Inventory Digestion Continues, So Why Has the Lithium Price Halved First?
On October 19, the main lithium carbonate contract on the Guangzhou Futures Exchange hit an intraday low of CNY 94,860 per ton, reaching a new year-to-date low, and closed at CNY 99,382 per ton, up 1.49% from the previous trading day. On October 20, it closed at CNY 99,755 per ton. Although it rebounded slightly, it still failed to break through the CNY 100,000 mark.
Counting from the high of CNY 209,800 per ton in mid-May, the maximum drop in lithium carbonate futures prices exceeded 50% within five months.
The spot market faced synchronous pressure. Data shows that on October 19, the mid-price of battery-grade lithium carbonate in the morning session was reported at CNY 102,750 per ton, and the spot index in the afternoon session had fallen back to CNY 101,220 per ton.
There is an extremely abnormal phenomenon in this round of decline: inventory digestion is still ongoing, production scheduling for cathode materials in the fourth quarter continues to grow, and the spot market has not seen severe oversupply, yet futures prices have been plunging at a pace far exceeding the deterioration of fundamentals.
According to SMM statistics, as of October 8, the social inventory of lithium carbonate stood at 139,500 tons, and the destocking trend continued around the National Day holiday. Meanwhile, the production and scheduling of lithium iron phosphate (LFP) maintained month-on-month growth in September and October, and the sample scheduling of battery cells in October also continued to rise month-on-month.
The huge divergence between reality and the market points to an increasingly clear judgment: this round of lithium carbonate price drop is not a "reality-driven sell-off" but a typical "expectation-driven sell-off"—the market seems to be rapidly switching from pricing in the "tight supply-demand balance" of 2026 to pricing in the "renewed supply oversupply" of 2027.
In other words, it is not that lithium is not cheap enough today, but that the market believes there will be more lithium next year.
Supply Side: Resonance of Domestic Resumption and Overseas Expansion
The expected changes on the supply side are the most core driving variables for this round of decline. One of the important logics supporting lithium prices over the past few months has been supply disruptions at the mine end—the suspension of lepidolite production in Yichun, Jiangxi, and unstable shipments from overseas mines.
However, entering the fourth quarter, this logic is being completely reversed.
On October 8, the environmental impact assessment for the Jianxiawo lithium mine under CATL's Yichun Times re-entered the stage of public notice for proposed acceptance. As the world's largest single lepidolite mine, full production at Jianxiawo corresponds to a supply capacity of approximately 100,000 tons of LCE per year.
The signal conveyed by this news is not "an immediate addition of 100,000 tons of lithium carbonate today," but rather that a large block of low-cost capacity previously removed from the supply curve by the market may return in 2027.
Shortly after, Jiangte Motor announced that the safety facility design for the 3 million tons/year mining project of the Qiankeng lithium mine has passed the review, corresponding to a theoretical annual production of approximately 15,000 tons of LCE.
The overall return of supply expectations for Jiangxi lepidolite has an even greater impact on lithium prices than short-term actual production. The market is beginning to revise its previous judgment: Jiangxi lepidolite has not permanently exited, but is merely re-entering the market after a round of environmental protection and compliance rectification. Commodity prices are never priced based on today's supply and demand, but on the direction of marginal changes.
If there were only domestic resumption of production, lithium prices might not have fallen so sharply. The real problem is that domestic resumption and overseas expansion are happening simultaneously.
Shipments of lithium concentrate from Zimbabwe are gradually recovering, production resumption permits for some lithium mining projects in Brazil have been implemented, and mines invested in during the previous high-price period in Australia are also successively entering the release window.
This is actually the "sequela" left by the previous round of CNY 500,000 lithium prices—after the surge in lithium carbonate prices from 2021 to 2022, global capital frantically invested in lithium resource development, but mine construction has a lag cycle of 2 to 5 years.
Much of the supply increase seen today is the seed sown by high prices in 2022, which is being harvested intensively from 2026 to 2027.
This is also the most classic rule of the resource commodity cycle: high prices stimulate investment, massive capacity expansion is released with a lag, ultimately leading to oversupply and price declines.
According to calculations by CITIC Securities, the global lithium market may see a renewed surplus of approximately 38,000 tons of LCE in 2027. The Global Metals team at Goldman Sachs is even more pessimistic, predicting that the global lithium market will sharply shift from a supply shortage of 404,000 tons in 2026 to a supply surplus of 444,000 tons in 2028.
