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SQM Embarks on Expansion in Lithium Market, Betting Big on EV Future

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Michael Chen

March 21, 2024 - 23:16 pm

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SQM Spearheads Lithium Expansion Amidst Volatile Market Dynamics

As the global push towards electric vehicles gathers momentum, the demand for lithium—the linchpin of EV battery technology—has surged. Amidst the parched sprawls of Chile's famed Atacama Desert, one of the juggernauts of lithium refining is poised to elevate its operational footprint even further.

Atacama's Lithium Giant Embarks on a Major Upgrade

SQM, a leading lithium producer, is staging a significant expansion at its refinery near the edge of the Atacama Desert. With an investment pegged at $490 million, the company is prepping to launch a new processing line aimed at bolstering lithium hydroxide production. This expansion is not merely a scale-enhancing move but a strategic wager on the electric vehicle battery market's potential. Despite the industry's recent struggles with price declines and oversupply, SQM is steadfast, making a deliberate choice to grow while many of its peers are pulling back on operations.

By initiating the construction of additional mammoth tanks and processing vats next year, SQM is adhering to an ambitious strategy that could amplify the ongoing supply glut, according to Humberto Carvajal, SQM's production manager. The company's expansion plans present a stark contrast between careful inventory management and aggressive market positioning, running counter to the scaled-back experiences that have characterized much of the industry of late.

"We always produce at maximum levels," Carvajal asserts, underscoring SQM's philosophy from the vantage point of the Salar del Carmen plant, a notable distance from the salt flats pivotal to SQM's brine extraction operations.

SQM's Lithium Refinery: A Mirror of Market Emergence

Transforming into a prodigious complex stretching over 840 acres, SQM's refinery reflects the ascendancy of lithium as a pivotal resource for fostering a sustainable future devoid of fossil fuels. The plant’s growth in recent years mirrors the market’s evolution, with plans to expand annual production from around 200,000 metric tons to an astounding 300,000 tons. This figure echoes the entire size of the lithium market merely half a decade ago.

Navigating EV Market Segments and Geopolitical Supply Chains

The expeditious growth of the lithium market is intricately aligned with the evolution of the electric vehicle (EV) segment. The spectrum ranges from top-tier Teslas demanding high performance to more economically priced urban vehicles. With the West seeking to loosen China's steadfast grip on the battery supply chain, investments are increasingly channeled towards bolstering hydroxide output, thereby granting SQM greater versatility amidst market fluctuations.

"Hydroxide is costlier," admits Carvajal. "But it’s much better in terms of quality."

The stakes for SQM's operational tenure in Chile hinge on a proposed agreement, which entails ceding the majority stake of its brine assets to the state-owned Codelco. This arrangement would renew and extend SQM's extraction contracts until 2060. The principal shareholders of SQM, including Julio Ponce, Augusto Pinochet's former son-in-law, and Tianqi Lithium Corp. of China, are cautiously eying the proceedings around the Codelco deal, with Tianqi in particular seeking more clarity before committing to a definitive agreement.

Pioneering Sustainability in Lithium Extraction

Discussing the deal with Codelco, a central focus remains on refining the environmental impact associated with brine and plant operations. With a substantial $2 billion allocated to augment efficiency, strategies include the deployment of direct extraction technologies to complement the existent evaporation methods. Reducing the environmental footprint is not only integral for SQM's image but also resonates positively with local communities and stakeholders deeply invested in environmental, social, and governance virtues.

Riding the Downturn: SQM’s Operational Philosophy

SQM is no stranger to maintaining full production during economic downturns. The company has operated at near-maximum capacity since recovering from the 2007-2008 financial crisis. Motivations include maximizing state-allocated production quotas and shouldering the responsibility to ensure supply continuity, thereby upholding buyer confidence and staving off investments in lithium battery alternatives.

By marking its territory in the lithium market and growing its market share, SQM stands out. Currently, the disproportionately low prices have put some of the company's rivals in a precarious position, with losses becoming a new normal. As industry leaders vocalize the necessity for supply discipline, SQM defies the trend with an audacious, growth-focused approach.

"In markets as dynamic as ours, growth companies must pivot with disciplined decision making and focused execution," elucidates Kent Masters, CEO of Albemarle Corp, the top lithium producer. Albemarle's response to market pressures amounts to cost-cutting, workforce downsizing, and scaling back expansion plans—measures diametrically opposed to SQM's bullish strategy.

Read more about Albemarle’s strategy and its repercussion for contractors: Albemarle’s Delay to Lithium Expansion Sees Contractors Let Go.

Inventory Management: Preparing for a Lithium Demand Surge

SQM is betting on a resurgence in lithium demand, ramping up production to exceed its sales this year, as revealed by Carvajal. The company currently maintains an inventory equating to three to four months' supply. This disciplined approach to stockpiling is deemed a strategic advantage as the industry anticipates a robust demand landscape post-2025.

"Holding additional inventory is going to be very good news," states Ricardo Ramos, CEO of SQM, during an earnings call. He further elucidates the strategic reasoning, "We embrace a policy of maintaining stocks, ready to meet market demands at a moment's notice."

At this critical juncture for the lithium market and its associated industries, SQM’s ambitious expansion signals a robust vote of confidence in the long-term prospects of electric mobility. As economies worldwide pivot towards cleaner energy and transportation solutions, the appetite for lithium is projected to burgeon, and companies like SQM will be at the forefront, shaping the future landscape of energy storage technologies.

©2024 Bloomberg L.P.