated cost efficiency, and long-term reliance on technological iteration and diversified pathways. This same competitive framework will be fully replicated in the lithium iron phosphate (LFP) segment.

Let's review the seven historical lessons left by the ternary battery industry, which will directly determine the survival of LFP enterprises.

Lesson One: Low-end, homogenized capacity is the first to be eliminated; structural pricing premiums must be achieved through product segmentation.

In the past shakeout of the ternary industry, numerous small and medium-sized manufacturers clung stubbornly to conventional polycrystalline NCM523 materials, falling into endless price wars with long-term margins collapsing to zero. Meanwhile, leading companies advanced simultaneously toward single-crystal, high-nickel, and doped-coated technologies, segmenting their products into two categories:

1) basic models used to maintain production capacity and share fixed costs;

2) premium new products capturing value-added with new technology, with single-crystal products commanding over a 20% price premium compared to standard polycrystalline ones. Companies relying solely on low-end, mass-market products have no room for survival at the bottom of the cycle.

LFP Winning Strategy

1. Proactively segment product lines and avoid concentrating all capacity on standard power materials. Use conventional LFP only as a baseline capacity to ensure continuous furnace operation, without pursuing profitability. Instead, direct R&D and new capacity toward high-density fourth-generation materials, long-cycle energy storage-specific grades, and low-temperature-resistant modified products to create differentiated offerings and secure premium pricing above market levels.

2. Avoid industry-wide homogenization and cutthroat competition: Currently, most manufacturers produce basic power LFP, leading to a race solely on cost. Only energy storage-specific and high-end passenger vehicle high-density products can break free from price wars.

Winning strategy: Use mainstream products to secure market entry, leverage high-end materials for profit, and employ performance-based tiering to offset oversupply in total capacity—replicating the ternary battery model of "low-end volume sales, high-end profitability."

Lesson Two: Self-sufficiency in precursors is a matter of survival; the light-asset model relying solely on processing purchased materials cannot withstand cyclical fluctuations.

Historical Lessons from the NMC Industry

Two cycles have proven that companies merely purchasing external precursors for sintering and processing have almost all been eliminated from the market. When raw material prices rise, profits are eroded by upstream suppliers; when prices fall, finished product prices drop accordingly—leaving these firms with only meager processing margins. Leading players like Huayou and Ruixiang have achieved large-scale in-house production of precursors, retaining the profit margin from the synthesis stage within their own operations, thereby stabilizing manufacturing profits and cushioning against raw material price volatility.

Raw materials (nickel, cobalt, lithium) account for over 70% of total costs. Once a company loses control over precursors, it becomes nothing more than a defenseless contract manufacturer without any competitive moat.

LFP Winning Strategy

1. Must achieve self-sufficiency and a closed-loop production of LFP precursors, eliminating the light-asset model of purchasing precursors externally for sintering. If only the final sintering process is performed, continuous losses will occur during periods of sharp fluctuations in lithium salt and phosphorus source prices.

2. Secure upstream supply of iron sources (ferrous sulfate) and phosphorus sources, integrate precursor synthesis into the industrial chain, and anchor profitability on chemical manufacturing and processing fees rather than speculative gains from lithium price volatility.

Lesson Three: Customer structure determines risk resistance; companies relying on a single client and domestic spot orders will be the first to exit the market.

Industry Insights from the Ternary Sector:

1. Enterprises that have secured long-term supply agreements (3–5 years) with three or more leading battery manufacturers such as CATL, LG, and SK maintain capacity utilization above 75% over the long term.

2. Companies heavily dependent on a single mid-sized or small battery manufacturer and operating exclusively on domestic spot orders immediately become unprofitable when downstream customers cut prices during bidding.

3. Overseas clients offer higher processing premiums. When the domestic market becomes highly competitive, export orders help stabilize profit fluctuations. For example, Dalian Technology, with over half of its orders coming from overseas, demonstrates significantly stronger earnings resilience.

