The Lithium Spot

Albemarle 2Q18 Earnings Call

August 8, 2018

Albemarle held their second quarter 2018 earnings call this morning which was unsurprisingly mostly focused on the lithium business.  Below are the lithium related comments from the call.

Highlights from prepared remarks:

Lithium Q&A

Seeing weakness in Chinese spot lithium prices, as you look forward to second half, how are contract pricing discussions going? Also could we expect further incremental pricing growth from laddering structure of contracts?

For lithium EBITDA, you said Q3 will be similar to Q1, but I’m more curious about the flat EBITDA from Q2 to Q4, could you talk about what that implies for volume and pricing trends?

In lithium when we’re thinking about your longer term contracts.  You’ve mentioned they range from 3-5 years, up to 10years.  Is there a particular grade of lithium you’re seeing longer term demand from versus others (hydroxide, carbonate, etc.)?

Can you tell us the sequential price change in lithium?  How do we think about product mix in that business?

When you look at the lithium market today, do you think the supply demand balance is becoming looser, tighter, or staying the same over the next 12 months?

So as a base case, as you model potential returns of the lithium business, do you assume the benefits to ALB over a longer period of time are going to come from volume growth, and the pricing would be neutral?

On lithium pricing in 2018- are you still up high single digits yoy?

On lithium volumes- still on track for 10,000t increase yoy?

Given the rapid pace of battery chemistry evolution, how quickly do you need to tweak the formulations on products to meet customers specs?

Given the lifespan of most vehicle programs being 5-7 years, how much fluidity are you expecting within those vehicle programs? Trying to get some insight into your customers’ customers.  As they try to extend range, lower weight requirements, how much fluidity are you seeing in terms of that chemistry evolution you were just talking about?

Perhaps I’m reading too into it since you are still on track for La Negra, but I noticed that on the slides that “wave I expansions on track” is no longer there?  And related to that question, can you comment on two of the regions you are expanding capacity.  First in Australia, the dispute with Global Advanced Metals- if that’s having impact on your ability to increase production, and what potential damage they’re claiming.  Second, in Chile- news articles about being slow to respond to CORFO, if that’s having any impact at all?

You’ve accelerated another share repurchase, you commented about an undervalued stock.  During the last couple of months, the junior companies have also experienced greater declines in share value.  Can you update on how you think about consolidation in the industry, and the relative importance between relationships with customers and low cost assets?

We see the China spot prices falling for carbonate, but there’s questions about how good the info content is in that data.  Can you comment on that- is there any connection between those data points, and what you’ll see in your contract pricing?

Could you provide an update on your contract negotiations with Cathode manufacturers.  You expressed a goal of converting about 80% of the contracts by the first quarter of 2019, is that still the case.  Can you elaborate on the contract features you’re seeking and how that’s received by customers?

How would you contrast demand for hydroxide versus carbonate?  One of your peers seems to be seeing a mix shift toward hydroxide- are you seeing that as well, and how sustainable is it?

I recognize that you don’t have exposure to the China spot market, but can you offer your view of what’s going on in that whole lithium to EV value chain over there, is there anything you see that has implications for EV sales in China and therefore global demand for lithium?

Xinyu 2 in China– what could be the benefit in terms of volume next year.  Will it just offset the tolling volume you have, or incremental to that?

On the extent of coverage of your volumes in longer term contracts- can you give an idea of what % of volumes are booked out for the next 2-3 years? 

On the development of lithium demand this year- do you have enough visibility to say you’ll expect the market to grow by  let’s say 20 or even more %, or in absolute terms this would be about 260-270kt?

I wanted to ask about the costs you’re experiencing in lithium- how would you characterize the cost curve over the last year and your outlook for the next year.  Any material changes in cash costs for yourself?

When you see the high single digit price increase this year go through, does that bring you more in line with where it should be, or is there further roll overs that could raise it next year?

Tianqi recently announced they’re investing more to increase spodumene production in Australia- would you get any offtake from that, or is it something we’d expect you to grow further in?

You spoke positively on EVs again- can you update us on your outlook for lithium, has it increased since the beginning of the year, and to what degree?

There seems to be concern that lithium prices could fall significantly, do you have a concern about your prices falling significantly?

Any concerns about the worker strikes in Chile?

Can you talk about lithium margins- how should we think about the cadence of margins quarter by quarter?

Increased activity with tollers- it’s always been a part of the mix for you.  Are these tollers you’re working with now, are they totally focused on battery grade, and you’re comfortable with them hitting the specs?  And is it having any dampening effects on margins? If so, when you shift volumes back in house, will it impact the margin outlook?

Since most are not focused on battery grade, is it fair to assume then that the strategy will be to build out in house conversion capacity instead of another converter acquisition?

The lithium sector continues to heat up going into the second half with SQM set to report earnings on August 22, 2018.  We will have you covered with their results as well, so stay tuned via Twitter and email for our analysis!