Albemarle Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
February 17, 2022

There are 16 speakers on the call.

Operator

Good day, and welcome to the 4th Quarter Albemarle Corporation Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. As a reminder, this call is being recorded. I would now like to turn the call over to Meredith Fandy, Vice President of Investor Relations and Sustainability.

Operator

You may begin.

Speaker 1

All right. Thanks, Michelle, and thank you all, and welcome to Albemarle's Q4 2021 earnings conference call. Our earnings were released after close of market yesterday, and you'll find our press release and earnings presentation posted on our website under the Investors section at albemoral.com. Joining me on the call today are Kent Masters, Chief Executive Officer and Scott Tozier, Chief Financial Officer. Our GBU Presidents, Rafael Crawford, Netha Johnson and Eric Norris are also available for Q and A.

Speaker 1

As a reminder, some of the statements made during this call, including outlook, guidance, expected company performance and timing of expansion projects may constitute forward looking statements within the meaning of federal securities laws. Please note the cautionary language about forward looking statements As contained in our press release and earnings presentation, that same language applies to this call. Please also note that some of the comments made today refer to non GAAP financial measures. A reconciliation to GAAP financial measures can be found in our earnings release and the appendix of our earnings presentation. Now I'll turn the call over to Kent.

Speaker 2

Thanks, Meredith, and thank you all for joining us today. On today's call, I will highlight our quarterly results, recap our 2021 successes and update you on our expansion plans. Scott will provide more details on our financial results, outlook and capital allocation priorities. And finally, I'll walk you through our 2022 objectives. 2021 was a transformative year for Albemarle.

Speaker 2

Our strategic execution and ability to effectively manage The challenges of the global pandemic enabled us to capitalize on the strength of the lithium and bromine markets and generate results that exceeded expectations. For the year, excluding our Fine Chemistry Services business, which was sold in June of 2021, We increased net sales by 11% to $3,300,000,000 which was in line with our previous guidance. Adjusted EBITDA grew 13% in 2021 to $871,000,000 surpassing the upper end of our guidance. Looking ahead, our outlook for 2022 has improved based primarily on favorable market conditions for lithium and bromine. We expect adjusted EBITDA to grow between 35% 55% versus 2021 excluding Fine Chemistry Services.

Speaker 2

To continue driving this growth, we are focused on quickly bringing capacity online with accelerated investments. La Negra 34 is currently in commercial qualification and we expect to start realizing first sales from this facility in the second quarter. In November, we achieved mechanical completion of the 1st train at Kemerton. The construction team is now dedicated to the 2nd train, and we will be able to leverage our experience from Train 1 to improve efficiencies and timeliness of this project. And we recently signed a non binding letter agreement to explore the expansion of our Marlboro joint venture with increased optionality and reduced risk.

Speaker 2

Now looking at Slide 5. We introduced this slide early last year to lay out our 2021 objectives Designed to support the 4 pillars of our strategy: to grow profitably, to maximize productivity, to invest with discipline and to advance sustainability. I would like to thank our teams for their extraordinary efforts. Virtually all the goals we set last year were met or exceeded despite challenges related to severe weather, supply chain issues And the ongoing effects of the pandemic. The focus of our people around the world is what drove our strong year and underscores Our ability to deliver on our commitments.

Speaker 2

These accomplishments have also set the stage for us to take advantage of the growth opportunities ahead. Just as important as driving growth is an ongoing dedication to strong ESG values. I'm very proud of what you see on Slide 6. Since I became CEO in 2020, one of my main priorities has been continued improvement in sustainability. I'm pleased to see that these efforts are increasingly being recognized externally, but it certainly isn't a new initiative for Albemarle.

Speaker 2

Sustainability is not just doing the right thing, but also doing it the right way. For example, The lithium market is expected to see significant demand growth in the coming years. As a leader in lithium production, We expect to be an example and help define the standards of sustainability in this market as it goes through this fundamental shift. Now turning to slide 7 and more on the lithium market outlook. Based on our current market data, EV trends and regular interactions with our customers, we are revising our lithium demand outlook upwards once again.

Speaker 2

We now expect 2025 lithium demand of approximately 1,500,000 tons, up more than 30% from our previous estimates. Beyond 2025, we anticipate continued growth with lithium demand of more than 3,000,000 tons by 2,030. EV sales growth is accelerating as consumers become more energy conscious, governments incentivize clean energy, Technology improves and EVs approach pricing parity with internal combustion vehicles. In 2021, global EV production nearly doubled to over 6,000,000 vehicles from 3,000,000 in 2020. By the end of the decade, EVs are expected to account for close to 40% of automotive sales.

Speaker 2

When you look at last year's growth rate of nearly 50% and the auto industry's ambitions for a rapid transition to EVs, It's easy to see why demand expectations are so bullish. However, meeting this demand will be a challenge. Turning to our Wave 2 projects on slide 8. La Negra 34, which will add conversion capacity for our Chilean brine resource in Salar de Atacama is currently in the customer qualification process. We anticipate incremental volumes and revenue contribution from this project in the Q2 of this year.

Speaker 2

While there are significant changes taking place to the political landscape in Chile, We do not anticipate any material impacts to our business. We support the Chilean people's right of self determination and applaud the peaceful leadership transition in that country. Our team has already begun building relationships with the incoming administration. As I mentioned earlier, Kemerton 1 reached mechanical completion late last year and is currently in the commissioning phase. This puts us on track to begin first sales in the second half of this year.

