The Overcapacity Wall
Global lithium-ion overcapacity hit roughly 900 gigawatt-hours in 2025, according to McKinsey's Battery 2035 report. That figure is not a forecast. It is the number printed in supply reports this year, and it means factories built during the 2021-2023 rush now sit half-empty or idle.
The rush began when pandemic-era demand for electric vehicles and grid storage surged. Battery makers answered with new lines and expanded shifts. By 2024, the market had overshot. Dr. Lena Moris, a battery supply analyst at the Carnegie Endowment, put it plainly: "We went from shortage panic to surplus in roughly 24 months." That speed of reversal is unusual. In previous cycles, shortfalls lasted years because new mine capacity takes a decade to permit and build.
Buyers have noticed. Large auto OEMs have paused long-term cell contracts. They are waiting for prices to drift lower before committing fresh capital. The result is that factories keep running, adding more cells to inventories that already outweigh near-term demand. Some Chinese gigafactories are reportedly running at 60% capacity, which is low enough to be a problem for margins but high enough to keep dumping product onto the global market.
Why Prices Keep Sliding
Cell prices fell approximately 20% year-over-year in 2025, and the drop is not uniform across chemistries. Lithium-iron-phosphate, or LFP, cells for grid storage are cheaper than ever — market sources report prices below $80 per kilowatt-hour for some bulk deals. Nickel-manganese-cobalt, or NMC, cells for electric vehicles stayed firmer but still slid, with some deals closing around $110 per kilowatt-hour.
The reason is straightforward: gigafactories in China, South Korea, and the European Union ran past the demand curve. New lines came online faster than automakers could absorb them. McKinsey's model shows that even if no new factories are built this year, the 2025 overhang will take until late 2026 or early 2027 to work through.
It is not clear this will hold. Some independent analysts expect a 2027 correction when older lines are permanently shut. Others bet that new grid-storage contracts, especially in Europe and the United States, will absorb the glut by late 2026. The truth likely sits between: a staggered adjustment rather than a sharp crash. If storage demand falls short, the correction could drag into 2028.
The Recycling Math
The U.S. Department of Energy put $3 billion into 25 battery manufacturing and recycling plants in 2024. That is real money directed at a problem the market has not yet solved at scale. These plants are not just making new cells. They are pulling lithium, cobalt, and nickel back out of spent packs.
Recycling buys two things. First, material security. A plant that recovers 95% of lithium from old packs cuts exposure to volatile ore markets. Second, price insulation. If recycled material enters the supply chain at a known cost, it sets a floor for virgin-material pricing.
The economics are tight. Recycled lithium currently costs more than mined lithium when ore prices are low. The math only works if ore stays expensive or if carbon pricing shifts the cost balance enough to matter. The DOE funding helps bridge that gap, but commercial viability is still a few years off for most operators. One operator in Nevada told trade press the plant runs at 40% capacity because recycled feedstock is more expensive than virgin ore right now. Recycling plants face a chicken-and-egg problem: they need enough old batteries to process, and those batteries only exist once EVs from 2022 and 2023 reach end of life in larger numbers.
Raw Material Prices Stay Volatile
Beyond recycling, raw material prices remain a wildcard. Lithium carbonate prices have hovered near $30,000 per metric ton for most of 2025, down from $70,000 in 2023, but still above the $20,000 level that would make new mines profitable. Cobalt prices have swung between $90 and $130 per ton, driven by ESG pressure on buyers to find alternatives. Nickel prices have stayed relatively stable around $90,000 per metric ton, supported by new projects in Indonesia and the Philippines.
These costs feed directly into pack pricing. A battery pack that once cost $150 per kilowatt-hour in 2023 now sits at $160, even as demand softens. The industry is absorbing the shock by slowing production ramps and shifting toward lower-cost chemistries like LFP for energy storage. The transition is not smooth. Many automakers still rely on NMC for performance in premium EVs, and the shift to LFP takes time to scale. Investors are already pricing in lower margins for battery makers that do not adjust quickly, which could accelerate plant closures by the second half of 2026.
What Comes Next
The 900 G Wh figure is not just a statistic. It means contract renegotiations under way now, idle lines that will be permanently shut by mid-2026, and a few factory closures you will read about in trade journals before the year ends. It also means recyclers have time to scale before demand catches up.
Ford and CATL both announced new circular-economy targets this quarter. The moves are not driven by market demand alone. Regulators in the European Union and California are pushing harder on circular requirements for EV makers. The rules are coming faster than the supply adjusts.
For buyers, the message is direct: do not lock in long contracts at 2024 prices. The glut has legs. Market participants should wait for the glut to clear, or pay a premium for recycled content if regulatory credits matter to the bottom line. Grid operators planning battery installations should factor in continued price erosion through 2026 rather than lock in today's quotes. Analysts at JPMorgan noted this month that utility-scale tenders in the EU are already pricing in an extra 10% discount for 2026 delivery contracts, which shows buyers have internalized the surplus. The market is telling manufacturers what buyers already know: wait.
More context on the supply cycle is available at the McKinsey Battery 2035 feature. Our desk coverage at desk coverage tracks pricing week to week. Reuters coverage of the sector has tracked the same supply dynamics.