The global battery supply chain is entering a second round of capacity expansion, and with demand growth slowing while supply catches up, the classic hallmarks of a "downcycle" are beginning to appear. Yet Citi argues that compared with the previous cycle from 2022 to 2024, the supply-demand balance this time is more even and the risk of a price war is significantly lower. Market pessimism about this downcycle is overdone, and overall utilization rates should remain stable.

Citi said in an October 7, 2026 report that after a strong demand rebound in 2025 drove broad upward revisions to industry earnings forecasts, the pace of capacity expansion is now accelerating to catch up. Based on bottom-up capacity modeling, global battery capacity growth is expected to reach 46% in 2026 and 24% in 2027, while demand growth is projected to decelerate to about 26% and 20% in 2027 and 2028. The analysts updated their sector priority ranking to: battery assemblers > battery components > LFP cathodes > separators > lithium resources > anodes > electrolytes > NCM cathodes.

Citi sees three fundamental differences between this downcycle and the one in 2022-2024. First, battery and lithium prices have not overshot sharply this time, leaving a relatively solid foundation for end demand. Second, battery assemblers are expanding aggressively, but expansion at the materials stage is clearly more restrained, keeping overall supply chain utilization broadly stable. Third, Chinese policy has begun to curb excess capacity expansion, which over the long run should improve the supply chain's industry structure.

Based on these judgments, Citi explicitly stated that it is no longer appropriate to follow the previous downcycle strategy of "overweight battery assemblers, underweight supply chain."

Demand growth is slowing, but the market has already priced in an excessively bearish scenario

Citi raised its forecast for global battery demand. Global battery demand rose 46% year on year in 2025 and is expected to grow about 39% in 2026 to roughly 2,927 GWh, both above previously more optimistic expectations. Looking to 2027-2028, as China's EV penetration approaches a high of 60% and global energy storage demand growth enters a high-base phase, demand growth is expected to gradually slow to 26% and 20%.

Energy storage system (ESS) batteries are the core engine of this round of demand growth. Citi expects global ESS battery demand of 1,030 GWh, 1,390 GWh and 1,700 GWh in 2026, 2027 and 2028, corresponding to growth of 66%, 35% and 22%, and projects global ESS demand will reach about 2,210 GWh by 2030, a compound annual growth rate of about 29% from 2025 to 2030. Some market views argue that China's ESS demand will peak this year, and Citi explicitly disagrees. Its forecasts show China's ESS demand will still grow modestly by about 15% in 2027, with global net annual additions maintained at around 300 GWh.

On EVs, Citi expects global EV battery demand to reach 1,713 GWh in 2026, up 27% year on year, with China's EV wholesale volume at about 16.76 million units and penetration at about 59%, while U.S. sales fall 26% year on year to about 1.09 million units with penetration at about 7%. Global EV battery demand is expected to rise to 2,069 GWh in 2027.

Supply is catching up faster, but utilization rates should remain stable

According to Citi's model, global battery capacity will reach about 5,266 GWh by the end of 2026, up about 45% year on year, with China contributing about 4,400 GWh and the United States, Europe and other regions adding about 189 GWh, 158 GWh and 36 GWh respectively. Capacity is expected to expand further to about 6,534 GWh by the end of 2027.

However, compared with the previous capacity expansion cycle, the pace of expansion at the materials stage is clearly more conservative this time. Citi believes three factors are restraining the impulse to expand materials capacity. First, materials companies have suffered persistently thin profits over the past several years. Second, existing capacity utilization still has room to rise. Third, the painful downcycle of 2022-2024 taught industry participants a lesson, making them behave more rationally.

According to Citi's estimates, effective capacity utilization for LFP cathodes, anodes and separators will remain at about 70% in 2027, meaning supply and demand for key materials are broadly balanced and battery makers will struggle to compress material prices sharply as they did in the last cycle. Citi therefore expects overall supply chain prices and profitability to remain basically stable, without the destructive price war seen in the previous cycle.

Three key differences in this cycle

Growth on both the supply and demand sides is markedly slower than in the previous cycle. Demand growth exceeded 100% in 2021, while the peak growth this cycle is about 46% in 2025, though the absolute increase is larger, with battery demand rising by a net 635 GWh in 2025, far above about 210 GWh in 2021. The supply side is also more moderate, with global battery capacity growth of about 66% in 2021, versus an expected 46% in 2026, 24% in 2027 and a further narrowing to about 15% in 2028.

China's anti-involution policy provides structural support. Chinese policy has clearly begun to restrict excess capacity expansion, which will help leading companies maintain higher utilization rates while making it increasingly difficult for smaller players to add capacity. Citi noted that the concrete effects of the anti-involution policy remain uncertain, but the overall policy stance will be stricter, which is positive for long-term structural improvement in the industry.

LFP battery technology is maturing and products are gradually becoming commoditized. Citi's analysis noted that Chinese LFP cell energy density has barely improved at the cell level over the past five years, with improvements at the battery pack level mainly relying on advances in packaging design. As LFP cell energy density approaches its physical limit, the direction of technological improvement is shifting toward fast charging and all-weather performance, and the quality gap between tier-one and tier-two battery makers is gradually narrowing.

