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LFP ESS battery market entry: Better late than never

LFP ESS battery lines to come online in 2H24

The share of LFP batteries in the ESS market is rapidly expanding. And going forward, we expect this growth to continue, thanks in part to the limited impact of global reshoring policies on ESS battery production (compared to EV battery production). Under its Stated Policies Scenario (STEPS), the International Energy Agency (IEA) sees LFP batteries capturing more than 80% of the 440GWh ESS market by 2030.

Despite being a relative latecomer, LG Energy Solution (LGES) is tapping into the ESS-use LFP battery market, starting in China. Last year, the company converted part of its Nanjing plant to LFP battery production, aiming to start mass production in 2H24 with annual capacity of approximately 9GWh. In addition, in February, the company signed a five-year procurement agreement with Chinese supplier Changzhou Liyuan for 160,000 tonnes of cathode materials. Assuming 2,000 tonnes of cathode materials are needed per 1GWh of battery capacity, this contract translates to average annual battery capacity of around 16GWh.

US LFP battery facilities to start production in 2026

In 2026, LGES is likely to begin operating ESS-use LFP battery lines in Arizona (annual capacity of 16GWh). Assuming utilization and yield both reach 80%, we estimate that related AMPC recognition could reach around W600bn. We believe the company will have little difficulty securing US customers, given: 1) the Biden administration’s planned tariff increases on ESS batteries (starting in 2026); and 2) the potential for additional tariff hikes on Chinese goods if Trump returns to office. The company is currently in negotiations with multiple potential customers in the US.

Estimated medium/long-term value of the ESS business: W18tr to W39tr

From a medium/long-term perspective, we estimate LGES’s ESS business to be worth between W18tr and W39tr. The lower end of this range is based on the IEA’s STEPS, assuming a 15% market share in 2030 and applying a target EV/EBITDA of 10x. The upper end is based on the IEA’s Net Zero Emissions (NZE) scenario, assuming a 20% market share in 2030 and applying the same target multiple.

Currently, we value the ESS business at W5.6tr (applying a target EV/EBITDA of 15x to our 2025F EBITDA). However, we expect to revise our valuation as the company expands its LFP battery portfolio and secures meaningful market share, especially in the US.