Under the policy tailwind, the new energy vehicle industry is developing rapidly. The output of lithium iron phosphate, the main cathode material for power lithium batteries, also hit a new high in 2022, with a year-on-year increase of over 160%. However, lithium iron phosphate seems to be gradually sliding towards overcapacity, and some institutions predict that lithium iron phosphate will face the risk of overcapacity in 2023.

　　 Strong demand stimulates expansion

　　According to statistics from the China Association of Automobile Manufacturers, in 2022, the production and sales of new energy vehicles reached 7.058 million and 6.887 million respectively, with year-on-year growth of 96.9% and 93.4% respectively.

　　Driven by the market, the production capacity of the raw material supply side is accelerating its expansion. On February 1, according to the official WeChat account of the Lithium Branch of the China Nonferrous Metals Industry Association, the output of China's lithium-ion battery cathode materials in 2022 is as follows: ternary cathode material output 656,000 tons, a year-on-year increase of about 48.8%; lithium iron phosphate output 1.196 million tons, a year-on-year increase of about 160.6%; lithium cobaltate output 78,000 tons, a year-on-year decrease of about 22.8%; lithium manganate output 87,000 tons, a year-on-year decrease of about 21.6%.

　　"The rapid growth in lithium iron phosphate material production capacity is a response to market demand." Wu Wei, assistant professor at the China Energy Policy Research Institute of Xiamen University, told Beijing Business Today that due to the rapid growth in new energy vehicle sales last year, downstream demand growth has led to a significant increase in the prices of the entire lithium battery materials, so upstream raw material manufacturers have significantly increased production capacity.

　　On the other hand, lithium iron phosphate currently has advantages over ternary materials, which are also major cathode materials. Cathode materials account for the highest proportion of the cost of lithium battery materials, directly affecting the performance and overall cost of the battery. Lithium iron phosphate is cheap, but its energy density is a shortcoming that is difficult to make up for. The installed capacity of ternary batteries once exceeded that of lithium iron phosphate.

　　However, due to the higher cost and safety defects of ternary batteries, the competitive landscape has reversed again. With the advent of BYD's blade battery, performance has been significantly improved, and lithium iron phosphate production once again surpassed ternary batteries in May 2021.

　　"Compared with lithium iron phosphate, ternary materials are definitely more expensive, and the production process requires cobalt, which is mostly imported from Congo. The global production capacity is limited by the mining process. For various reasons, the growth of ternary materials is limited, and lithium iron phosphate should still be the mainstream technological route in the future." said Wu Wei.

　　Unlike cobalt in ternary materials, which needs to be imported from abroad, China has abundant reserves of lithium ore and phosphate ore needed for lithium iron phosphate production. China is the world's largest producer and second largest reserve holder of phosphate rock, and China's lithium reserves rank fifth in the world, relatively abundant, accounting for 7% of the world's reserves.

　　Low technical barriers and short expansion cycle

　　While the output of lithium iron phosphate is growing rapidly, the future risk of overcapacity has attracted widespread attention. According to Dongwu Securities' forecast, in 2023, with the release of production capacity by major companies, the overall supply of lithium iron phosphate nationwide will reach 2.371 million tons. However, the demand is only 1.846 million tons, resulting in a surplus of 525,000 tons.

　　According to incomplete statistics from Battery China, the announced expansion scale of lithium iron phosphate from various manufacturers plus existing production capacity has exceeded 5 million tons, and the planned production capacity is significantly higher than the demand.

　　Why is it easy for lithium iron phosphate production capacity to become excessive? This is mainly because the production technology of lithium iron phosphate is simple and the threshold is low. The expansion cycle of lithium iron phosphate is only 6-12 months, and there is serious homogeneity. In addition to veteran players such as Defang Nano and Hunan Yulong, companies involved in lithium iron phosphate also include titanium dioxide and phosphate chemical companies, even coal chemical and petrochemical companies, and power battery and lithium resource companies.

　　Wu Qi, executive dean of Wuxi Institute of Digital Economy, told Beijing Business Today that lithium iron phosphate may experience oversupply and overcapacity in 2023, "success and failure both lie in new energy vehicles". On the supply side, in recent years, driven by the new energy vehicle market, the production capacity of lithium iron phosphate has grown rapidly. However, due to the low technical barriers and short expansion cycle of lithium iron phosphate, the planned production capacity of lithium iron phosphate nationwide has exceeded 21 million tons.

　　"On the demand side, in 2023, with the withdrawal of national subsidies and the decline in oil prices, the new energy vehicle market will enter an adjustment period, and the sales growth rate may slow down. Moreover, lithium iron phosphate, which has relatively low energy density, will face pressure from ternary cathodes, leading to a slowdown in demand." said Wu Qi.

　　However, some believe that it may be too early to talk about overcapacity, so policy intervention is not yet needed. "Currently, the overall demand in the new energy vehicle market is still very strong, and the economic benefits of new energy vehicles are becoming increasingly apparent, and the market penetration rate is expected to continue to improve. In addition to power batteries, energy storage batteries also grew very rapidly in 2022, especially the energy storage market represented by the United States and China, which has grown very fast, and the demand for the energy storage market will also be very large. At the same time, after the European energy crisis, distributed photovoltaics are accelerating their development around the world, which also requires the support of lithium iron phosphate materials." said Wu Wei.

　　Accelerating new energy substitution

　　Once lithium iron phosphate production capacity becomes excessive, how will relevant companies cope? Xingfa Chemical Group stated that the impact of future overcapacity on the company will depend on factors such as the company's cost of manufacturing lithium iron phosphate, market prices, and product scale.

　　Wu Qi believes that to cope with overcapacity, technological innovation should be accelerated to improve the energy density of batteries, avoid low-end and homogeneous competition, and accelerate the commercial application in the energy storage market to create a diversified business structure including power and energy storage.

　　Overcapacity will put pressure on companies to reduce costs and increase volume. To reduce costs and increase efficiency, cathode material companies are expanding upstream and downstream. Taking Defang Nano as an example, the company plans to invest 800 million yuan to build a 200,000-ton annual production capacity of lithium iron phosphate precursor project in Qujing, Yunnan. On the downstream side, it cooperates with CATL and EVE Energy.

　　Hunan Yulong, Hubei Wanrun, and Anda Technology have also announced their plans to expand into the lithium iron phosphate business. In addition, cross-border chemical companies are expected to leverage their integrated advantages.

　　Wu Wei said that if overcapacity occurs in the future, it may actually become an opportunity to accelerate the replacement of traditional fuel vehicles by new energy vehicles.

　　In the future, the replacement of new energy vehicles will further accelerate. "In the past two years, some models of new energy vehicles have seen price increases, and the reason is related to the increase in the price of upstream battery materials. If the production capacity of lithium batteries and lithium iron phosphate is moderately excessive, it can lead to a decline in raw material prices, thereby reducing the price of new energy vehicles, which is conducive to promoting the replacement of traditional fuel vehicles by new energy vehicles." said Wu Wei.