Citigroup: The global battery supply chain may be entering a new downturn, but there is no need to be overly pessimistic.

The global battery supply chain is entering its second round of capacity expansion, with slowing demand growth coupled with supply catching up, exhibiting characteristics of a traditional "downturn cycle." However, Citi believes that compared to the previous cycle (2022-2024), the current supply and demand situation is more balanced, and the risk of a price war is significantly reduced. Market pessimism regarding this downturn cycle is excessive, and overall utilization rates are expected to remain stable.

A report released by Citigroup on October 7, 2026, pointed out that after a strong rebound in demand in 2025, which led to a comprehensive upward revision of profit forecasts across the industry, the pace of capacity expansion is accelerating. Bottom-up capacity model calculations predict that global battery capacity growth will reach 46% and 24% in 2026 and 2027, respectively, while demand growth will slow to approximately 26% and 20% between 2027 and 2028. Analysts updated the industry priority order to: battery assembly > battery components > LFP cathode > separator > lithium resources > anode > electrolyte > NCM cathode.

Citigroup believes that this downturn cycle differs from the 2022-2024 cycle in three key ways: First, battery and lithium prices have not experienced a significant overshoot in this cycle, and the foundation of end-user demand remains relatively stable; second, while battery manufacturers are actively expanding production, the expansion of material suppliers is significantly more restrained, resulting in overall stable capacity utilization across the entire chain; and third, Chinese policies have begun to curb the expansion of excess capacity, which is beneficial to the long-term improvement of the supply chain industry landscape.

Based on the above assessment, Citigroup clearly stated that it is not advisable to continue the strategy of "overweighting battery devices and underweighting the supply chain" used in the previous downturn cycle.

Demand growth is slowing, but the market has over-priced in pessimistic scenarios.

Citigroup has raised its forecast for global battery demand. Global battery demand is projected to grow by 46% year-on-year in 2025 and by approximately 39% in 2026, reaching about 2,927 GWh, both exceeding previous optimistic expectations. Looking ahead to 2027-2028, as the penetration rate of electric vehicles in China approaches 60%, coupled with the high base effect of global energy storage demand growth, demand growth is expected to gradually decline to 26% and 20% respectively.

Energy storage batteries (ESS) are the core engine of this round of demand growth.

Citigroup projects global ESS battery demand to reach 1030 GWh, 1390 GWh, and 1700 GWh in 2026, 2027, and 2028, respectively, representing growth rates of 66%, 35%, and 22%. It further projects global ESS demand to reach approximately 2210 GWh by 2030, with a CAGR of approximately 29% from 2025 to 2030. While some market observers believe Chinese ESS demand will peak this year, Citigroup explicitly disagrees—its forecast indicates that Chinese ESS demand will still grow moderately by approximately 15% in 2027, with global net increases remaining around 300 GWh annually.

Regarding electric vehicles, Citigroup projects that global EV battery demand will reach 1,713 GWh in 2026, a year-on-year increase of 27%, with China's EV wholesale volume at approximately 16.76 million units, representing a penetration rate of about 59%; while US sales will decline by 26% year-on-year to approximately 1.09 million units, representing a penetration rate of about 7%. Global EV battery demand is expected to increase to 2,069 GWh in 2027.

Supply is catching up rapidly, but utilization rates are expected to remain stable.

According to Citi's model calculations, global battery production capacity will reach approximately 5266 GWh by the end of 2026, representing a year-on-year increase of about 45%. China will contribute approximately 4400 GWh, while the US, Europe, and other regions will add approximately 189 GWh, 158 GWh, and 36 GWh respectively. By the end of 2027, capacity is expected to further expand to approximately 6534 GWh.

However, compared to the previous capacity expansion cycle, the pace of capacity expansion in the materials sector this time is significantly more conservative. Citi believes that three factors have constrained the expansion impulse in the materials sector: first, the profits of materials companies have remained weak for the past few years; second, there is still room for improvement in the utilization rate of existing capacity; and third, the painful downturn from 2022 to 2024 has taught industry participants a lesson, leading to more rational behavior.

