Ladies and gentlemen, thank you for standing by. And welcome to the Q3 2020 Albemarle Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference to your presenter today, Ms. Meredith Bandy, Vice President of Investor Relations. Thank you. Please go ahead, ma'am.

All right. Thanks, Mark and welcome to Albemarle’s third quarter 2020 earnings conference call. Our earnings were released after the close yesterday and you will find our press release, presentation and non-GAAP reconciliations posted to our website in the Investor Relations section at albemarle.com. Joining me on the call today are Kent Masters, Chief Executive Officer; and Scott Tozier, Chief Financial Officer. Raphael Crawford, President, Catalysts; Netha Johnson, President, Bromine Specialties; and Eric Norris, President, Lithium, are also available for Q&A. As a reminder, some of the statements made during this conference call including our outlooks, expected company performance, expected impacts of the COVID-19 pandemic and proposed expansion projects may constitute forward-looking statements within the meaning of federal securities laws. Please note the cautionary language about forward-looking statements in our press release and that same language applies to this call. Please also note that some of our comments today refer to financial measures that are not prepared in accordance with U.S. GAAP. A reconciliation of these measures to GAAP financial measures can be found in our earnings release and the appendix of our presentation, both of which are on our website. Now, I will turn the call over to Kent.

Thank you, Meredith, and good morning, everybody. On the call today, I will cover a high-level overview of results and strategy and highlight additional actions we are taking to improve the sustainability of and to grow our business. Scott will then review third quarter financials, provide updates on our balance sheet and cost-saving initiatives, and review our outlook. At Albemarle, our first priority is the safety and wellbeing of our employees, customers, and communities. Thanks to the courage and dedication of our employees, we've been able to safely operate our facilities throughout the pandemic to meet customer needs. Our cross-functional global response team continues to meet regularly to assess pandemic-related risks and adapt protocols as necessary. Protocols, including restricted travel, shift adjustments, increased hygiene, and social distancing remain in place at all locations. Our recent focus has shifted from managing the immediate crisis to building flexibility to adjust for regional differences and changing conditions. Today, looking at our non-essential workers around the globe, most of North America remains on work-from-home status. Asia and Australia have returned to worksites. Most of Europe returned to worksites over the summer but have now gone back to work-from-home, given rising COVID-19 cases and rates. And finally, in Chile, improving COVID-19 rates and falling cases have allowed us to trial a soft reopening approach at a worksite at reduced capacity. As we all know, the situation is challenging and continues to evolve. I'm grateful to our team for their continued vigilance and commitment to working safely and productively. Turning to recent results. Yesterday, we released third quarter financials, including net income of $98 million or $0.92 per share and adjusted EBITDA of $216 million, down 15% from the prior year. Our adjusted EBITDA results have surpassed the high end of our Q3 outlook by 14%, thanks to better than expected performance in Lithium and Bromine and the exceptional cost-saving results across our businesses. We currently expect full year 2020 adjusted EBITDA of between $780 million and $810 million, lower year-over-year based on reduced global economic activity due to the global pandemic and reduced Lithium pricing as expected going into the year. Scott will go into more detail on our outlook for the rest of this year and talk directionally about next year. In late 2019, we launched an initiative to achieve sustainable cost savings of over $100 million per year by the end of 2021, with about half of that or $50 million to be achieved in 2020. Earlier this year, with the onset of the pandemic-related economic slowdown, we accelerated those initiatives, giving us line of sight to $50 million to $70 million savings in 2020. Implementation has been even more successful than we expected, and we are on track to deliver about $80 million in savings this year and to reach a run rate of more than $120 million by the end of 2021. We plan to turn this two-year project into an ongoing culture of operating discipline and continuous improvement with additional cost and efficiency targets. Our strategic approach to sustainability is another facet of this operational discipline and a key area of focus for Albemarle. Since we spoke last quarter, we have published our enhanced sustainability report, which expands on the four key quadrants of our sustainability framework and sets the baseline for our environmental performance and increased disclosures. Now, we are working to establish sustainability goals and targets and continue to make progress in each quadrant. This week, we also published our Global Labor Policy in alignment with International Labor Organization conventions and our human rights and global community relations and indigenous peoples policies, both consistent with UN guiding principles. These policies will be available on the sustainability section of our website. I'm proud to say that Albemarle generates more than 50% of our revenues from products that help reduce greenhouse gas emissions or promote greater resource efficiency, as our Lithium business grows and an even larger proportion of our business will contribute to global sustainability. In summary, we are concentrating our efforts where they matter most, so we can continue to create sustainable value for our customers, investors, and stakeholders. Our growth projects at La Negra and Kemerton are key to increasing our battery-grade lithium conversion capacity in line with long-term customer demand. La Negra III and IV is an expansion of our lithium carbonate capacity in Chile. The project is expected to reach mechanical completion in mid-2021, followed by a six-month commissioning and qualification process. La Negra III and IV allows us to add carbonate capacity at the very low end of the cost curve. Kemerton, our new lithium hydroxide conversion plant in Western Australia, is on track to reach mechanical completion by late 2021, with a six-month commissioning and qualification process to follow. Kemerton is core to growing our hydroxide capacity in line with expected strong long-term market demand. And with that update, I'll turn it over to Scott for more detail on our recent results.

