Tianqi Lithium Corp. had everything going for it: generous subsidies, Beijing’s blessing on the electric-vehicle industry it supplies, and the hype of Tesla Inc. getting its sedans off the production line in China. The only thing interrupting this nice fairy tale is the reality of demand and making money.

Over the past few years, China has supported its EV industry by doling out large subsidies; giving preferential treatment to domestic companies; and providing large outlays for charging infrastructure. The sector has surged as a result. The kickoff of Tesla’s Model 3 in Shanghai last month sparked a fresh rally among producers of lithium – a key ingredient in batteries – and other suppliers.

Hyped up

All this excitement is bubbling away despite the cratering of the lithium market. After peaking more than a year and a half ago, prices have slumped over 50 percent and inventories have piled up. The glut, a problem China knows all too well, has weighed on producers.

This reality is starting to settle in for Tianqi Lithum. Earlier this week, the company canceled its bondholder meeting as worries about repaying investors 318 million yuan ($46 million) in principal and interest loomed. Its bonds fell to just over 64 cents on the dollar from around 75 cents days earlier.

Battered bond

While China reported its first monthly slump in EV purchases in July, Tianqi Lithium was struggling before then. The world’s second-largest producer reported its first quarterly loss in almost six years years in September, following two quarters of declining net income.

Like many fad-commodity producers before it, Tianqi Lithium is seeing the painful consequences of China’s supply and demand mismatch. The adoption of electric cars and progress on battery technology have both been slower than anticipated. Expectations were so far off the mark that despite lithium prices falling, analysts adjusted higher their estimates for the average selling price of batteries last year.

Tianqi Lithium booked a 63 percent increase in government subsidies in the nine months to September as non-operating income from a year earlier.

The government’s supportive rhetoric also led the company to pile on debt as it sought stakes in Chile’s Sociedad Quimica y Minera de Chile SA and an Australian lithium mine. The company eventually financed its way to commanding a 16 percent share of global lithium production; but now its balance sheet looks bloated and questions about the company’s ability to refinance its debt – and at what cost – are becoming more pressing.

For all the hopes pegged to its expansion and profitability, Tianqi Lithium didn’t have enough cash to cover the 3.1 billion yuan of short-term debt it owes as of September. The company has already tapped various channels of funding, from medium-term notes to an equity raising. When Moody’s Investors Service downgraded the company last month, it cited Tianqi Lithium’s inability to raise enough capital through its rights offering, saying it would have trouble deleveraging.

Expectations for the EV industry are starting to recalibrate. With targeted subsidies shifting from cars to batteries and infrastructure, the bargaining power has moved from manufacturers of one to the other. The likes of Geely Automobile Holdings, BMW Group and Volkswagen Group are locking in long-term contracts and partnerships with battery makers, but these car giants are no longer calling the shots.

Battery makers nevertheless face their share of challenges: They haven’t quite figured out how to advance technology safely, while bringing down prices and preserving margins. Any reduction in subsidies will pass through to suppliers as well. It may be time for a more realistic reassessment.

Tianqi Lithium may be able to keep rolling over its debt, but that doesn’t change the fact that we’re still years away from widespread adoption of electric cars. A few thousand Teslas on the streets of China isn’t going to change that. EV suppliers may be better served keeping an eye on their balance sheets than Elon Musk’s production line.