According to Citigroup's estimates, the effective capacity utilization rate of LFP cathodes, anodes, and separators will remain at around 70% in 2027. This means that the supply and demand of major materials will be largely balanced, and battery manufacturers will find it difficult to drastically compress material prices as they did in the previous cycle. Citigroup therefore predicts that overall supply chain prices and profitability will remain relatively stable, and the destructive price wars of the previous cycle will not occur.

Three key differences in this cycle

The growth rates on both the supply and demand sides are significantly slower than in the previous round.

Demand growth exceeded 100% in 2021, with the highest growth rate expected in this round reaching approximately 46% in 2025, and the absolute increase being even larger—net battery demand is projected to increase by approximately 635 GWh in 2025, far exceeding the approximately 210 GWh in 2021. On the supply side, growth is also becoming more moderate. Global battery capacity growth was approximately 66% in 2021, and is projected to reach approximately 46% in 2026, decreasing to approximately 24% in 2027, and further narrowing to approximately 15% in 2028.

China's anti-involution policy provides structural support.

China's policies have clearly begun to restrict the expansion of excess capacity, which will help leading companies maintain high utilization rates while making it increasingly difficult for smaller companies to add new capacity. Citigroup points out that the specific effects of the anti-involution policies remain uncertain, but the overall policy orientation will be more stringent, which will benefit structural improvements in the industry in the long run.

LFP battery technology is maturing, and products are gradually becoming commercialized.

Citigroup analysis points out that over the past five years, the energy density of LFP cells in China has seen almost no improvement at the cell level, with improvements at the battery pack level mainly relying on advancements in packaging design. As the energy density of LFP cells approaches its physical limits, technological improvements are shifting towards dimensions such as fast charging and all-weather performance, and the quality gap between first- and second-tier battery companies is gradually narrowing.

Citigroup believes that without major technological breakthroughs, the homogenization trend of LFP battery products will continue, which will benefit second-tier battery companies in acquiring customers. CATL's market share in China (excluding BYD) has slightly decreased from 66% in 2022 to 59% in the first half of 2026, better than market expectations, but the trend of market share ceding will continue.

China's energy storage market: Shifting from policy-driven to return-driven.

China's energy storage market is undergoing a period of adjustment. According to data from the China Energy Storage Alliance (CNESA), China's new energy storage installations in the first half of 2026 decreased by approximately 18% year-on-year, to approximately 21.81GW/58.60GWh. This was mainly due to the cancellation of mandatory energy storage requirements under Document No. 136 issued in February 2025, coupled with the year-on-year pressure from a high base of new photovoltaic and wind power installations. However, in July and August, the monthly year-on-year growth rate of installed capacity recovered to approximately 75% and 20%, respectively.

Citigroup predicts that China's new energy storage capacity will grow by approximately 15.8% year-on-year to 219.4 GWh in 2026, and further increase by approximately 15% to 252.3 GWh in 2027. This growth is mainly due to: firstly, the introduction of capacity pricing compensation mechanisms by many provinces, including Hubei, Jilin, Gansu, Xinjiang, Shanxi, and Qinghai, which have clarified their capacity compensation standards; and secondly, the growth rate of renewable energy installations is expected to rebound in 2027, assuming that the combined installed capacity of photovoltaic and wind power reaches 300 GW.

It is worth noting that the profitability of energy storage projects is facing multiple pressures. In September 2026, the peak-valley price difference narrowed in 21 of the 31 provincial power grids compared to the same period last year, reducing market arbitrage opportunities. Meanwhile, grid system operating costs rose sharply, with the average system operating cost reaching RMB 0.068/kWh in the first three quarters of 2026, an increase of approximately 93% year-on-year. Some projects that had already completed bidding have postponed construction due to declining revenue projections. Citi believes that developers remain optimistic about medium-term opportunities and are awaiting policy clarification regarding the sustainability of the capacity compensation mechanism.

European energy storage market: Rapid construction phase begins

The European Energy Storage System (BESS) is entering a period of large-scale construction.