Demand Side: Not a Decline, but Insufficient Growth Rate
Corresponding to the reversal of expectations on the supply side, changes on the demand side are also being repriced by the market. But there is a point here that is very easily misunderstood: it is not that NEVs (New Energy Vehicles) or energy storage are suddenly no longer being bought; in fact, the real-world data is still not bad.
Data from the China Passenger Car Association shows that NEV sales in September reached 1.5775 million units, a year-on-year increase of 16.8%; data from the China Automotive Power Battery Innovation Alliance shows that the installed capacity of power batteries in September was 87.2 GWh, a year-on-year increase of 14.7%.
Multiple institutions predict that the absolute values of LFP and battery cell production scheduling in October remain at high levels, but the month-on-month growth rate has already shown signs of marginal slowdown.
Then, why has the lithium price fallen first when demand has not declined?
The problem is that the market was originally trading the story of "super demand." The reason lithium prices surged from low levels to CNY 200,000 in the first half of the year is that the market was simultaneously pricing in multiple narratives: the explosion of energy storage, high growth in NEVs, solid-state battery expectations, lithium mine suspensions, and anti-involution.
However, after the third quarter, the market began to ask a more sober question: Can such a high growth rate be maintained in 2027?
What the commodity market fears most has never been a decline in demand, but rather demand still growing at a rate lower than previously expected.
Domestic NEVs have entered a stage of high penetration, with NEVs accounting for over 60% of new car sales, indicating that the industry is gradually shifting from the "high-speed growth stage of replacing fuel vehicles" to the "stock competition stage after high penetration."
It is easy to achieve high-speed growth when the penetration rate rises from 20% to 40%, but as it advances from 60% to 70% and 80%, the growth curve will naturally flatten. The market does not think that NEVs will stop growing, but rather that power batteries may gradually enter a stage of stable growth from being the primary growth driver of demand in the past, and the valuation center of lithium prices will naturally decline accordingly.
The energy storage sector, on the other hand, presents a more complex picture. In 2026, energy storage actually took the baton from power batteries, becoming one of the largest marginal increments in lithium demand. But energy storage has a natural characteristic: it is highly sensitive to battery prices.
Energy storage projects are essentially businesses that calculate IRR (Internal Rate of Return), forming a unique negative feedback loop—when lithium carbonate prices fall, battery cell costs drop, energy storage system costs decrease, project IRR improves, installation demand grows, which in turn drives LFP demand, providing support for lithium carbonate prices.
This is also why it is difficult for lithium carbonate to fall indefinitely: the lower the lithium price, the better the economics of energy storage, which in turn makes it easier to create new lithium demand.
However, the market's concern is that current energy storage installations may have certain characteristics of advanced construction. The peak-valley price spread in some regions is narrowing, putting pressure on project returns. Multiple institutions judge that, after the transmission of the bullwhip effect along the industrial chain, the growth rate of energy storage production scheduling in 2027 is expected to fall back from over 60% to within 40%.
The adjustment of export tax rebates has further exacerbated the mismatch in demand timing—the export tax rebate rate for battery products was reduced from 9% to 6% in April and will be completely canceled starting January 1, 2027, prompting enterprises to arrange production and exports in advance in the second half of the year, forming a rush-to-produce effect.
Front-loading demand does not equal demand increasing out of thin air; a brief vacuum in orders and production scheduling may occur in early 2027.
Catalysts: Inventory Statistical Calibration Adjustment and Futures Main Contract Switch
In addition to the marginal changes on both the supply and demand sides, there are two special catalysts in this round of market movement that have accelerated the switch in pricing logic.
The first is that SMM adjusted the statistical calibration for lithium carbonate inventory in early September. The new version of the statistics includes traders, battery cell manufacturers, and other downstream segments in the sample, while also adding some new sources of lithium. As a result, the inventory data increased by approximately 90,000 to 100,000 tons at once, and the social inventory under the new calibration reached 169,300 tons.
Although this is merely a change in statistical calibration and does not mean that an additional 100,000 tons of lithium were suddenly produced overnight, the psychological impact on the futures market is enormous.
It has changed the market's perception of a fundamental question: How much lithium is actually hidden in the industrial chain? The original logic was "inventory continues to decline, and lithium is getting tighter and tighter," which suddenly turned into "it turns out there is still so much hidden inventory in the industrial chain," severely weakening the bulls' tight balance narrative.
The second catalyst is the switch of the main futures contract to LC2701. The market is now mainly trading contracts for delivery in early 2027, which means that the market pricing is no longer about whether the spot market is tight in October 2026, but whether inventory will accumulate in the first quarter of 2027.