Speaker 2

Kemerton II remains on track to reach mechanical completion by the end of this year. The OEMs and battery manufacturers have been investing heavily in growth, including commitments in North America and Europe, and the lithium industry must do the same. Turning to slide 9, we provide an overview of how Albemarle is investing to support downstream growth. Since our Investor Day, we have accelerated and further defined our Wave 3 projects, including the announcement of 3 strategic investments in China. This wave of investments will provide Albemarle with approximately 200,000 tons of additional capacity.

Speaker 2

That's up from 150,000 tons of capacity originally planned for Wave 3. We've also continued to progress our growth options for Wave 4. Based on discussions with our customers, we are analyzing options to restart our Kings Mountain Lithium Mine and the potential to build conversion assets Our vertical integration, access to high quality, low cost resources, Years of experience bringing conversion capacity online and strong balance sheet provide us with considerable advantages. I'm on Slide 10 now. In China, we expect to close the acquisition of The Chenzo conversion facility in the first half of this year.

Speaker 2

This transaction is progressing well and we continue to work through the appropriate regulatory reviews. The Chenso plant is currently being commissioned and we have begun tolling our spodumene to assist with that process. We continue to progress to 2 greenfield lithium conversion projects in Meishan and Zhangzhigong. We have started site clearing at Meishan and expect to break ground at Zhangzhigong later this year. We expect mechanical completion of both projects by the end of 2024.

Speaker 2

The restart of 1 of 3 processing lines at the Wodgina mine is going well With first spodumene concentrate production now expected in the 2nd quarter. At Greenbushes, Talison continues to ramp production from the CGP-two facility to meet design throughput and recovery rates. In addition, the tailings project at Talison Is on track. Before I turn the call over to Scott, I'd like to highlight our bromine growth projects on slide 11. Our bromine business is investing in innovation and capital projects to take advantage of growth opportunities.

Speaker 2

We expect new products to make up more than 10% of annual bromine revenues by 2025, up from essentially a standing start. The first of these products to launch is Cetex Alero, our next generation polymeric flame retardant. We first discussed Cetex Galero at our Investor Day last year, and I'm excited to say that we have achieved 1st commercial sales in January and Expect to scale production throughout the year. We've also invested in the resource expansion at the Smackover formation in Arkansas, We continue to grow our conversion and derivative capacity in both Arkansas and Jordan. With that as an overview, I'll turn the call over to Scott to discuss recent results and our outlook.

Speaker 3

Scott?

Speaker 2

Scott, you might be on mute.

Speaker 3

Hello, can you hear me now?

Speaker 2

Yes, we hear you.

Speaker 3

Okay. Sorry about that. I was on mute. Thanks, Ken, and good morning, everyone. I'll begin on Slide 12.

Speaker 3

For the Q4, we generated net sales of $894,000,000 which is an increase of $15,000,000 compared to the prior year quarter. This was driven by higher sales from lithium and bromine, partially offset by the loss of revenue From our Fine Chemistry Services business, which was sold in June 2021. Excluding FCS, we grew by 11%. The 4th quarter net loss attributable to Albemarle was $4,000,000 reflecting an increased Cost estimate to construct our Kemerton Lithium Hydroxide Plant due to anticipated cost overruns from the impact of pandemic related issues On the supply chain and labor, 4th quarter adjusted diluted EPS of $1.01 Was down 14% from the prior year. The primary adjustment to EPS is the $1.13 add back of that Kemerton revision.

Speaker 3

Let's turn to Slide 13 for more detail on adjusted EBITDA performance. Excluding FCS, 4th quarter adjusted EBITDA was up 12% from the prior year. Lithium results remained strong, driven by higher volumes as well as higher pricing. Bromine results were roughly flat year over year reflecting strong performance in late 2020 and repeating it in 2021. And Cavallist improved in the Q4 as refinery markets continued to rebound and the business saw benefits from one time items.

Speaker 3

Our second half sales grew 13% from the first half of the year, Following relatively flat growth since mid-twenty 20. This acceleration of growth is expected to continue into 2022. On Slide 14, you can see we are expecting both volume and pricing growth in all three of our business Units in 2022. We expect net sales of between $4,200,000,000 to $4,500,000,000 And adjusted EBITDA in the range of $1,150,000,000 to $1,300,000,000 This implies an adjusted EBITDA margin of between 27% 29%. Adjusted diluted EPS and net cash from operations Are also expected to improve year over year.

Speaker 3

We anticipate healthy growth in adjusted EBITDA in all four quarters this year And we expect Q1 to be the strongest quarter for several reasons. All 3 GPUs are expected to benefit from lower cost inventory sold at prices that have been raised in anticipation of inflation. In the Q1, lithium also has the benefit of strong shipments from our Talison joint venture to our partner As well as a one time spodumene sale of material produced at Wodgina on initial startup in 2019. And finally, going forward, higher spodumene transfer pricing increases are going to increase our cost of sales and only partially be offset by higher Talison joint venture income, which is included in our EBITDA after tax. And this creates a tax impacted EBITDA margin drive.

Speaker 3

As Kent mentioned, CapEx is expected to increase to the $1,300,000,000 to $1,500,000,000 range this year as we accelerate lithium investments to meet increased customer demand. The key actions to meet or exceed this guidance include: 1st, Successful execution of our lithium project startups second, closing the acquisition in China 3rd, solid performance at our sold out plants in lithium, bromine and FCC catalysts. 4th, continued strength in our end use markets and favorable pricing environment and lastly, Solid procurement to combat inflation. Let's turn to Slide 15 for more details by GBU. Lithium's full year 2022 EBITDA is expected to be up 65% to 85%, A significant improvement from our previous outlook.

