China's battery boom is being propped up with debt
The fragile foundations of the global energy transition
China leads the world in clean energy technology and especially battery production. Its largest battery maker, CATL, is among the most profitable clean-energy companies globally, reporting nearly $7 billion in net profit so far this year.
But that success rests on a midstream supply chain of battery material producers who mostly do not make money. Many rely on bank loans and rolling debt to survive or issue new equity to invest in ever more production capacity.
Will rising battery and, in particular, energy-storage demand lift all boats? Or will Beijing allow financial stress to force consolidation? The answer will be a key test of Xi Jinping’s resolve to tackle “involution-style vicious competition” in China.
In this piece, I look at the quiet debt crisis brewing inside China’s battery supply chain, focusing on LFP cathode producers and why it matters far beyond China.
Because profit margins have been compressed to near zero, or turned negative, by years of overcapacity, many of these companies are no longer generating enough cash to meaningfully pay down their debts. Instead, they are forced to rely on a constant cycle of new borrowing or equity fundraising simply to keep operating and service their existing liabilities. Jiangsu Lopal, the world’s fourth-largest LFP cathode producer, now has a gearing ratio — total debt divided by equity — of 363%.
Despite this, the sector continues to expand capacity. Chinese cathode producers are building new projects not only at home, but increasingly overseas, from Malaysia to Indonesia, exporting China’s debt-fuelled overcapacity and making it even harder for foreign competitors to gain a foothold.
At the same time, these companies must keep raising capital to invest in the latest fourth-generation LFP cathode technologies that enable faster charging and higher performance, further locking them into a cycle of leverage in an industry that is no longer generating healthy returns.
The epicentre of the debt crisis
The focus here is lithium iron phosphate (LFP) cathode materials, which make up around 80% of China’s battery market. LFP batteries are used in most mass-market electric vehicles as well as large grid-scale energy-storage systems.
Despite their dominant position in global LFP cathode supply, China’s largest producers generate little operating cash relative to their debt loads, leaving them reliant on refinancing rather than repayment.
A reminder: a lithium-ion battery is made up of a cathode and an anode — the positive and negative electrodes. In most LFP batteries, the cathode is made from lithium iron phosphate, while the anode is made from graphite.
According to one Chinese media report, the combined profit of ten listed cathode material producers was just RMB 552 million in the first three quarters of this year, with six reporting losses. Over the same period, CATL alone earned 88 times that amount.
China’s dominance
All four of the world’s largest LFP cathode producers are Chinese. Hunan Yuneng, the market leader, is partly owned by BYD and CATL and appears to be in the strongest financial position, remaining profitable. The other three have seen rising debt levels alongside weak margins and operating cash flow, as shown in the chart below.