Looking forward from the perspective of the 2701 contract, on the supply side, there are multiple increments such as the resumption of Jianxiawo, the recovery of Jiangxi lepidolite, the increase in African lithium mines, the expansion of South American salt lakes, and the release of supply from Australian mines;
On the demand side, there are pressures such as the declining growth rate of NEVs, the seasonal off-season in the first quarter after the year-end rush, and the uncertainty in energy storage growth. The market naturally reaches a conclusion: the first quarter of 2027 is highly likely to shift from inventory digestion to inventory accumulation.
This forms a very typical dual pricing system: the spot market trades the real supply and demand of the fourth quarter of 2026, while the futures market trades the expected balance of the first quarter of 2027.
Guotai Junan Futures pointed out that there may still be a gap in real supply and demand in October, but if consumption weakens after November, inventory accumulation may resume as early as December. As a forward pricing tool, futures have chosen to side with expectations.
Negative Feedback of Capital and Cost Line Gaming
All the above are fundamental factors, but why could it plunge from around CNY 150,000 to over CNY 90,000 in just over a month? Fundamentals alone cannot explain this speed.
The market trend since September has roughly experienced the following transmission chain: supply expectations loosen, longs reduce positions and exit, prices break below key support levels, trend funds short accordingly, the basis widens, traders reduce inventory, downstream delays purchases, spot transactions weaken, further reinforcing short expectations.
In particular, LC2701 fell 11.79% in a single day on October 12, and subsequently continued to show obvious characteristics of rising open interest alongside falling prices.
The latter half of the market trend has evolved from being driven by fundamentals to a resonance of fundamentals overlaid with trend trading and emotional stampede.
Some institutions calculate that the marginal full cost of lithium carbonate corresponding to 2027 is approximately CNY 85,000 to CNY 90,000 per ton. Using this as a reference: when lithium prices are above CNY 100,000, most lithium salt production projects still retain profit margins, and the motivation for the supply side to actively reduce production is insufficient.
When prices fall to the CNY 80,000 to CNY 90,000 range, routes such as smelting with purchased ores, high-cost lithium extraction from lepidolite, and African ores combined with domestic smelting will gradually approach the cost line; if prices further plunge below CNY 70,000 to CNY 80,000, more and more high-cost capacity will be forced to consider production cuts.
The most important underlying mechanism of the commodity cycle is that prices ultimately do not fall until everyone loses money, but rather fall until a sufficient amount of marginal capacity exits. What truly determines the bottom of this round is not the round number threshold of "90,000" or "80,000," but at what price point a sufficient scale of high-cost lithium resources will actually stop.
Three Inflection Points Determine the Bottom Position
If an industry definition is given to this round of lithium carbonate price decline, it can be summarized as: this is not a demand collapse, but a valuation reconstruction driven by expectations of long-term supply oversupply.
CNY 200,000 prices in "not enough lithium," CNY 150,000 prices in "tight supply-demand balance," CNY 100,000 prices in "renewed oversupply in 2027," and below CNY 90,000 prices in "renewed clearance of high-cost capacity." Behind these four prices correspond four completely different industrial logics.
What is truly worth paying attention to now is not "how much more can lithium carbonate fall," but several key inflection points.
When exactly will the new supply from Jianxiawo and others be truly released—approval expectations and actually forming 100,000 tons of production are two completely different things.
Will it really shift from inventory digestion to inventory accumulation from the fourth quarter of 2026 to the first quarter of 2027—if inventory digestion continues in Q1 2027, then some of the pessimistic expectations currently priced in by futures may be excessive.
How much high-cost lithium resources will actually reduce production around CNY 80,000 to CNY 90,000—this determines the position of the next round of supply clearance.
Among them, the inventory inflection point is the most critical, because the biggest contradiction in the market right now lies precisely in: the market is already pricing in oversupply, but the industrial reality is still in inventory digestion. Data as of mid-October still shows declining inventory, relatively strong demand in the fourth quarter, and a supply release rate lower than previously expected.
Industry insiders analyze that if the combination of "futures at CNY 90,000 plus spot market still in inventory digestion plus high LFP production scheduling" occurs in the next month or two, then this round of market trend is highly likely to experience obvious expectation overshoot.
Conversely, if signals of declining battery cell production scheduling, increased lithium carbonate production, clear resumption at Jianxiawo, and inventory turning upward appear from November to December, then CNY 80,000 to CNY 90,000 will no longer be just an emotional price, but may become the real price center for 2027.