Thank you, Kent. Good morning, everyone. Albemarle generated third quarter net sales of $747 million, a decrease of about 15% compared to the prior year and in line with our previous outlook. This reduction was driven primarily by reduced prices in Lithium as expected coming into the year and reduced volumes in Catalysts and Bromine related to pandemic-related economic weakness. GAAP net income was $98 million or $0.92 per diluted share. The non-GAAP adjustments this quarter were primarily related to restructuring for cost savings and discrete tax items, with adjusted earnings of $1.09 per diluted share. Lower net income was primarily driven by lower net sales, partially offset by costs and efficiency improvements. Corporate and SG&A costs were lower versus the prior year due to these cost savings initiatives. As Kent stated, adjusted EBITDA was $216 million, a decrease of 15% from the prior year. The success of our short-term and sustainable savings initiatives, as well as the timing of equity income from the Callison JV helped us improve margins and beat the midpoint of our Q3 EBITDA outlook by about 20%. Turning to slide eight for a look at the EBITDA bridge by business segment. Adjusted EBITDA was down $38 million over the prior year, reflecting lower net sales and lower equity income, partially offset by cost savings initiatives and efficiency improvements. Lithium's adjusted EBITDA declined by $31 million versus the prior year, excluding currency. Pricing was down about 17%, partially offset by cost savings. Lower pricing reflects previously agreed battery-grade contract price concessions for 2020, as well as lower market pricing in technical grade products. Lithium EBITDA margin benefited from cost savings and the timing of Callison JV shipments to our partner Tianqi. Bromine's adjusted EBITDA was down about $10 million, excluding currency. The decline was primarily due to lower volumes as a result of the pandemic-related economic downturn, partially offset by ongoing cost savings. Likewise, Catalyst adjusted EBITDA declined by $30 million, excluding currency, primarily due to lower volumes offset by cost savings and efficiency improvements. Fluid Catalytic Cracking, or FCC, volume improved sequentially but remained down compared to the prior year due to lower transportation fuel consumption as a result of travel restrictions. Hydroprocessing Catalysts, or HPC, volumes were also down compared to the prior year due to normal lumpiness of shipments and softness related to lower oil prices and reduced fuel demand. Our corporate and other category adjusted EBITDA increased by $15 million, excluding currency, primarily due to improved Fine Chemistry Services results. We ended the quarter with liquidity of about $1.5 billion, including just over $700 million of cash, $610 million remaining under our revolver and $220 million on other available credit lines. Total debt was $3.5 billion, representing net debt to adjusted EBITDA of approximately 3.2 times. Our commercial papers supported by our revolver, which is not due until 2024. And so that leaves about $670 million of short-term debt to be restructured or repaid over the next year. We expect to repay the 2021 debt maturities out of cash on hand, assuming continued economic recovery and cash inflows from divestitures. However, we are also working with our banks on a delayed draw term loan to backstop those 2021 maturities. If the economic recovery or divestitures are delayed, we'd be able to refinance the short-term debt using this new delayed draw term loan. As Kent highlighted earlier, our 2020 sustainable cost savings initiative is on track to achieve cost reductions of about $80 million this year. That's 60% above our initial estimates. We expect to reach run-rate savings of more than $120 million by the end of 2021, up 20% from the previous outlook. We continue to expect short-term cash management actions, such as travel restrictions, limited use of external services and consultants and working capital management to save the company about $25 million to $40 million of cash per quarter this year. Next year, we expect some headwinds as some of these temporary cash savings reverse. Finally, we're narrowing our expected range of 2020 capital spending to $850 million to $900 million, based on timing of spend. Our two major capital projects, La Negra III and IV and Kemerton remain on track for completion in mid-2021 and late 2021, respectively. They will begin generating sales revenue in 2022, following a roughly six-month qualification period for each plant. Turning to our outlook. This quarter is a transition from quarterly to annual outlook. Our next quarter, we expect to return to our normal practice of giving annual outlooks. As we approach the end of the year, we currently expect to deliver full year 2020 net sales of around $3.1 billion at the midpoint of our range, adjusted EBITDA of between $780 million and $810 million, and adjusted diluted earnings per share between $3.80 and $4.15. Lithium's Q4 adjusted EBITDA is expected to increase 10% to 20% compared to Q3 2020, as battery-grade customers continue to meet planned volume commitments. Bromine's Q4 EBITDA is expected to be similar to Q3. Stabilization in electronics and building and construction continue to help offset weakness in other energy markets, particularly deepwater drilling and automotive. Finally, Catalysts Q4 EBITDA is expected to be down between 20% and 30% sequentially, primarily due to HPC volumes and mix. FCC demand is expected to continue to recover, with increased travel and depletion of global gasoline inventories. But Q4 is expected to be particularly weak for HPC Catalysts, in part because of normal lumpiness, but also as refiners continue to defer HPC spending into 2021 and 2022. As we look beyond this year, visibility remains challenging. However, we are seeing signs of improvement or at least stabilization in our businesses. EV sales remain a key driver for the growth of our Lithium business. Global EV sales were up 90% in the month of September compared to the previous year. September represented a new monthly record of EV registrations led by European EV sales. The rest of the world continues to rebound from the pandemic-related slowdown earlier this year, with year-to-date global EV sales up 15%. The fourth quarter is also typically a seasonally strong quarter for auto sales. And similarly, IHS market expects global EV production to increase by 20% to 30% in full year 2020 and by nearly 70% in 2021. Our Bromine business supplies a diverse set of end markets and is generally driven by broader consumer sentiment and global GDP. Consumer sentiment continues to improve in most regions, albeit still below pre-pandemic levels. Analysts now expect global and U.S. GDP to be down about 4% in 2020 before rebounding next year. Finally, in Catalysts, after the sharp drop-off in March, U.S. miles driven has rebounded, but remains well below normal levels. Similarly, refinery capacity utilization has improved from earlier this year, but remains well below typical levels. Refinery utilization rates in the mid-70% range are a challenge for an industry designed to run efficiently at utilization rates of 85% or higher. Given recent shifts in demand and refining economics, we don't expect to see pre-pandemic levels until 2022 at the earliest. Forecast and leading indicators like these help gauge the outlook for our end-use markets. However, a variety of factors, including supply chain lags, contract structure, inventory changes, and regulatory impacts can cause our results to differ from the underlying market conditions.

