The global battery supply chain is entering a second round of capacity expansion. Slowing demand growth combined with accelerating supply additions is gradually revealing the hallmarks of a traditional downcycle. But Citigroup, in its latest research report, offers a view that diverges from prevailing market sentiment: this downturn is fundamentally different from the brutal price war of 2022–2024, the supply-demand balance is far more even, and bearish expectations are overpriced.
Citigroup published the report on October 7, 2026. The report notes that after a strong demand rebound in 2025 that drove industry-wide upward earnings revisions, the pace of capacity expansion is now accelerating to catch up. Based on a bottom-up capacity model, global battery capacity growth is projected to reach 46% in 2026 and 24% in 2027, while demand growth is expected to decelerate to roughly 26% and 20% in 2027–2028.
Analysts have accordingly updated the industry priority ranking to: battery cells first, followed by battery components, LFP cathodes, separators, lithium resources, anodes, electrolytes, and finally NCM cathodes.
Three structural differences sharply reduce price-war risk
Citigroup identifies three fundamental differences between this downcycle and the previous one. First, battery and lithium prices did not experience a massive overshoot in this cycle, leaving end-demand on a relatively solid footing. Second, battery-cell makers are expanding aggressively, but materials players are notably more restrained, keeping utilization rates across the chain broadly stable. Third, Chinese policy has begun to curb excess-capacity expansion, which is favorable for long-term improvement in the supply-chain industry structure.
Based on these judgments, Citigroup explicitly states that investors should not simply reuse the previous downcycle playbook of “overweight battery cells, underweight the supply chain.”
Comparing growth rates on the supply and demand sides, the pace of expansion this round is indeed more moderate. Demand growth exceeded 100% in 2021, whereas the peak rate this cycle is around 46% in 2025—though the absolute increment is actually larger: net battery demand additions in 2025 are roughly 635 GWh, far above the approximately 210 GWh in 2021. The supply side is also more rational: global battery capacity grew about 66% in 2021, while this cycle is projected at roughly 46% in 2026, declining to about 24% in 2027 and further narrowing to around 15% in 2028.
The restraint in materials is particularly critical. Citigroup attributes the muted expansion appetite to three factors: materials companies have suffered persistently thin profits over the past several years; existing capacity utilization still has room to rise; and the painful lessons of the previous cycle have made industry participants more rational. By its estimates, effective utilization rates for LFP cathodes, anodes, and separators will hold at around 70% in 2027, meaning supply and demand for major materials are broadly balanced and battery makers will find it difficult to squeeze material prices as aggressively as they did last cycle. Overall supply-chain prices and profitability are expected to remain broadly stable.
Energy storage takes the baton as demand structure undergoes deep evolution
Citigroup has raised its global battery demand forecasts. Global battery demand grew 46% year-on-year in 2025 and is expected to grow about 39% in 2026 to roughly 2,927 GWh, both exceeding previously optimistic expectations. Looking ahead to 2027–2028, as China’s EV penetration approaches the high level of 60% and global energy-storage demand growth enters a high-base phase, demand growth is expected to gradually moderate to 26% and 20%.
Energy storage systems (ESS) are the core growth engine of this demand cycle. Citigroup projects global ESS battery demand of 1,030 GWh, 1,390 GWh, and 1,700 GWh in 2026, 2027, and 2028 respectively, corresponding to growth rates of 66%, 35%, and 22%, with global ESS demand reaching approximately 2,210 GWh by 2030—a compound annual growth rate of about 29% from 2025 to 2030.
Some market participants argue that China’s ESS demand will peak this year. Citigroup explicitly disagrees. Its forecasts show China’s ESS demand still growing moderately by about 15% in 2027, with annual net additions globally holding at around 300 GWh.
On electric vehicles, Citigroup expects global EV battery demand to reach 1,713 GWh in 2026, up 27% year-on-year, with China’s EV wholesale volume at roughly 16.76 million units and penetration at about 59%. U.S. sales are projected to fall 26% year-on-year to approximately 1.09 million units, with penetration at about 7%. Global EV battery demand is expected to rise to 2,069 GWh in 2027.
Capacity-side data are equally noteworthy. According to Citigroup’s model, global battery capacity will reach approximately 5,266 GWh by end-2026, up about 45% year-on-year, with China contributing roughly 4,400 GWh while the U.S., Europe, and other regions add about 189 GWh, 158 GWh, and 36 GWh respectively. Capacity is expected to expand further to around 6,534 GWh by end-2027.
China’s energy storage market is undergoing a period of adjustment. According to data from the China Energy Storage Alliance (CNESA), China’s new-type energy storage installations fell about 18% year-on-year in the first half of 2026 to approximately 21.81 GW/58.60 GWh, mainly because Document No. 136 issued in February 2025 removed mandatory storage-pairing requirements, compounded by high-base pressure from strong PV and wind installation figures in the prior year. However, monthly installations returned to year-on-year growth of about 75% and 20% in July and August respectively.
Citigroup expects China’s full-year 2026 new-type energy storage installations to grow about 15.8% year-on-year to 219.4 GWh, with a further increase of roughly 15% to 252.3 GWh in 2027. Two factors underpin this: first, multiple provinces have introduced capacity-price compensation mechanisms, with Hubei, Jilin, Gansu, Xinjiang, Shanxi, and Qinghai among those that have set explicit capacity compensation standards; second, renewable installation growth is expected to rebound in 2027, assuming combined PV and wind installations reach 300 GW.