Speaker 3

We now expect volume growth to be up 20% to 30% for the year With the new capacity coming online as well as ongoing efficiency improvements, Average realized pricing is now expected to increase 40% to 45% compared to 2021 Due to strong market pricing as well as the expiration of pricing concessions originally agreed to in late 2019. In some cases, as these concessions rolled off, pricing reverted to legacy contracts With significantly higher variable pricing. And as we've been saying, we've also taken the opportunity to work with our strategic customers to renegotiate contracts to more variable rate structures. Catalyst EBITDA is expected to be up 5% to 15%. This is below our previous outlook, primarily due to cost pressures related to high natural gas pricing in Europe and raw material inflation.

Speaker 3

Volumes are expected to grow across segments with overall refining markets improving. We continue to see volumes returning to pre pandemic levels in late 2022 or 2023. FCC volumes are already there, but HPC volumes are lagging. Bromine EBITDA is expected to be up 5% to 10%, slightly above our previous outlook based on strong flame retardant demand And as discussed, higher pricing and ongoing cost and efficiency improvements Are expected to offset higher freight and raw material costs. Now turning to slide 16, I'll provide some additional Color on lithium volume growth.

Speaker 3

This slide shows the expected lithium production volume ramp From the new conversion facilities, we expect to complete this year. We begin the year With a base load production of 88,000 metric tons in 2021, which includes Silver Peak, Kings Mountain, Xinyu, Chengdu and La Negra 1 and 2. And you can see this is virtually a fifty-fifty As our Wave 2 projects come online, output will begin to favor hydroxide. Generally speaking, we expect it to take about 2 years to ramp to full conversion capacity at a new plant, including approximately 6 months for commissioning and qualification. Therefore, we expect to reach our full 200,000 tons of conversion production by early 2025.

Speaker 3

Before I turn it back to Kent, I'd like to update you on our capital allocation priorities and I'll turn to slide 17 to do that. Our capital allocation priorities remain the same. Our primary focus is to invest in profitable growth opportunities, particularly for lithium and bromine. Strategic portfolio management and maintaining financial flexibility are important levers to support this growth. For example, we have divested non core businesses like FCS and reallocated funds to organic and Inorganic growth opportunities like the expected acquisition of the Qingzhou plant.

Speaker 3

The strategic review of Catalyst is progressing well and is on track for us to make an announcement of the outcome in the first half of this year. We'll also continue to evaluate bolt on acquisitions to accelerate growth or bolster our portfolio of top tier assets. As always, future dividends and share repurchases are subject to Board approval. However, we expect to continue to support our dividend. Given the outsized growth opportunities we see in lithium, we don't anticipate share repurchases in the foreseeable future.

Speaker 3

And with that, I'll turn it back to Ken.

Speaker 2

Thanks, Scott. I'll end our prepared remarks on Slide 18, outlining our 2022 objectives aligned with our long term strategy. First, we will continue to grow profitably. This means completing our wave 2 expansions and progressing wave 3 expansions to grow lithium conversion capacity and volumes. We'll also focus on safely and efficiency starting up those facilities.

Speaker 2

Next, we will continue to maximize productivity. And this is even more important in today's environment with rising costs for raw materials. We will leverage our operational discipline to offset inflation through manufacturing Implementing lean principles and embracing smart technology to improve HSE, cost, reliability and quality. Our procurement cost saving initiatives and manufacturing excellence projects will be key to offsetting higher raw materials and freight costs as we work to achieve adjusted EBITDA margin of between 27% 29%. We will invest with discipline.

Speaker 2

As Scott discussed, portfolio management and maintaining our investment grade credit rating are both high priority for us and will continue to be a focus in 2022. Importantly, we plan to complete the Catalyst strategic review later this year, which will maximize value and set that business up for success, while enabling us to focus on growth. Finally, we will advance sustainability. That means driving progress toward our goals for greenhouse gas emissions and freshwater use and setting additional sustainability targets. We'll also continue to work with our customers to improve the sustainability of the lithium supply chain by completing our mine site certifications, Scope 3 greenhouse gas assessments and analyzing product life cycles.

Speaker 2

So with that, I'd like to open the call for questions and I'll turn it back to Michelle.

Operator

Question comes from David Decelbaum with Cowen. Your line is open.

Speaker 4

Good morning, guys. Thanks for taking my questions today. I was curious if you could talk a little bit about the lithium pricing outlook. You raised your outlook to 40% to 40 5% increase in 22%. When you think about that and you talked about renegotiating your fixed price contracts, How do we think about your exposure to spot market fluctuations now as we head into 2023?

Speaker 4

And I guess in conjunction with that, Would you expect that you would see further pricing increases into 2023 based on your outlook today?

Speaker 5

Good morning, David. This is Eric Norris. So our pricing outlook, let me start first with The composition of what we see in 2022, we have, as Scott and Ken indicated in their prepared remarks, moved our pricing structures to be more variable. About upwards of close to 50% of our existing battery grade contracts have a Variable component to an index with a price and a ceiling. Those indices are not what you would see In China, those are indices based upon global publicly available indices such as Benchmark Minerals, Fast Markets and the like.