Citi believes that absent a major technological breakthrough, the homogenization trend in LFP battery products will continue, helping tier-two battery makers keep winning customers. CATL's share in the Chinese market excluding BYD has edged down from 66% in 2022 to 59% in the first half of 2026, better than market expectations, but the trend of share transfer will continue.

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

China's energy storage market is undergoing a phase of adjustment. According to China Energy Storage Alliance (CNESA) data, China's new-type energy storage installations fell about 18% year on year in the first half of 2026 to about 21.81 GW/58.60 GWh, mainly because Document No. 136 in February 2025 scrapped the mandatory storage allocation requirement, compounded by the high base of new solar and wind installations a year earlier. However, in July and August, monthly installations resumed year-on-year growth of about 75% and 20% respectively.

Citi expects China's new-type energy storage installations to grow about 15.8% year on year to 219.4 GWh in full-year 2026 and rise a further 15% to 252.3 GWh in 2027, mainly supported by two factors. First, multiple provinces have introduced capacity price compensation mechanisms, with Hubei, Jilin, Gansu, Xinjiang, Shanxi and Qinghai among those that have clarified capacity compensation standards. Second, renewable energy installation growth is expected to recover in 2027, assuming combined solar and wind installations reach 300 GW.

Notably, storage project returns are facing multiple pressures. In September 2026, 21 of 31 provincial power grids saw peak-valley price spreads narrow compared with a year earlier, reducing arbitrage space. At the same time, 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 lower return calculations. Citi believes developers remain optimistic about medium-term opportunities and are waiting for policy clarity on the sustainability of capacity compensation mechanisms.

Europe's energy storage market: a rapid build-out phase begins

Europe's battery energy storage system (BESS) market is entering a large-scale construction phase. Citi expects European BESS installed capacity to expand from about 45 GW/86 GWh in 2025 to about 180 GW/405 GWh in 2030, with battery output rising more than 370% during the period. The core drivers are the continued intensification of power market volatility as the share of wind and solar generation rises rapidly, and policy support from national storage installation targets.

European BESS project economics are currently attractive, with battery packs accounting for about 55% of project capital expenditure. Citi estimates that utility-scale BESS project IRRs currently reach the mid-teens, with some projects exceeding 20%. Citi cautioned that as ancillary services markets become saturated, investment returns may decline toward the end of the decade, but long-term project IRRs are still expected to remain above 10%. Grid connection backlogs in markets such as Germany and Italy are currently the main bottleneck.

From a regional competitive landscape perspective, Citi expects Chinese battery companies' capacity share in Europe to expand from about 10% in 2022 to about 60% by 2028, while South Korean companies' share will narrow from about 80% to about 28%. In the U.S. market, the capacity landscape is separate from China's system, and South Korean companies are expected to maintain a share of about 60%.

Divergence across supply chain segments: cathodes and separators relatively favored

LFP cathodes: Citi expects effective capacity utilization for LFP cathodes to remain at about 72% in 2027, slightly below 73% in 2026. Processing fees have risen somewhat as demand recovers, but pressure from accelerated capacity expansion in 2026-2027 will limit further improvement. NCM cathode utilization remains below 50%, and processing fees remain under pressure.

Separators: The pace of supply-side expansion is clearly slower than in the previous cycle, with capacity growth of about 17-18% in 2026-2027, below demand growth, which supports a recovery in utilization. Wet-process separator demand is stronger than dry-process, and some battery companies are shifting material use from dry to wet. Citi expects separator prices to gradually gain support, but the probability of a sharp rebound is low.

Anodes: Anode expansion has lagged relatively in this cycle. Although capacity utilization has recovered, the segment remains in overall oversupply. The U.S.-Iran conflict has raised raw material costs such as petroleum coke and needle coke, partly offsetting profit improvement from economies of scale.

Electrolytes: Citi believes electrolytes have entered a phase of falling back from the peak of the cycle. New capacity continues to be released, and amid intensifying product commoditization, profit margins may come under gradual pressure in coming quarters.

Global competitive landscape reshaped: China accelerates penetration in Europe, South Korea leads in the U.S.

In the U.S. market, South Korean battery companies are expected to maintain about a 60% capacity share through 2030, while Chinese companies have a relatively limited market presence due to policy restrictions. LG Energy Solution (LGES), with more than 50 GWh of accumulated LFP storage capacity across five U.S. sites, was first to lock in grid-side storage and data center power demand, and has received NVIDIA "DSX-Ready" energy storage system supplier certification (the other two certified companies are Tesla and Hitachi Energy), and is expected to benefit from rising order visibility brought by its first-mover advantage. LGES's effective capture rate of the U.S. Advanced Manufacturing Production Credit (AMPC) is about 50%-55% on the storage side, significantly higher than about 25% for its General Motors joint venture projects, and earnings momentum is expected to improve further from the second half of 2026 to 2027.

In the European market, Chinese battery companies are expanding rapidly. CATL's capacity layout in Europe, including a 100 GWh expansion plan in Hungary, continues to advance, while EVE, CALB and Gotion are also accelerating their layouts, with their combined share expected to reach about 60% by 2028. Panasonic has formed a unique defensive growth point with about an 80% market share in backup power units (BBU) for AI data centers. Citi expects its BBU business revenue to grow from about 322 billion yen in fiscal 2026 to about 1 trillion yen in fiscal 2029, with its contribution to group adjusted operating profit rising from about 15% to about 19%.