Citigroup predicts that Europe's BESS (Brain Storage and Energy Storage) installed capacity will expand from approximately 45GW/86GWh in 2025 to approximately 180GW/405GWh in 2030, representing a battery output increase of over 370% during this period. The core driving forces are the continued increase in electricity market volatility due to the rapid increase in the proportion of wind and solar power generation, and policy support for various countries' energy storage installation targets.

Currently, BESS projects in Europe are quite economically attractive, with battery pack costs accounting for approximately 55% of project capital expenditures. Citi estimates that the IRR of utility-scale BESS projects can reach the mid-range of more than ten percentage points, with some projects exceeding 20%.

Citigroup notes that as the ancillary services market approaches saturation, the return on investment may decline by the end of this decade, but the long-term project IRR is still expected to remain above 10%. Grid connection queues in markets such as Germany and Italy are currently the most significant bottleneck.

In terms of regional competition, Citigroup predicts that by 2028, Chinese battery companies' market share in Europe will expand from approximately 10% in 2022 to approximately 60%, while the share of South Korean companies will narrow from approximately 80% to approximately 28%. In the US market, the market structure is independent of the Chinese system, and South Korean companies are expected to maintain a market share of approximately 60%.

Differentiation across supply chain segments: cathode materials and separators relatively dominant.

LFP cathode: Citi expects the effective capacity utilization rate of LFP cathode to remain at approximately 72% in 2027, slightly lower than 73% in 2026. Processing fees have improved with the recovery in demand, but the pressure of accelerated capacity expansion in 2026-2027 will limit further improvement. NCM cathode utilization rate remains below 50%, and processing fees remain under pressure.

Separator: Supply-side capacity expansion is significantly slower than in the previous cycle, with capacity growth expected to be around 17-18% in 2026-2027, lower than demand growth, which is conducive to a recovery in utilization rates. Demand for wet-process separators is stronger than that for dry-process separators, and some battery manufacturers are shifting their materials from dry-process to wet-process. Citi expects separator prices to gradually find support, but a significant rebound is unlikely.

Negative electrode: Negative electrode capacity expansion has lagged behind in this cycle. Although capacity utilization has rebounded, overall supply remains excessive. The US-Iran conflict has led to increased costs of raw materials such as petroleum coke and needle coke, which has to some extent offset the profit improvement brought about by economies of scale.

Electrolytes: Citi believes the electrolyte market has entered a phase of decline from its peak. With new capacity continuing to be released and the trend towards product commercialization intensifying, profit margins may gradually come under pressure in the coming quarters.

Reshaping the global competitive landscape: China accelerates its penetration into Europe, while South Korea dominates the United States.

In the US market, South Korean battery companies are expected to maintain a market share of about 60% until 2030, while Chinese companies have a relatively limited market presence due to policy restrictions.

LG Energy Solution (LGES), with its accumulated LFP energy storage capacity of over 50GWh across five US sites, has taken the lead in securing grid-side energy storage and data center power demand. It has also received NVIDIA's "DSX-Ready" energy storage system supplier certification (the other two certified companies are Tesla and Hitachi Energy), and is expected to benefit from increased order visibility due to its first-mover advantage. LGES's effective capture rate of the US Advanced Manufacturing Tax Credit (AMPC) in the energy storage sector is approximately 50%-55%, significantly higher than the approximately 25% of the GM joint venture project. Profitability momentum is expected to further improve in the second half of 2026 and into 2027.

In the European market, Chinese battery companies are expanding rapidly. CATL's capacity layout in Europe (including the 100GWh expansion plan in Hungary) continues to advance, and companies such as EVE, CALB and Guoxuan are also accelerating their layout. Their combined market share is expected to reach about 60% by 2028.

Panasonic has established a unique defensive growth driver by leveraging its approximately 80% market share in AI data center backup power (BBU) products. Citigroup projects that its BBU revenue will grow from approximately ¥322 billion in fiscal year 2026 to approximately ¥1 trillion in fiscal year 2029, corresponding to an increase in its contribution to the group's adjusted operating profit from approximately 15% to approximately 19%.

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