Energy storage project returns are facing multiple pressures. In September 2026, 21 of 31 provincial power grids saw peak-valley price spreads narrow year-on-year, shrinking market arbitrage opportunities. Meanwhile, grid system operating costs rose sharply, with average system operating costs reaching 0.068 yuan/kWh in the first three quarters of 2026, up about 93% year-on-year. Some projects that had completed tendering have delayed construction due to deteriorating return calculations. Citigroup believes developers remain optimistic about medium-term opportunities and are awaiting policy clarity on the sustainability of capacity compensation mechanisms.
Europe’s battery energy storage system (BESS) market is entering a large-scale construction phase. Citigroup expects European BESS installed capacity to expand from roughly 45 GW/86 GWh in 2025 to about 180 GW/405 GWh by 2030, with battery output increasing more than 370% over the period. The core drivers are persistently rising power-market volatility from the rapid increase in wind and solar generation share, plus policy support from national storage installation targets. Current European BESS project economics are attractive, with battery pack costs accounting for about 55% of project capex. Citigroup estimates that utility-scale BESS project internal rates of return (IRR) currently reach the mid-teens, with some projects exceeding 20%.
Citigroup cautions that as ancillary services markets become saturated, investment returns may decline toward the end of this decade, but long-term project IRRs are still expected to remain above 10%. Grid connection queue backlogs in markets such as Germany and Italy are currently the primary bottleneck.
Competitive landscape reshaped: China penetrates Europe, South Korea dominates the U.S.
LFP battery technology is maturing and products are becoming increasingly commoditized. Citigroup’s analysis notes that over the past five years, Chinese LFP cell energy density has barely improved at the cell level, with pack-level gains driven mainly by packaging design advances. As LFP cell energy density approaches physical limits, technological improvement is shifting toward fast-charging and all-weather performance, and the quality gap between first- and second-tier battery makers is gradually narrowing.
Citigroup believes that absent a major technological breakthrough, the homogenization trend in LFP battery products will persist, benefiting second-tier battery makers in winning customers. CATL (300750.SZ) has seen its share of the Chinese market (excluding BYD) slip modestly from 66% in 2022 to 59% in the first half of 2026—better than market expectations—but the share-concession trend is expected to continue.
On the regional competitive landscape, Citigroup expects Chinese battery makers’ share of European production capacity to expand from about 10% in 2022 to roughly 60% by 2028, while South Korean players’ share narrows from about 80% to around 28%. In the U.S. market, the capacity landscape operates independently of the Chinese system, with South Korean companies expected to maintain roughly 60% share.
LG Energy Solution (LGES), leveraging its cumulative LFP energy-storage capacity exceeding 50 GWh across five U.S. sites, has moved first to lock in grid-side storage and data-center power demand, and has secured Nvidia’s (NVDA) “DSX-Ready” energy storage system supplier certification—the other two certified companies being Tesla (TSLA) and Hitachi Energy. LGES’s effective capture rate on U.S. Advanced Manufacturing Production Credits (AMPC) in the storage segment is approximately 50% to 55%, significantly higher than the roughly 25% on its GM joint venture, with earnings momentum expected to improve further from the second half of 2026 into 2027.
In the European market, Chinese battery makers are expanding rapidly. CATL continues to advance its European capacity buildout, including a 100 GWh expansion plan in Hungary. EVE Energy (300014.SZ), CALB (03931.HK), and Gotion High-tech (002074.SZ) are also accelerating their deployments, with combined share expected to reach about 60% by 2028.
Panasonic (6752.T), with roughly 80% market share in AI data-center backup battery unit (BBU) business, has carved out a distinctive defensive growth niche. Citigroup expects its BBU revenue to grow from approximately ¥322 billion (approximately $2.0 billion) in fiscal 2026 to about ¥1 trillion in fiscal 2029, with the contribution to group adjusted operating profit rising from about 15% to roughly 19%.
In the materials segment, Citigroup offers differentiated judgments across sub-sectors. For LFP cathodes, effective utilization is expected to hold at about 72% in 2027, slightly below the 73% in 2026; processing fees have already improved somewhat as demand recovered, but the pressure of accelerated capacity expansion in 2026–2027 will constrain further improvement. NCM cathode utilization remains below 50%, with processing fees still under pressure.
For separators, the supply-side expansion pace is notably slower than in the previous cycle, with capacity growth of about 17% to 18% in 2026–2027—below demand growth—which is favorable for utilization recovery. Wet-process separator demand is outperforming dry-process, with some battery makers shifting materials from dry to wet. Citigroup expects separator prices to gradually find support, though the probability of a sharp rebound is low.
For anodes, capacity expansion has lagged in this cycle. While utilization has recovered somewhat, the segment remains in overall oversupply. The U.S.-Iran conflict has driven up raw material costs for petroleum coke and needle coke, partially offsetting margin improvements from economies of scale.
For electrolytes, Citigroup believes the segment has passed its cyclical peak and is entering a decline phase. New capacity continues to come online, and the intensifying commoditization trend is likely to put gradual pressure on margins over the coming quarters.
Overall, Citigroup’s assessment of the battery supply chain can be summarized as follows: a downcycle has indeed arrived, but its character is fundamentally different from the last one. Structural demand support comes from sustained high growth in energy storage, supply-side self-restraint stems from industry participants’ deep memory of the previous cycle’s lessons, and policy intervention provides an additional margin of safety for industry-structure improvement. For investors, the key is identifying which segments can maintain utilization and profitability stability through this moderate downturn—rather than simply replicating the allocation logic of the previous cycle.