The lithium market heads into 2026 after one of its most punishing years in recent memory, shaped by deep oversupply, weaker-than-expected electric vehicle (EV) demand and sustained price pressure.
In 2025, lithium carbonate prices in North Asia sank to four year lows, forcing production cuts and project delays as the industry grappled with the consequences of years of aggressive supply growth.
The second half of the year saw a rebound as lithium carbonate began a slow ascent. By December 29, prices had risen 56 percent from their January start position of US$10,798.54 per metric ton to US$16,882.63.
While volatility and brief price rallies highlighted the market’s sensitivity to sentiment and policy signals, analysts increasingly see the sector’s first-half downturn as an inflection point. With high-cost supply under strain and inventories gradually tightening, expectations are building that 2026 could mark the start of a rebalancing phase, supported by long-term demand tied to electrification, energy storage and the broader energy transition.
Battery energy storage systems to drive lithium growth
Energy storage is emerging as the fastest-growing pillar of battery demand, with major implications for the lithium market heading into 2026. Indeed, according to Benchmark Mineral Intelligence’s Iola Hughes, growth in this segment is accelerating well ahead of the broader battery market.
“We’re expecting about 44 percent growth (in 2025),” she said. That’s compared with roughly 25 percent growth across total battery demand. As a result, energy storage is set to account for about a quarter of total global battery demand in 2025, a share that is rising rapidly. The shift is even more pronounced in the US, where Hughes expects storage to make up a significant “35 to 40 percent of battery demand in the next few years.”
That growth is being driven by falling costs and the growing role of lithium iron phosphate (LFP) chemistry, which Hughes described as the dominant technology in stationary storage.
“It very much is the story of LFP right now,” she said, pointing to recent innovation and lower costs, which have helped to make LFP “the best chemistry” for most storage applications.
Globally, deployment remains highly concentrated. China and the US account for roughly 87 percent of cumulative grid-scale storage installations, but new markets are emerging quickly.
Saudi Arabia, Hughes noted, has surged from effectively zero to the world’s third largest market in a matter of months, deploying around 11 gigawatt-hours in the first quarter alone. “That really goes to show just how early this market is in its story,” she said; it also indicates how quickly new sources of battery demand can materialize.
Cost declines sit at the core of the expansion. Fully integrated storage systems in China are now approaching, and in some cases falling below, US$100 per kilowatt-hour. Hughes said this has fundamentally changed the economics of storage, making deployments viable even as policy support tightens. “The prices are so much cheaper, the economics are a lot stronger, even in a normal, unsubsidized environment,” she said.
In the US, growth remains concentrated in a handful of states — led by California and Texas — but Hughes stressed how early stage the market still is. New Mexico, now the fifth largest storage market, is built on just a few projects.
At the same time, the scale of energy storage projects is increasing rapidly. Giga-scale installations, defined as projects larger than 1 gigawatt-hour, are moving from novelty to norm.
Hughes said nine such projects are expected to come online this year, accounting for about 20 percent of battery demand, with more than 20 in the pipeline for next year, representing close to 40 percent.
Policy remains a key variable. While investment tax credits for storage remain in place in the US, Hughes warned that tighter sourcing and eligibility rules are reshaping supply chains, particularly for LFP. The pipeline of announced LFP gigafactories has grown sharply this year — up more than 60 percent — led largely by Korean manufacturers.
“We’re in a much better position when it comes to sourcing of cells for energy storage than we were even three months ago,” she said, though challenges remain around production tax credits and heavy reliance on Chinese cathode supply.
Underlying the storage boom is a broader shift in electricity demand.
After more than a decade of stagnation, US power demand is rising again, driven by data centers, AI, electrification and reshoring of manufacturing. Hughes said estimates now point to electricity demand rising 20 to 30 percent by 2030, placing energy storage at the center of energy security planning. “Storage has become a central topic in the energy security conversation,” she said, adding that its role will only grow.
Looking ahead, Hughes said LFP is likely to dominate shorter-duration storage, while sodium-ion and other battery technologies compete in longer-duration segments.
For the lithium market, the message is clear: as storage scales up in size, geography and strategic importance, it is becoming one of the most powerful demand drivers shaping the sector’s outlook for 2026 and beyond.
Lower costs driving LFP adoption
Howard Klein, RK Equity co-founder and partner, argued that falling costs remain a central driver of LFP battery adoption, reflecting a familiar economic dynamic: as prices decline, demand accelerates.
While lithium is a key input, he suggested that ongoing manufacturing efficiencies and economies of scale are likely to continue pushing LFP battery costs lower over time, potentially offsetting upward pressure from higher lithium prices.
Klein emphasized that even if LFP costs rise modestly, battery storage will remain highly competitive as a source of grid power. Compared with conventional generation options such as gas or coal, storage already offers a compelling cost and performance proposition, he said, and does not rely solely on subsidies to remain economically viable.
Geopolitical instability on the rise
Critical minerals are increasingly at the center of US foreign policy, and that shift is set to reshape the lithium value chain through 2026, according to Klein. He noted that geopolitics now underpins many of Washington’s strategic priorities, from Eastern Europe to Africa and the Arctic.
“The entire foreign policy agenda is largely being driven by critical minerals,” Klein said, citing regions including Ukraine, Russia, the Democratic Republic of Congo, Greenland and Canada.
