After more than two years of oversupply and falling prices, the global lithium market is entering 2026 with a more complex and cautiously improving demand outlook, driven largely by rapid growth in battery-based energy storage rather than electric vehicles. While the industry continues to contend with elevated supply levels, analysts point to structural changes in power systems as a key factor reshaping lithium consumption trends.

Lithium prices have struggled since the second half of 2022, when a surge in supply followed a sharp price rally that had been triggered by an electric vehicle battery boom. New production came online quickly, but demand growth did not keep pace, resulting in a persistent market glut. That imbalance weighed heavily on lithium producers throughout 2024 and into 2025, pressuring margins and share prices globally. Prices continued to weaken in the first half of 2025, reaching a low of 58,400 yuan per ton on June 23. The decline forced some mining companies to curb output as profitability deteriorated. However, market conditions began to shift later in the year as demand from energy storage applications accelerated more rapidly than expected.

China’s power sector reforms played a significant role in strengthening lithium demand during the second half of 2025. These changes supported increased deployment of battery systems used for power grid storage, contributing to higher consumption of lithium-based batteries. At the same time, a surge in data centre construction in China and other regions added further momentum to energy storage demand.

Growth in lithium demand from energy storage during the latter half of 2025 exceeded expectations. Energy storage could materially improve lithium market fundamentals going forward, while excessively high prices could undermine the economics of storage projects and constrain future price gains. The expanding role of energy storage is becoming increasingly evident in demand forecasts. Lithium demand for energy storage is expected to rise by 55% in 2026, following an increase of 71% in 2025, based on a Reuters calculation using UBS data. This shift comes as battery storage systems have emerged as China’s most valuable clean technology export. Sales reached nearly $66 billion in the first ten months of 2025, surpassing electric vehicle exports, which totaled about $54 billion over the same period.

Looking ahead, analysts project solid growth in overall lithium demand but also continued expansion on the supply side. A group of four analysts forecast global lithium demand growth of between 17% and 30% in 2026, while supply is expected to increase by 19% to 34%. The analysts declined to be identified, citing a lack of authorization to speak to media.

Despite expected supply growth, several forecasts point to a tightening market balance compared with 2025. Morgan Stanley projects a deficit of 80,000 metric tons of lithium carbonate equivalent in 2026, while UBS estimates a smaller deficit of 22,000 tons. These estimates contrast with an anticipated surplus of 61,000 tons in 2025. Three Chinese analysts also said they expect a narrower surplus this year rather than a full deficit. Price expectations for 2026 reflect this uncertainty. Analysts forecast lithium prices ranging from 80,000 to 200,000 yuan per ton, compared with a range of 58,400 to 134,500 yuan in 2025.

Market volatility intensified in the second half of 2025 following several policy and supply-related developments. In July, Beijing pledged to crack down on overcapacity across multiple sectors, including lithium. This was followed in August by a production halt at Chinese battery manufacturer CATL’s Jianxiawo mine, which accounts for roughly 3% of global lithium supply. These events contributed to a sharp rebound in prices.

Lithium carbonate prices on the Guangzhou Futures Exchange rose by 130% from their 2025 low, reaching 134,500 yuan per ton on December 29, the highest level since November 2023. Spot prices assessed by Fastmarkets increased by 108% over the same period. Despite these gains, analysts warn that several factors could limit demand growth and price upside. A faster-than-expected transition to sodium-ion battery technology for energy storage systems could reduce lithium consumption, while slowing electric vehicle sales would further soften demand. Continued supply growth is also expected to cap price increases.

In December, the head of China’s passenger car association cautioned that lithium battery demand could slump in the first quarter, partly due to an anticipated decline in electric vehicle sales as tax incentives are phased out. As the lithium industry enters 2026, energy storage has emerged as a critical variable in determining whether the market can move beyond its recent period of oversupply. While the sector’s rapid expansion has improved demand expectations, analysts emphasize that pricing, technology shifts, and policy developments will remain central to the market’s trajectory.