Speaker 5

The remaining 10% of our business is spot in China, so that is going to be exposed to what you see. And the rest is largely at this point fixed. Although as Scott indicated, as we continue to approach customers and then they Seek to add to their volumes through our expansions. We are in those discussions asking them and considering moving to more variable with them as well. So we have, bottom line, increased our exposure to pricing upside.

Speaker 5

But I think you need to consider that the contracts The indices we're using largely are the global indices, not the China indices, where you see much higher price in the China market than you do globally. So in terms of the outlook going forward, I mean, I would say that we expect it really comes down to what China pricing It is the lead sort of the tip of the spear where that goes, the indices follow globally. Those global indices are about half in some cases of current China prices. So there's probably room to go in those indices, but there's prices where they are in China, One can only speculate where they would go and could they go down? We don't know.

Speaker 5

So there's there'll always be some variability on that 10% of our business that's in China.

Speaker 4

Appreciate that. And thanks for the color there. My follow-up is just on the capital raise, A $200,000,000 increase this year to the budget, it sounds like that's accelerating some of the conversion assets in China. Could you just give a little bit Color around that and when you expect to see some of the volumetric impact relative to your original outlook?

Speaker 2

Okay. So I'm not sure volumetric impact. So you're talking about our Wave 3 expansions, when we see those volumes coming on?

Speaker 4

It sounds like that the timing has now accelerated around Wave 3. So I guess Per your if you were to look at it based on your original vision that you laid out at the Investor Day, how much time are you pulling forward with that Additional $200,000,000 around the conversion assets.

Speaker 2

Yes. So we brought it forward because of the Meishan Jiang Zhigong, the acquisition at Jiang Zhigong, so that was not we were hoping to do an acquisition that hadn't planned, didn't have that nailed down at the When we did the equity raise and the comments that we made then, so that's brought it forward and we've increased the capacity about 50,000 tons In that wave, so the timeframe has been pulled a bit forward because we've confirmed that acquisition and then we've increased that wave by 50,000 tons. And as we said before, The 2 greenfields we think will be on by the end of 2024.

Speaker 4

Thank you all.

Operator

Our next question comes from Bob Koort with Goldman Sachs. Your line is open.

Speaker 6

Thank you. Good morning. Kent or Eric, I was wondering if you could talk about your strategy on contracting the customers in a growing and very tight market. Is there an approach to not contract all your volume to ensure your customers can get deliverability? Do you want to have as much as possible Fixed volume obligations, how do you think about that?

Speaker 2

Yes. So I'll just add a high level and let Eric can give you a little more detail on it. But I think we've talked about it. We want to have a portfolio across the range of those projects. So we're not Tying up all the volume on long term fixed contracts, but we do want to have that element of it.

Speaker 2

It's becoming Probably a bigger part. We're probably fighting to make sure that we keep the portfolio the way we envision it.

Speaker 5

Yes, I don't have much to add, Bobby. You heard how I answered David's question just before you on the mix. We've seen And influence that to have a up to a half on some sort of variable price that has some floors and ceilings, A bit of spot and then the rest fixed. And we still strive to have, as we grow the business and add capacity, On the amount that we can play in the spot markets, and that gives us access to flex with our contract customers as they grow as well. Strategy still remains to be a partner to our customers and to seek those partnerships for their long term growth.

Speaker 5

And that's becoming In this market, a very important topic, that's security of supply.

Speaker 6

Can I ask a follow-up? What was the reason and what are the ramifications of changing your Marbel agreement?

Speaker 2

Yes. So we're I mean, we're in the middle of that. So I don't really want to front run discussions that we're having with our joint venture partner. But I mean, it's really about it's expanding it to giving us more reach and mitigating Some of the risks that we see in the marketplace by sharing it with a partner.

Speaker 7

Got you. Thanks, Ken.

Operator

Our next question comes from Jeff Zekauskas with JPMorgan. Your line is open.

Speaker 8

Thanks very much. When you look at your lithium carbonate, your LCE Production from now to 2025, does your cost per ton change very much? And in what direction?

Speaker 5

Well, Jeff, as Ken described, Derek, good morning, first off. As Scott described wave 3 is hydroxide based and spodumene based in that regard. Those are high that's a higher cost of production And carbonate production out of Chile. So generally speaking, because of the higher cost To produce hydroxide versus carbonate out of brine, the average cost goes up slightly, but that's a function of resource and product mix. We continue to drive productivity throughout the portfolio to ensure that we're operating at a low conversion cost to take advantage of The good resources we have.

Speaker 8

And I think Scott said that the first Quarter would have the of 22 would have the highest EBITDA total of the year. Why is that given that lithium production would be much greater in the second half?

Speaker 2

Yes. So there are a couple of dynamics happening there. So first is we've been aggressive around pricing given inflation coming through. And in the Q1, We're selling out of inventory where that inflation has not actually hit our cost base yet. So and that's true across all of our businesses.

Speaker 2

So that inflation catches up to us in the Back half of the year and we've already implemented pricing. So that there's a lull on that. And then it's really the Same answer on lithium. That's across all the businesses, but particularly in lithium. Spodumene prices have gone up dramatically.

Speaker 2

In the Q1, we're selling out of inventories, which have 21 costs. And in 2022, those cost increases come through the P and L. That was the dynamic Scott was talking about where our EBITDA becomes tax affected because it's minority interest from JV income because Even though we're protected from those spodumene prices going up, it shifts from being in our peer EBITDA to minority interest, which gets added to EBITDA, but on an after tax basis. So those are the really the two drivers for why the Q1 is the highest EBITDA level.

