The lithium battery industry is facing an unprecedented downturn, placing considerable strain on corporate assets across the sectorThis decline in industry vitality prompts numerous companies to reassess their asset valuations, a situation that can yield significant financial implications.

On January 19, Tianqi Lithium announced that while preparing its annual report for 2024, the company was conducting an impairment test on its lithium hydroxide project in Kwinana, Australia, which involves a total of 48,000 tonsThe company cautioned that any determined asset impairment could adversely affect its operational performance for the year.

This situation is emblematic of a broader challenge confronting the lithium battery industry, with reports indicating that of the twelve sample companies already forecasting losses, eight, including Sinochem International, Shenzhen Xinxing, and Jiangte Electric, to name a few, are planning to recognize impairments that could sum to over one billion yuan.

It's critical to recognize that the fallout from these accounting adjustments will directly impact the income statements of listed companies

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The losses recognized through impairments will be classified as non-operating expenses, which could profoundly influence the annual profit margins of these firms.

Impairment losses are set to become a pivotal factor influencing annual financial reports in the lithium battery sectorMany companies are grappling not only with operational losses stemming from a declining market but also facing the heightened pressures which impairments place on their reported profitability.

For instance, Sinochem International’s lithium battery operations, primarily focused on ternary cathode materials and power battery cells, contribute a modest share of overall revenuesNevertheless, their associated impairments have emerged as a primary driver of their lossesIn a recent earnings forecast, Sinochem projected a staggering loss between 2.28 billion to 2.86 billion yuan for 2024. The company acknowledged the potential for further impairments due to industry fluctuations and risks associated with asset recoverability.

Previously, in the first three quarters of 2024, Sinochem’s impairment losses were relatively minor and did not significantly affect its profit margins; however, the anticipated impairments could see a dramatic increase in its annual losses compared to an earlier reported loss of 516 million yuan.

The systematic decline of the lithium sector has led to multiple reasons for asset impairments

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For example, Shenzhen Xinxing expects losses between 250 million to 350 million yuan, deriving approximately 120 million yuan from operational losses due mostly to plummeting lithium hexafluorophosphate prices and unmet customer demandIn addition, the company anticipates recognizing impairments to its related production equipment, construction in progress, and inventory, totaling around 136 million yuan, alongside 23 million yuan attributed to credit losses.

Tianqi Materials, a top domestic producer of lithium hexafluorophosphate, continues to report profitsHowever, it predicts a fall in net profit by over 70% due to the dual pressures of declining product prices and impairments associated with inventory devaluation.

The landscape is exacerbated for upstream lithium salt producers, all of whom are also feeling the downward pressure as lithium carbonate prices continue to fall in 2024, leading to potential impairments across all aspects of their operations.

Jiangte Electric, reflecting this trend, recently disclosed that it would recognize an impairment provision totaling 188 million yuan in 2024, broken down into various components including construction in progress, inventory write-downs, and provision for bad debts.

Other companies like Yicheng New Energy, Jiayuan Technology, Huasheng Lithium Battery, and Ocu Shares also surfaced in their earnings forecasts discussing the significant impacts of asset impairments.

Clearly, impairment losses on construction projects, receivables, and other balance sheet items will be directly reflected in the financial statements of these firms, further complicating their profitability

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The dual challenge of operational losses exacerbated by impairments creates significant pressures on their accounting positions.

Upon further scrutiny of upcoming earnings forecasts and reports, it is plausible that impairment amounts could surpass operational losses, further highlighting the pressing financial vulnerabilities of these companies.

The risks associated with asset impairment vary significantly among companies, influenced heavily by market conditions and business circumstancesWhen the value of relevant assets fluctuates due to these factors, firms are compelled to conduct impairment tests and recognize potential impairments to appropriately reflect the current valuation.

In discussing the risks tied to its business operations, Sinochem highlighted various industry challenges, including intensifying competition, export risks, and shifts in demand structures

The firm pointed out that heightened competition has resulted in decreasing market shares for non-leading firms, and the vast discrepancies between battery production and installation capacities have led to significant overcapacity in the sector.

Export markets are also affected by geopolitical tensions; for instance, as of September 13, 2024, the U.Sgovernment revealed plans to implement substantial duties on Chinese lithium battery exports, creating further headwinds for these companies.

Given the unpredictable nature of international trade policies, Sinochem acknowledged significant delays in contracting for export business, leading to increased uncertainty regarding ongoing supply arrangements.

These risks are widespread across the lithium battery industry, impacting major players and smaller firms alike in the lithium salt and cathode material sectors.

Additionally, given that the industry reached a peak of activity between 2021 and 2022, many companies engaged in mergers and acquisitions during this time are now facing the repercussions, as profitability has sharply declined

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If these acquired assets do not meet performance expectations in 2024, the potential for substantial impairment losses looms large.

An illustration of this is Longpan Technology, a leader in iron phosphate production, which indicated its projected loss of 590 million yuan was partially attributed to goodwill impairments.

In this shifting environment, companies that have not recognized impairments or that have reported relatively low levels of impairments in recent years are likely to face heightened risks, particularly those with larger ongoing construction projects.

An additional layer of complexity arises from data suggesting that within the lithium battery sector, 82% of listed companies signaled declining net profits, with over 58% forecasting operating lossesUnder these circumstances, recognizing various impairments to streamline the balance sheet could enable companies to set a lower profitability base for future recovery efforts.

In summary, the lithium battery industry's prevailing challenges have sparked a wave of reassessments and restructurings among key players, unveiling a cycle of impairments that not only reflect current market conditions but are also likely to shape the future of these corporations profoundly.