LFP Winning Strategy

1. Not simply rely on just one or two battery companies. It is essential to simultaneously expand into multiple channels, including power passenger vehicles, large-scale energy storage, residential storage, and overseas energy storage, to diversify order risks and avoid the situation faced by some secondary NMC players—where a single customer cutting orders leads directly to insufficient production capacity.

2. Aggressively secure long-term contracts with overseas battery manufacturers and energy storage system integrators to escape the intense price competition in China's domestic energy storage market and achieve higher product margins. Lock more than 70% of production capacity into long-term agreements, using spot sales only to absorb remaining output.

Winning Principles: Use long-term contracts as the foundation, major clients as safeguards, and overseas orders to offset domestic market competition, avoiding a pure spot-trading model.

Lesson Four: Technology iteration must not lag behind—relying solely on simple formulas will eventually lead to replacement by new processes.

The rise and fall of the ternary industry is no longer determined by basic formula competition; instead, success hinges on engineered manufacturing techniques such as single-crystal sintering, impurity control, continuous synthesis, and element doping and coating. Many small and medium-sized enterprises simply copy basic formulas but fail to control crystal morphology and impurity levels, resulting in inconsistent product quality that prevents them from entering top-tier battery supply chains.

Technological barriers exist at two levels: the superficial layer involves doping formulations (easily replicated), while the deeper layer consists of continuous synthesis, precise kiln control, and advanced chemical purification processes—the latter forming the true long-term moat.

LFP Winning Strategy

1. Move beyond the basic competition based on simple lithium-iron-phosphate formulations, and focus deeply on crystallization control, continuous liquid-phase synthesis, carbon coating modification, and low-impurity preparation processes. In the future, industry competition will not be about formulas, but rather about product consistency, tap density, and cycle life stability under mass production.

2. Continuously iterate production line processes: explore replacing tunnel kilns with rotary kilns to further reduce energy consumption and improve yield, thereby widening the manufacturing gap with smaller and mid-sized manufacturers.

Lesson Five: Strictly control technological bets—relying on a single track can lead to shrinking demand, so it's essential to prepare a second growth curve.

A profound lesson from the ternary battery industry:

Numerous companies went all-in on high-nickel ternary batteries, completely abandoning other technology paths. When the cost-reduction wave hit the new energy vehicle sector and automakers began switching en masse to lithium iron phosphate (LFP) solutions, domestic demand for high-nickel ternary materials continued to decline, causing significant revenue drops for pure-play ternary battery makers. In contrast, leading companies that had proactively expanded into LFP and sodium-ion cathodes successfully offset the downturn in their core business, achieving a smooth transition.

Sticking rigidly to a single material path leaves companies vulnerable to stagnation whenever downstream technology trends shift.

LFP Winning Strategy

1. Avoid clinging to the traditional LFP path; proactively invest in sodium-ion cathodes and lithium iron manganese phosphate (LMFP) as secondary growth drivers.

2. Explore advanced cathode materials such as high-voltage nickel-manganese oxide and lithium-rich manganese-based compounds to diversify technological risks and prevent being completely marginalized by emerging technologies.

Lesson 6: Resource Integration Sets Cost Bottom Line, Enterprises Highly Dependent on Raw Materials Cannot Withstand Price Wars

Huayou Cobalt directly controls overseas nickel and cobalt mines, integrating the entire chain from minerals, wet processing to precursors and cathodes. The self-sufficiency rate of raw materials has significantly increased, and the raw material costs are consistently lower than those of its peers; enterprises without upstream mineral support and completely relying on externally purchased nickel and cobalt raw materials are always passively subjected to the sharp fluctuations of commodity prices, and their profits are extremely unstable.

In the cathode material industry, the self-sufficiency rate of resources directly determines the cost ranking.

The winning strategy for lithium iron phosphate:

1. Lock in three core raw materials from the upstream: Long-term contracts for lithium salts to ensure stable prices, phosphorus ore supply, and nearby supply of by-product ferrous sulfate. Phosphorus chemical enterprises such as Xingfa Group, Yun Tianzao, and Guizhou Phosphorus Chemical have natural cost advantages due to their own phosphorus sources, and they can secure nickel and cobalt resources for the upstream of the ternary battery enterprises.