Speaker 8

Great. Thank you so much.

Operator

Our next question comes from P. J. Juvekar with Citi. Your line is open.

Speaker 9

Yes, good morning. How quickly do you see the Wodgina ramp up? And is that limited by available convergent capacity in Australia and China. And then talking about conversion capacity, your potential North American, European conversion capacity is in wave 4. What does it take to move it to wave 3?

Speaker 2

I'm going to take the second question first and then probably Punt to Eric for the first. But so what we've defined, I mean, the waves are really just those are our definition of projects. So Nothing else is going to change. It's not going to move North America from 4 to 3 because 3 is defined and we're well into execution on those projects right now. And we're still defining exactly what we will do in Wave 4, but we would look to we look to accelerate those, but they'll still remain in Wave 4.

Speaker 5

And P. J, on your first question about Wodgina, we are only with our joint venture partner ramping up the first train of Wodgina, which 50,000 tons of 6 percent spodumene, a little over 30,000 tons on an LCE basis. We look at the China, the growth in conversion capacity in hydroxide from Wave 3 that Kent described as the output or excuse me, the consumer for that material. As a side note, Spodumene tends to come on pretty quickly. It's a different kind of plant operation than a conversion chemical conversion plant, which Tends to ramp over 2 years.

Speaker 5

A spodumene plant can come up within 6 months.

Speaker 2

Plus those trains are already built.

Speaker 5

Plus the trains, yes, fair, per point. Plus trains are built and they're just being restarted. So we would expect by mid year to see spodumene flowing from that, and put it into the assets that we talked about in Wave 3. And the balance, we'd consider looking at tolling, for the balance. And then as we continue to progress Wave 3 and other Expansion activities, we'd look down the road.

Speaker 5

We've made no decisions yet on the second and third train at Washington, but those would be for down the road, Giving us plenty of dry powder, so to speak, to support our growth as we continue to build out conversion capacity.

Speaker 9

Great. And you guided to lithium volume growth of 20% to 30%, which I would think is in line with where the industry is growing. But you have so much new capacity coming online in 2022, first half and second half. So I would have thought that your volumes would grow faster than the industry. Any reason why it's not growing faster than the industry?

Speaker 5

Well, certainly we'd like to continue to maintain Our position in the industry and growth of the industry, and you're right, with this growth guidance, we are doing that. But underneath that are the practical realities of capacity limitation. So The guidance we've given, PJ, speaks to we give you dates of when we think these plants will come online. We and we first have that first qualification sample, we have 6 month period before it can be qualified, and then we have about a 2 year ramp to ramp that. When you back calculate that math, That's on our fixed base of 88,000 tons last year.

Speaker 5

That is the growth increment you get. So it happens to correspond to market growth, but it's Going as fast as we can on our capacity expansion.

Speaker 9

Understood. Thank you.

Operator

Our next question comes from Christopher Parkinson with Mizuho. Your line is open.

Speaker 10

Great. Thank you very much. Just two quick questions. Just the first would be for the Western OEMs, let's say, all in on the EV front, Just what's your assessment of their own perceptions just regarding some of the newer competitor supply additions and how that product will or potentially will not be accepted in the marketplace in the ultra, let's say, near to intermediate term. Any color would be helpful.

Speaker 10

Thank you.

Speaker 5

Yes. So good morning, Chris. So by that, you're referring to Western OEM's view of new lithium competitors coming into the market Correct. We're trying to bring capacity to market. Look, I mean, I think you'd have to ask their view on things.

Speaker 5

I will say this, security supply is A very, very big concern in the market. I think that's why in a pure spot market like China, you see prices That are an order of magnitude higher than they were a year ago. It's folks trying to get supply at any price. So that is true certainly in China, given those prices, but that same sentiment is true here in the U. S, particularly as Western OEMs are in Europe as well, underwrite big investments.

Speaker 5

So they are looking for lithium wherever they can get it. I think the offering that Albemarle brings and as part of our dialogue with them is we have the resources, We have the execution capability and we're reliable in bringing on supply. So, we're an attractive partner for them in those dialogues, And we're in the middle of all those discussions now as we bring on this new capacity and look into the future to bring on future capacity, particularly as Kent referenced, as we look to Localized capacity in North America and Europe.

Speaker 10

That's helpful. And just a quick follow-up, just what would just be your latest thought process On the demand front, you already hit on a few things, but just in terms of battery technologies, energy density, just any color on what you've seen in terms of new model launches And potentially advancing high nickel cathode chemistries would be very helpful. Thank you.

Speaker 5

Yes. So on battery chemistry for electric vehicles, We still see over the 5 10 year view or sorry, I'll put it another way, over the 2025 and 2,030 view that we've characterized in our growth charts in the earnings deck. We still see nickel, high nickel being the key to higher range. And we further see Innovations on the anode side in proliferation and new technologies that will further allow more energy density and cost effectiveness of those nickel chemistries with that parity to internal combustion engines and coming in within that 18 to 24 month period. That being said, it's pretty clear and our projections would show that LFP for lower energy density For lower range vehicles, lower cost vehicles is going to remain a segment of this market, not only now, but through this 10 year period, And it's a double digit percentage.

Speaker 5

Over that period of time, a low double digit percentage, but a double digit percentage of the market. But most of the growth will be hydroxide.

