The lithium battery industry is currently experiencing a tumultuous period as profitability fails to meet expectations and inventory depreciation becomes a pressing concernAs of January 21, 2024, a recent report revealed that 25 companies within the lithium battery index sector have published their performance forecasts, and alarmingly, only three have projected an increase in profitsIn contrast, a staggering 14 companies anticipate losses, while an additional seven expect a drop in their earnings.

In light of these developments, at least nine companies are planning to recognize asset impairments, encompassing losses related to inventories, construction in progress, accounts receivable, and credit impairments, all of which are anticipated to have a significant adverse impact on their operational performance for the upcoming year.

Companies across the sector have universally cited the rapid evolution of the new energy vehicle (NEV) market as a major factor driving the surge in demand for lithium battery materials

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However, this explosive growth has led to an abrupt expansion of production capacities, intensifying competition within the industryThe result of this heightened rivalry has been a dramatic drop in sales prices, causing considerable strain on companies' profit margins.

The intensifying competition has led many lithium battery firms to face the dual pressure of shrinking profit margins and potential asset impairments that could exacerbate balance sheet lossesSeveral listed companies within the lithium battery sector have recently issued announcements regarding asset impairment, shedding light on this trendIndustry leader Tianqi Lithium Industries (002466.SZ) is a case in point; while preparing its annual report for 2024, the company conducted an impairment test on its hydroxide lithium project in Australia, which accounts for a total of 48,000 tonsOn January 19, the company released a risk warning, stating that if they determine to recognize asset impairment for this project, the resulting losses will significantly affect their operational results for 2024.

Similarly, Jiangte Electric (002176.SZ) disclosed its asset impairment announcement, revealing a total impairment provision of 188 million CNY for 2024. This amount includes 64 million CNY for construction in progress impairment, 47 million CNY for inventory depreciation, and 37 million CNY for bad debt provision for accounts receivable, alongside 5 million CNY and 35 million CNY for impairment of fixed assets and intangible assets, respectively

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These measures underscore the negative impact on the company's overall performance.

Meanwhile, Mengduli (301487.SZ) has forecasted a net loss ranging from 65 million to 80 million CNYIn this forecast, the company noted that its downstream customers are facing weakened credit capabilities due to fierce industry competition, leading to prolonged overdue accounts receivableThis has prompted the company to account for customer credit risk and potential recoverable amounts in its bad debt provisions, which has further increased credit impairment losses when compared to previous figures.

China National Chemical Corporation (600500.SH) has indicated a projected loss of between 2.28 billion CNY and 2.86 billion CNY for 2024, of which long-term asset impairment provisions are estimated to account for around 1.3 billion CNY to 1.9 billion CNYThe firm remarked, "The escalating competition in the industry has sharply curtailed the survival space for non-leading companies

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Inefficient, lower-tier production capacities are gradually being phased outSimultaneously, the output of power batteries is significantly surpassing installations, resulting in an oversupply of power batteries and exacerbated stockpiling, which ignites price wars."

Moreover, several other firms, including Shenzhen Xinxing and Yicheng New Energy, have also released announcements regarding their asset impairment provisions and acknowledged the repercussions of these impairments on their financial standings.

Despite the prevailing struggles, there is a silver lining on the horizon as capacity clearance and industry consolidation may lead to an improved supply-demand landscapeOver recent years, the surge in lithium salt production has prompted a consistent decline in prices; lithium carbonate prices plummeted from approximately 500,000 CNY per ton in early 2023 to as low as around 70,000 CNY per ton, surpassing the cost viability for numerous firms and raising risks of inventory depreciation.

Nonetheless, with the ongoing clearance of excess capacity, the industry is beginning to show signs of stabilization

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According to analysis from Dongfang Securities, "Taking into account the demand from different chains—including power, energy storage, and exports, the lithium battery demand is expected to continue its growth trajectory through 2025." They further noted that although the lithium battery industry has faced a downward trend since the beginning of 2022, it has entered a resurgence since the first quarter of 2024, thanks to the bottoming out of upstream resources, industry consolidation, and improvements in processing fees and product structure—all of which are anticipated to support a continuous cycle of profitability improvement.

Currently, lithium salt prices hover around 70,000 CNY per tonAnalysis from ICBC Credit Suisse Asset Management suggests that, from the supply-side perspective, leading lithium battery companies have entered a new cycle of capacity expansion, while secondary battery manufacturers are gradually recovering from the trough of utilization rates, indicating a potential improvement in the supply-demand dynamics.

From the demand perspective, ICBC Credit Suisse Asset Management highlights that the domestic NEV market is poised for continued growth through 2025. The ongoing "old-for-new" policy and anticipated reductions in tax subsidies for NEVs in 2026 are expected to provide further support for the demand in electric vehicles.

Looking towards the European market, as carbon emission regulations tighten and trade disputes subside, Chinese automakers are likely to accelerate their entry into Europe, creating additional competitive pressure