The End of the Lithium "Big 3"

Posted on: Mar 11, 2016
Tagged: Joe Lowry, Lithium
Author: Joe Lowry

This is a combination of three separate articles written by lithium expert Joe Lowry, who has provided written permission to republish these articles this way on www.criticalinvestor.eu

The End of the Lithium "Big 3"

Published on March 11, 2015
Source

By: Joe Lowry, one of the world's leading lithium market experts

Most people writing about the lithium industry refer to Albemarle/Rockwood, SQM and FMC as the “Big 3” lithium companies. The concept of the “Big 3” in lithium was valid for almost two decades but now is as antiquated as the idea of the “Big 3” automakers.

The lithium industry structure currently has one “super power”, two former members of the “Big 3” that still participate, a newcomer starting-up (Orocobre), and a rising group of producers in China that have captured most of the recent growth in the market.

The “super power” is Rockwood Lithium which was recently acquired by Albemarle. Rockwood’s strong global presence in the upstream lithium business (spodumene, lithium carbonate, lithium hydroxide, etc.) and their clear leadership position in the downstream lithium business (butyl lithium and a broad portfolio of other organic lithium products) puts them in a class by themselves. Albemarle clearly saw great value and potential synergy with other business units in acquiring Rockwood. Rockwood will continue to grow within Albemarle. Whether the acquisition price Albemarle paid for Rockwood is justified is a separate question.

Despite their large capacity and low cost reserves in the Atacama Desert, SQM remains a lithium producer with a “by – product” mentality. SQM produces a reasonably high quality lithium carbonate product and a basic industrial grade lithium hydroxide. SQM also sells partially treated lithium brine as a feedstock for conversion to value added lithium products in China. Lithium is less than 10% of SQM’s sales. Several years ago, SQM attempted to move into the downstream lithium business but quickly realized they were better served by remaining focused in the more commodity like segments of the lithium market leveraging their low cost position. In recent years SQM’s lithium carbonate production has not reached former peak levels despite the growing global market.

Not too many years ago FMC was the #2 lithium company in the world with leading positions in key product lines such as lithium hydroxide and lithium chloride. After several years of operational issues in Argentina negatively impacting volumes and costs, FMC’s market share has declined. FMC's current strategic intent for their lithium business is unclear. After more than a decade of positioning the lithium business as a specialty chemical unit, in early 2013 FMC suddenly rebranded lithium within their newly created Minerals Division. A year later FMC announced the planned spin-off of the Minerals Division. Within months the spin-off plan was scrapped and the main Minerals asset (the soda ash business) was sold separately effectively leaving lithium an orphan in the FMC portfolio. Lithium now constitutes less than 5% of FMC sales and as one analyst following FMC wrote in December, 2014: “the lithium business does not warrant much discussion”.

China Rising

On the other side of the world, two things have been happening: 1) most of the growth in the lithium market has been in China and 2) a couple of publicly traded Chinese lithium companies have captured most of that growth and become global industry players in the process.

Sichuan Tianqi Lithium shocked the lithium world in late 2012 by outbidding Rockwood for global spodumene leader Talison. Tianqi’s strategy to control a significant lithium resource and become the leader in the upstream China lithium market was clear. Tianqi’s currently planned acquisition of Galaxy Resource’s lithium carbonate plant in Jiangsu province to supplement their capacity in Sichuan province further demonstrates the execution of their growth plan.

While Tianqi got headlines outbidding Rockwood for Talison another company, Jiangxi Ganfeng Lithium, has quietly employed a very different strategy – growth via sourcing rather than owning their raw material source. Ganfeng focused first on the downstream market – becoming the largest metal producer in the world and a major regional player in the butyl lithium business. Now they are growing their upstream presence globally having recently built the world’s largest lithium hydroxide plant.

Ganfeng’s lithium raw material comes from various sources including Chilean brine and Australian spodumene while they seek the right moment to develop their own resource.

Stated in US dollar terms, Ganfeng currently has a market capitalization of $1.2 billion and their sales growth is something never previously seen in the lithium world - rising from ~ $1 million in 2000 to an estimate of ~ $180 million in 2015.

While Ganfeng’s and Tianqi’s projected 2015 sales may still be a bit lower than SQM and FMC, it is clear that their growth trajectory makes them the worthy of discussion as “major players”.

Another company in China, Sichuan Yahua, has recently acquired two small lithium companies and intends to make significant investment in growing their lithium business. This company should also be considered a potential major.

Albemarle’s Rockwood Lithium unit will remain the world’s leading lithium company for the foreseeable future; however the fact the Rockwood holds the minority interest with Tianqi in the 51/49% Talison JV speaks volumes about the change in the lithium industry structure.

The ranking of the companies below Rockwood in the lithium world is likely to change in the coming years; however one thing is clear: the former members of the "Big 3" no longer control the market.

 

The End of the Lithium "Big 3" Final Chapter

Published on June 1, 2015
Source

By: Joe Lowry, one of the world's leading lithium market experts

The chart below shows what happened over a decade to change the structure of the lithium industry. The next five years will likely bring more change than the past decade - global demand will increase at dramatic rates and after a shortage period driving record high prices, supply will expand and become more globally balanced.

Stay tuned.......

 

End of the Lithium "Big 3" Postscript: A Tale of Two Brine Producers

Published on August 7, 2015
Source

By: Joe Lowry, one of the world's leading lithium market experts

Albemarle and FMC released Q2 earnings this week. The results clearly show that Albemarle/Rockwood is the dominant company in the global lithium market. Both companies produce lithium raw materials from South American brine operations. The relative performance demonstrates that Albemarle/Rockwood's resource in Chile is world class and FMC's resource in Argentina is not. 

Based on the significant premium Albemarle paid to acquire Rockwood, a high level of performance needs to be sustained or even increased if the acquisition is to be judged a long term economic success.  In any case, so far so good for ALB.

Meanwhile, FMC seems content to be an "also ran" in the lithium space by citing their weak financial performance vs. the year ago period as a quarterly "highlight" and saying their lithium business "continues to operate extremely well".  I guess the question for FMC is - "how low is the bar set?" Declining performance in a sold out upstream market with rapidly increasing prices seems more of a "lowlight". Yes, there was an FX headwind but the decline in volume seems another self inflicted wound and more evidence that their production problems have not been solved. 

The two companies release their numbers in slightly different formats; but it doesn't require much analysis to see that ALB's $127M in Q2 revenue and $54M in EBITDA with a 43% EBITDA margin dwarfs FMC's $54M in sales, $4.6M in EBIT and anemic 8.4% margins. 

FMC mentioned they had record carbonate and hydroxide operating "rates" - "during the quarter". It seems "during the quarter" doesn't mean for the entire quarter. FMC had a negative volume variance vs the prior year period in a sold out market. Upstream market prices, year over year, are up on average double digits - it seems Albemarle took advantage of the favorable pricing environment much better than FMC did.

Albemarle's long term vision and recent lithium investments seem very well timed. Assuming they receive the permit to pump the additional brine required to feed the already completed expansion of carbonate capacity in Chile; they are in a great position to benefit from rising prices. 

Albemarle's earning call transcript can be found below.

http://www.nasdaq.com/aspx/call-transcript.aspx?StoryId=3154396&Title=albemarle-alb-luther-c-kissam-on-q1-2015-results-earnings-call-transcript

Meanwhile FMC still uses the word "if" when speaking about expanding their lithium capacity. The full FMC transcript can be found at:

http://www.thestreet.com/story/13248124/9/fmc-fmc-earnings-report-q2-2015-conference-call-transcript.html

 

 

 

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