Speaker 10

Thank you very much.

Operator

Our next question comes from Alex Yefremov with KeyBanc. Your line is

Speaker 11

open. Thank you. Good morning, everyone. I think As I look at your pricing guidance for lithium segment, it was very strong. If If I even assume some level of cost inflation that this cost number to get to your EBITDA and EPS guidance ends up being very high, Based on my model at least, maybe as high as 40% or more per ton, is there anything else beyond the So, I mean, and Talison Dynamics that you already described in terms of cost that we should keep in mind for 2022?

Speaker 2

So I mean, I think you have to appreciate we're bringing on new plants. And when we bring them on, They're not loaded, right? So there's a lot of so we're doing multiple facilities doing that. So there's high fixed costs associated with that with lower volumes. But Other than that, I mean, the pricing movements are pretty aggressive and pretty consistent.

Speaker 2

We've moved our portfolio Quite a bit. We've been talking about that and we've more or less done that. We're more exposed to the market than we have been in the past. But I think you have

Speaker 11

And then I wanted To follow-up on the pricing side, I guess, given approximately 50% of your volume have these indices, would any of these indices reset During the year and could you end up above the 45% sort of upper bound of your lithium guidance, Price guidance.

Speaker 5

It's Eric. I can answer that. It's They are all based on indices that continue to move. The recent movement has been upward In the past 3 months, again, sort of this tip of the spear being China prices, which are significantly higher. Where the market goes long term, we don't know.

Speaker 5

If there is a downward, sort of correction In China prices, that will hit the China spot volumes we have. If however, the spot these Indices for the large part of our business, it's variable fixed ceiling floor, those are well below those spot prices. It's very hard to say. If the prices remain high, we could definitely be to the higher end of our range on price.

Speaker 2

And I think part of your question was about are they fixed through the year, so they aren't. Those that move of the market can move during the year.

Speaker 11

I understand. Thanks a lot.

Operator

Our next question comes from Steve Richardson with Evercore. Your line is open.

Speaker 12

Hi, good morning. I was wondering again just back on the capital Peace. Scott, could you give us any more color just in terms of how much is cost inflation versus pull forward? I appreciate that you kind of I addressed this a little bit earlier, but it is something that continues to come up in our conversations and would be helpful. And then on the cost piece, Just on the previous question, appreciate that you're dealing with a lot of fixed costs in terms of some of these new project starts.

Speaker 12

But could you maybe tease out At least in terms of your unit cost, how much is process related in terms of Just general costs associated with the process versus what you're seeing in terms of this mismatch between volumes and Fixed cost versus variable?

Speaker 13

Yes.

Speaker 9

So let me take

Speaker 2

the first part of your question, Scott, and then I'll kick over to Scott to talk about the margin piece and the conversion costs. So looking at the change in our capital forecast, It's at least half the accelerations. I mean, there is I mean, we have had additional cost executing projects in Western Australia during the pandemic has been a challenge for us and we've had Additional costs as well as extending the projects on that. And we also see inflation impacting the projects that we're kicking off now That we didn't see a year ago. So it's probably how accurate we can be around that, but it's probably half acceleration and half Additional costs associated with inflation and pandemic costs.

Speaker 2

And Scott, I'll kick to you for The margin question.

Speaker 3

Yes. Hey, Steve. So as you look at the lithium margins going into this year, the Two factors are this plant startups and not being at full capacity and that's probably $100,000,000 drag In the year, somewhere in that range. And then the impact of the spodumene prices going up And changing the dynamic between cost of sales, so increasing our cost of sales, But also increasing our equity income on an after tax basis, that's probably north of $200,000,000 So those are the 2 biggest kind of movers as you're looking at the lithium margin.

Speaker 12

Great. Thanks. I appreciate the additional clarity. And one follow-up, if I may, For Eric on the lithium outlook on the demand side. The 1.5 number is obviously Huge relative to where the market had been, and I see the logic on the demand side.

Speaker 12

Can you address Your view is like the industry's ability to hit this from a supply perspective and at least how does this play out? Do we just end up seeing Ever higher incentive price to bring marginal projects to bear? Or do we have a limiting factor here in terms of The supply side's ability to hit that number and certainly the $3,000,000 in 2,030 is a huge number as well.

Speaker 5

Okay. I would say, Steve, that it's going to take it's a hard run, right? It's going to take Everybody being ourselves and our competition being successful at hitting their milestones in order provide that to meet that supply. So it's an all out effort to get there. So I don't want to sugarcoat it.

Speaker 5

It's I think it's the reason the industry So tight is because as a view, it takes a while and it doesn't go as it's always as expected. In terms of price, I don't have a crystal ball. I don't I never would have predicted a $65 carbonate price, so I don't know how to Think about where that would go in the future. It does reflect that hard slog I just referred to, I think, that everybody's got to step up and execute well in order to meet that demand. Thank you very much.

Operator

Our next question comes from Joel Jackson with BMO Capital. Your line is open.

Speaker 7

Hi, good morning, everyone. Some years ago, you guys had talked about kind of a 40% EBITDA margin Lithium is kind of being what I think you may get over the course of the cycle. We're now at a 34%, 35% range over the last 3 years to much different pricing scenarios every year. And you talk about now fully loaded plants and how that may affect margin. You're going to be, of course, ramping on plants indefinitely for a long time.

Speaker 7

So should we be thinking about this as the right cost base going forward, this margin as the right kind of base going forward for lithium?

