China’s battery manufacturers’ technology and cost leadership should keep them as beneficiaries of the global energy transition following the Iran conflict and related supply shocks, said Fitch Ratings.

The rating agency said in a note on Wednesday that the prolonged oil and liquefied natural gas supply disruptions add upside by strengthening energy security-driven investment in renewables and battery energy storage systems (BESS) across energy-importing economies.

“This should support volume visibility and utilization for scale Chinese producers, who dominate the global lithium iron phosphate (LFP)-cathode battery cell market and its supply chain,” it said.

According to Fitch, the demand for BESS should rise even if the Iran conflict is resolved shortly, as the related gas disruptions make electricity supply more expensive and less stable in markets reliant on gas-fired generation, and energy security becomes a more immediate policy priority.

It noted the main incremental overseas growth channel is likely to be “solar power plus battery storage” systems, particularly in emerging markets that rely on imported energy and have not yet secured stable, reliable electricity supply.

It also said the sharp decline in combined system costs in recent years strengthens the economic case versus fossil-based power generation, although raw material cost inflation may lead to some price rebound from this year.

“China is already well advanced in vehicle electrification and energy transition, so domestic demand is less central to the incremental upside thesis than overseas energy-security driven adoption,” it said.

Outside of China, it noted a weakened passenger electric car battery demand is broadly in line with Fitch’s base-case expectations, but it expects the scope for power batteries could widen into trucks, vessels and construction machinery as battery adoption widens across commercial transport and industrial uses.

According to the rating agency, global BESS battery demand has consistently exceeded expectations in recent quarters, demonstrated by reallocation of some production lines intended originally for electric-vehicle (EV) batteries, a shift already evident among some non-Chinese producers.

“Near-term profitability will remain sensitive to input-cost volatility, although leading manufacturers should be better placed to manage it,” it said.

It also highlighted that battery prices are linked to input costs like lithium and can generally be passed through, but gross margins could narrow mechanically when average selling prices rise while maintaining stable unit gross profit.

It opined that leading producers can mitigate this through bargaining power, operating leverage, product mix and tighter cost controls.

Meanwhile, structural policy and trade fragmentation could become a more persistent constraint even as demand rises, said Fitch.

It noted Chinese suppliers face high tariffs, supply-chain restrictions and regulatory risks in the US market, while European policies that incentivize local production could increasingly split up overall battery supply chains and drive capex duplication.

It opined that this is pushing Chinese manufacturers to expand overseas through foreign direct investment, including south-east Asia and Europe.

“China is also likely to retain more advanced technology production domestically, shaping where higher-value parts of the supply chain sit over time,

“Near-term supply-chain and capacity decisions are therefore shaped increasingly by trade and localization constraints, which could limit economies of scale even as demand rises,” it said.

However, it noted leaders’ speed and cost advantages in ramping capacity could reinforce their cost position and market standing as applications broaden.

“Energy-security tailwinds could also offset concerns about a post-rebate slowdown in China’s ESS battery exports,

“Stronger demand driven by energy-security priorities would lessen overseas demand volatility due to shipment front-loading ahead of China’s planned phase-out of export tax rebates at the end of 2026,” it added.

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