2. The production capacity is located in the low-cost hydropower regions in the southwest and northwest, which can reduce the costs of electricity and steam.

Lesson Seven: Control debt and expansion pace. During a bull market, leverage is increased to expand low-end production capacity. During a bear market, the financial chain is bound to break.

The Tragedy of the Ternary Cycle

During the prosperous period from 2017 to 2018, a large number of small and medium-sized enterprises borrowed heavily to build ordinary NCM production lines. In 2019, subsidies were reduced, prices dropped sharply, revenue decreased significantly, depreciation and financial expenses rose sharply, ongoing projects were halted, existing production capacity suffered losses, and a large number of enterprises exited the market due to debt issues.

Blind expansion of low-end generic production capacity was the first trigger for the explosion of risks at the bottom of the positive cycle in the positive electrode industry.

The winning strategy for lithium iron phosphate:

1. Stop building new production capacity for ordinary power lithium iron phosphate. Capital expenditures should be prioritized for upgrading old production lines and developing high-end new materials projects, and strictly control the expansion of similar redundant production capacity.

2. Reduce the debt-to-equity ratio. Do not rely on debt financing for heavy asset expansion. The lithium-ion battery industry has repeatedly proven: high leverage + low-end production capacity = bankruptcy at the bottom of the cycle.

The final analysis of the tripartite pattern reveals that the future of lithium iron phosphate will see three major player groups.

The first tier: Integrated oligarchs (comparable to Jinchuan Ruxiang and Huayou Cobalt)

Full-chain closed loop: Phosphorus source + Iron source + Precursor + Self-production of cathode, possessing a low-cost energy base; products cover conventional power LFP + high-end energy storage materials; deeply bonded with top battery leaders at home and abroad, with sufficient long-term contract orders. In the future, 5-6 leading players in the industry will divide up more than 70% of the market share, and the Matthew effect will continue to intensify.

The second tier: specialized enterprises focusing on specific technologies (comparable to RENB and XMT New Energy)

They do not participate in the low-end production capacity competition. Instead, they focus on the high-end LFP sector, deeply engaging in long-cycle energy storage cathodes and high-density passenger vehicle materials. They build barriers through process and product consistency, and focus on niche markets to earn stable technical premiums, avoiding nationwide cost consolidation.

The third tier: Regional supporting manufacturers (mid-sized and small enterprises in the third and fourth tiers)

Relying on the local phosphorus chemical and titanium dioxide powder industrial clusters, they process the by-products locally and only retain a small amount of production capacity to serve the regional battery supporting projects. They strictly control capital expenditures. Once the industry price war intensifies, the production capacity without cost advantages will have no choice but to shut down or be acquired.

In summary: Extracting the winning principles for lithium iron phosphate enterprises from the rise and fall of ternary materials

The two-round cycle of ternary cathode materials has verified the eternal competition logic of cathode materials:

1. In the short term, compete for customers and orders: Long-term contracts and major customers determine the utilization rate of production capacity;

2. In the medium term, compete on the cost of the entire supply chain: Self-production of precursors + upstream resource integration + low-cost energy build a moat. Pure contract manufacturers will definitely be eliminated;

3. In the long term, compete on the ability of technology iteration: Product stratification to avoid homogenization and internal competition, layout the second growth curve, prevent a single line from being replaced by technology.

Currently, the lithium iron phosphate-LFP industry is experiencing a repeat of the capacity overcapacity and reshuffling period that occurred in the Ternary battery industry in 2019: low-end production capacity is undergoing an endless internal competition, and the profits of ordinary generic products have vanished. For enterprises to survive, they must abandon the extensive expansion model of "competing on scale and capacity": they need to bind with high-quality major customers at the lower level, connect with the phosphorus, iron, and lithium raw materials and precursor links at the upper level, and horizontally build a product matrix of "conventional LFP + high-end energy storage materials + high-end power materials", safeguarding cash flow and strictly controlling leverage, ultimately transforming from a bulk raw material producer to a new material enterprise with refined chemical process barriers.

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