Speaker 2

I think what we've said in the past in the long term is we stand by that. So I think we've got one of the things we have You have to understand as spodumene prices go up, that impacts our EBITDA margin because of the nature of the JV. So EBITDA effectively becomes Tax affected to some degree because of the product we purchased from Talison, and that won't be different with Marvel Going forward, so that has an impact on the pure EBITDA margin, but it still flows through the P and L once you get fully to the bottom line. So I think to kind of answer your question, we still stand by the guidance that we've provided in the long term. We still think it's in that range.

Speaker 7

My next question is, it's great there are 3,000,000 ton demand forecast for lithium for 2,030. But let's be honest, we're never going to get there. There's not supply out there. Even if there's supply, we're not going to get there in 8 years for 3,000,000 tons, right? You've got to have new resources.

Speaker 7

You got to have new technology, DLE, whatever. You have to have lots of assets that aren't producing now in lots of strange places, new feedstocks. So never going to get to 3,000,000 tons. Would you agree with that? And if that's the case, what's going to happen?

Speaker 7

So does that mean the EV acceleration has got to come down, OEMs are going to change their plan or do I have it wrong?

Speaker 2

Eric said it before that it's a slog, but it's Doable. I think the industry has to be aggressive and has to execute well. And I think you're seeing in some of that We're getting through some of those growing pains. We think we're probably as experienced at anyone at doing these large conversion facilities and bringing on new resources. But it's a combination of resource and conversion capacity.

Speaker 2

It is a stretch, but it does require some new technology And operating in some places where historically the lithium industry hasn't done that, but it's not impossible.

Speaker 5

Thank you.

Operator

Our next question comes from Vincent Andrews with Morgan Stanley. Your line is open.

Speaker 14

Thank you and good morning everyone. Kent, just wondering if you could mark the Wave 3 total CapEx for us. I think you originally cited it at $1,500,000,000 and I think you mentioned half of the increase for 2022 was related to inflation, but Seems like maybe some of that was transitory if COVID indeed, comps down. So how would you tell us to think about Wave 3 now versus the original 1.5?

Speaker 2

Yes. Well, it's I mean, it has stretched a little bit because we've accelerated and we've had inflation. That inflation is if it goes away in 3 years, it doesn't matter because we're building the projects in the next couple of years. So there is some impact on that. So it's We've accelerated because there's additional capacity associated with that.

Speaker 2

So that is, say, half of the difference and the other half is inflationary. So it's Got to add that on. And even if it goes away, I mean, we're not going to be necessarily in Western Australia, but there's still going to be and we see Our forecasting says inflation in the capital equipment that we're buying in the next year and 2.

Speaker 14

So if we Thought of something like it was going to be like $1,800,000,000 to $2,000,000,000 now instead of $1,500,000,000 Is that good for a ballpark number?

Speaker 5

Yes. I think

Speaker 2

I'm going to start estimating what the projects are going to turn out to be, but it's up definitely from 1.5. Part of that is the acceleration. So I'm kind of focused on the inflation part, but overall, that's probably not a bad estimate.

Speaker 14

Okay. Thank you. And just on the Salar to Atacama Technology projects, can you just talk to us about what milestones are left to hit on that so that you'll Confident that you'll be able to execute it?

Speaker 2

Yes. So we're just getting Going into the real execution phase of that particular project, but I don't know that it's not as complicated a project as a conversion Facility. So I think we feel pretty good about executing on that. We are We've lost a little bit of the float we had in the schedule, but that's it. We're still on plan and on the schedule that we had, but we have lost a little bit of the contingency From a time standpoint that we originally had built in.

Speaker 14

Okay, very good. Thank you. I appreciate the answers.

Operator

Our next question comes from Kevin McCarthy with Vertical Research. Your line is open.

Speaker 15

Yes, good morning. A couple of questions on your Catalyst business. First, I think you had announced some price increases In early January, can you talk about the magnitude and the flow through with regard to realization of those Increases and also related to catalysts, any update on your level of confidence with regard to the ongoing Okay.

Speaker 2

So, Rafael, let me touch on the strategic review and then let you talk about pricing. So, I mean, we're going through that process and it's going well. The timing we had said, we think we'll have an answer by middle of the year. And I don't really want to front run it or comment too much on it beyond that. Rafael?

Speaker 13

Yes, sure. Thanks, Kent. Kevin, As you saw, we announced a price increase in January. That's really to help offset the inflation that we've seen Starting in the second half of twenty twenty one into this year, particularly around natural gas. So that's building momentum.

Speaker 13

So I think we'll see North of $10,000,000 worth of pricing in our forecast. Again, that's really to offset What we've seen on raw materials, as you know, Kevin, we produce performance products. So we create a lot of value for our customers. We think our pricing is justified. It's mostly around FCC catalyst where we're in a near Sold out position right now.

Speaker 13

All that being said, we've got a lot of confidence in what we shared as our long term forecast for the business at Investor Day. We think some of the raw material headwinds will be covered with price over time and we'll be on track to deliver what we said.

Speaker 15

Thank you for that. And then second, Kent, I think you mentioned in your prepared remarks that you've begun to build some relationships With the incoming administration in Chile, can you talk through what has changed in that country, I suppose politically, but also there's an ongoing effort to rewrite the constitution. What in your mind will be fixed To remain the same, what are you watching in terms of potential changes? And how are you thinking about it in terms of Capital allocation moving forward beyond La Negra 3 in country versus alternatives you may have in Australia, China, U. S.