China’s willingness to weaponize its dominance in key supply chains has sharpened that focus.
On that note, Klein pointed to Beijing’s renewed rare earths export restrictions in October, noting that these measures were applied globally, not just against the US.
“They showed that they wield a significant negotiating stick, and they’re willing to use it,” he said.
In Klein’s view, that move has triggered a forceful response from western governments. “I think they’ve overplayed their hand to some degree, because now you’ve had this very big reaction from the US.”
That reaction is translating into a renewed push to localize and reshore critical mineral supply chains — an effort that has gained rare bipartisan backing in Washington.
“Unlike so many other things in America, which are hyper-partisan, both sides agree we need to resolve this,” Klein said, adding that the policy momentum will continue to shape the lithium industry.
While rare earths remain the immediate pressure point, Klein said the policy lens is widening. The US recently added 10 minerals to its critical minerals list, which now stands at a total of 60. Lithium, he said, sits high on that agenda, not out of enthusiasm for the metal itself, but because of its role in batteries.
“It’s an understanding by the government that batteries and battery technology are very, very important, and the entire battery supply chain needs to be supported,” Klein said. That support extends beyond lithium to graphite, manganese, nickel, cobalt and battery components such as anodes and cathodes.
The approach is increasingly coordinated across western economies. Klein described it as “a G7 effort,” with the EU and Canada aligned alongside the US through a mix of bilateral and multilateral initiatives.
That coordination is already translating into capital flows. He pointed to US-backed progress at Thacker Pass, EU funding for Vulcan Energy Resources (ASX:VUL,OTC Pink:VULNF) and a 360 million euro grant for European Metals Holdings (LSE:EMH,ASX:EMH,OTCQB:EMHLF) as early examples. Canada, he added, is also ramping up support.
“Canada announced C$6 billion over 26 investments,” Klein said, adding that more announcements are likely by the time the Prospectors & Developers Association of Canada convention rolls around in March.
Klein sees geopolitics, industrial policy and supply chain security converging into powerful lithium tailwinds. “This is a super hot topic,” he said, and one that is likely to drive increased lithium-related activity well into 2026.
Should the US build a strategic lithium reserve?
To dilute China’s grip on the sector, Klein is advocating for a strategic lithium reserve in the US as a more effective and market-neutral alternative to company-specific subsidies. He argues that the industry’s core challenge is not demand, but extreme price volatility caused by global oversupply and what he describes as non-market behavior, which has driven prices below sustainable levels and distorted investment signals across the sector.
“The problem in lithium is volatile prices — prices below the marginal cost, catastrophically low prices that put companies out of business,” he said, pointing to persistent oversupply as the primary distortion.
In Klein’s view, a reserve would act as a counterweight by creating steady, large-scale demand that stabilizes prices within a sustainable range. “The main focus is to stabilize price … not at a super high level, but at a level where companies can make an economic return,” he said. That stability, he added, is essential to incentivize investment in mines, processing and conversion facilities across the US, Canada and allied jurisdictions.
Unlike targeted government support, Klein said a reserve would allow the market to determine which projects succeed.
“I want the market to decide which projects and companies are the best, not necessarily the government,” he said, noting the diversity of competing lithium resources, from US clay and brine projects to Canadian hard-rock deposits.
A more predictable price environment with fewer large swings would lower the cost of capital and give private investors greater confidence to finance viable projects.
Klein stressed that a lithium reserve should not be confused with a stockpile.
“People use ‘stockpile’ and ‘reserve’ like they’re the same thing, and they’re not,” he said. While a stockpile focuses on availability for emergencies, a reserve is designed as a market-stabilizing mechanism that can buy and sell material to smooth volatility. Availability, he said, is a secondary benefit.
He sees the concept as most relevant for mid-sized, fast-growing markets like lithium, graphite and other battery materials that lack deep futures markets and long-term hedging tools.
“Those are the markets that could be amenable to a reserve,” he said, contrasting them with large, liquid commodities like copper or very small, niche minerals tied mainly to military use.
Looking longer term, Klein said a lithium reserve aligns closely with the growth of EVs, energy storage, data centers and grid electrification, as well as geopolitical efforts to diversify supply chains away from China.
“This is no longer just a renewables or EV thing — this is national security, clean energy and building an electro-state,” he said, arguing that reducing volatility would make it easier for automakers, utilities and manufacturers to commit capital without fear of being caught on the wrong side of wild price swings.
North American cooperation key for lithium
Gerardo Del Real, publisher at Digest Publishing, also highlighted the impact of geopolitics on the lithium value chain, emphasizing the need for North American coordination to reduce reliance on dominant producers like China.
“I think this is the path towards that. It has to happen,” he said, noting that collaboration between the US, Canada and potentially Mexico could strengthen regional supply security and reduce vulnerability to global disruptions.
Del Real framed the issue in broader energy terms, pointing to the strategic value of domestic resources: “If we are serious as a country and as a region in being somewhat independent from China and from the Russians … we have a luxury of resources in the US, in Canada … there could be a very powerful path forward.”
On market dynamics, he suggested investors are focused on timing and catalysts, with policy shifts, demand surprises or supply disruptions likely to drive sentiment in 2026.
He also warned that the market may be underestimating the importance of coordinated regional supply initiatives as a factor shaping pricing and project economics.
Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.