Speaker 15

Or other countries?

Speaker 2

Okay. So there's a lot going on in Chile and new administration is not really in place. We're trying to build our relationship out in front of that with our local team there, but there had been discussions going on about rewriting the constitution and All of them, the mining royalties across multiple industries have been those discussions have been happening for the last 6 months, if not a year. So there's been a lot of discussion. So we're trying to build relationships with the new government, stay close to it.

Speaker 2

We don't anticipate wholesale change in the direction that the government goes with respect to extractive industries, But we do think there'll be changes. Most of that's going to be as you look forward as opposed to on existing businesses, particularly around lithium. So We don't see a wholesale change in the way that lithium is the existing business Done in Chile or our royalties that we pay as an example, we think they're very progressive, probably the highest in the world On lithium for sure and probably even in extractive industry. And we think that that will hold and maybe become an example for some of the other Resource Based Industries in Chile. So we're pretty optimistic about our position in Chile.

Speaker 2

From a capital allocation standpoint, I mean, we have we're spending money now there on the Salar yield project. We've got La Negra 34 project is really done and we're in the process of ramping that up. So we won't really need to make a capital allocation decision Vis a vis Chile for a while. So we'll have a much better view of what's happening in Chile and what the new administration The direction that they're going and what the rules of the road are before we have to make a significant capital allocation decision there.

Speaker 15

Perfect. Thank you very much.

Operator

Our final question comes from Chris Katz with Loop Capital Market, your line is open.

Speaker 6

Good morning. Thank you. So slightly more Nuance follow-up on the pricing and then also the security supply concept, something that Eric mentioned a couple of times. So obviously, it's an increasingly important theme, I think. And this is really juxtaposed against these new demand scenarios that you put out this morning, the 1,500,000 and the 3,000,000 Ton demand scenarios by 2025 and 2030.

Speaker 6

So at your Analyst Day in September, you talked about just how the industry's demand curve or sorry, cost curve will be steepening and even your own portfolio, I would So you're going to experience that. But as you ramp wave 3, even pulling forward the 50,000 metric Tons, you're talking about 200,000 metric tons. That's only 20% of the increased industry demand from now to 2025, it looks Like so, in terms of security of supply, we think these customers are just increasingly concerned, about their ability to source lithium So my question really is, are they coming to a big and Well established and reliable integrated supplier like Albemarle and saying like, is the pendulum swinging back towards this concept of being willing to pay Higher fixed costs in order to ensure that supply. I know you've gone from sort of those floor pricing contracts to more of a variable structure. I would think given how acute this potential shortage is shaping up to be, that they'd be more motivated To do that, and is that something you're considering?

Speaker 6

Just wondering, kind of it's kind of asking a couple of other analysts in different ways, but It just seems like there's this is going to be a tough scenario and the only answer is going to be for higher prices to induce more supply. Any more color around that would be appreciated. Thanks.

Speaker 2

Yes. So I'm going to take the First shot at that and Eric, you can fill in if I missed some of the key points. But I guess, the first thing is security of supply has always been a key part of our value proposition. And in our view, it didn't get the attention that we thought it deserved in the past. We've always built on Having multiple resources, different locations, diversification in our supply base and the security of supply, Albemarle has a portfolio that is unlike anyone In the industry, and that's from both the conversion, geopolitical, resource, cost base, brine, rock, everything.

Speaker 2

So that said, it is getting more attention and I think the OEMs and the battery manufacturers, but probably the OEMs more than anything else are paying more attention to that. They're seeing that there Maybe a structural deficit or at least they want to make sure they align with the most reliable players. And we're having conversations with People, they're just conversations about different pricing structures. In the industry, we've shifted our the portfolio shift that we've done now was really something we started Couple of years ago, put it on hold when prices went so low because we didn't want to renegotiate contracts at a trough, but we've been able to do that now and That will probably continue to evolve. The structure that we have now is probably not the one that lasts for the balance of the industry.

Speaker 2

I suspect there are changes in those structures to come, and a lot of it will be based on security of supply and quality and the ability to bring on Projects and deliver what you say you're going to do.

Speaker 6

And I could just have one follow-up. The just on, I don't know if Eric you want to add to that, but also just on your decision To self spot me, because I thought that you'd explained in the past that, that would be for, captive conversion To hydroxy, but now you've elected to, it sounds like, opportunistically sell some of the spasmodiums in the market. Thanks.

Speaker 2

Yes, I wouldn't read into that, that that's a change in our strategy. It was opportunistic and It was product that we had sitting in inventory that had was made several years ago and it's just been sitting and we took the opportunity To sell that into the market because it was there was just an opportunity, and we took advantage of it. It's just opportunistic. You shouldn't read into that, that we've changed our view

Operator

That's all the time we have scheduled for today's call. I'd like to turn the call back over Kent Masters for closing remarks.

Speaker 2

Okay. Thank you, Michelle, and thank you all for your participation on our call today. Our successes in 2021 have positioned us well to capitalize on the strength in the markets that we serve. And this coming year is about execution. I'm confident in our team's ability to drive value for all of our stakeholders by accelerating the growth of our business in a sustainable way and to lead the industry by example.

Speaker 2

Thank you.

Operator

This concludes the program. You may now disconnect. Everyone, have a great day.

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Earnings Conference Call
Albemarle Q4 2021
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