Thanks, Scott. Economic conditions are improving, but uncertainty remains, particularly if additional COVID-19 impacts lengthen the time to a full economic recovery. We have the playbook established and know how to manage through subsequent waves of COVID-19 as necessary. At the same time, we are confident in the long-term growth prospects of our core businesses and continue to focus on controlling what we can control. That means first and foremost, focusing on the health and wellbeing of our employees, customers, and communities. It also means building operational discipline and sustainability into all aspects of our business, including manufacturing, supply chain, capital project execution, and the customer experience. We remain confident in our strategy and we will modify execution of that strategy to further position Albemarle for success.

All right. Before we open the lines for Q&A, I'd just like to remind everyone to please limit questions to one question and one follow-up to make sure that we have enough time for as many questions as possible and feel free to get back in the queue for additional follow-ups if time allows. Thanks, Marcus. Please proceed with the Q&A.

Thank you. Your first question comes from the line of Bob Koort with Goldman Sachs.

Good morning. This is Tom Glinski on for Bob. So, first question is, you're guiding flat volumes in 2021 for Lithium, even though the battery chemicals market should be growing nicely next year. I guess, this suggests that you're going to be losing market share first, are you okay with that? And then second, if other producers capture that incremental volume in 2021 and get through that challenging qualification process with the customers, do you expect to regain that market share in 2022 and beyond, or is there a risk your competitors maintain that? Thank you.

Yeah. Tom. It's a function of our projects and when they're coming on and the capacity coming on and who has that capacity to capture growth. So, there's not much we can do about that at this point. We're on our plan to bring that capacity on, but likely demand will pick up before we have that capacity, so we will lose a little share, but we expect that that will move back to us as we get that capacity on as the market continues to grow out into the future.

Great. That makes sense. And then, I guess, higher level, looking at 2021, considering the moving pieces between price down in Lithium, volume flat, but capturing some incremental cost savings. Do you think you can grow segment EBITDA next year, or is EBITDA going to be flat to down? Thank you.

Well, frankly, it will depend on how the market develops over the year. Without volume, we will have some cost savings to offset inflation and other factors, but we will be close to being flat unless we experience a significant change in pricing.

Your next question comes from line of David Begleiter with Deutsche Bank.

Hi. This is David Fong here for Dave. I guess, first, just on pricing, because it's something that's pricing have bought in and even some carbonate pricing started to recover. I guess, if you can just elaborate a little bit more on your pricing weakness on carbonate in 2021, and do you expect that to broaden during the year or would that be like a 2022 story?

Yes. I'll make a comment and then let Eric give you a little bit more detail or his perspective. So, I mean, that's the magic question. It looks like when you look at the indices out there that it's at least bottomed, if not starting to pick up a little bit, but we'd probably need to see that a bit more to have more confidence. But we're anticipating that turns up during 2021. And the question is when during 2021? So, Eric, you want to add something?

Yes. Specifically regarding carbonate, when we examine the growth forecast for the upcoming year along with this year's performance, it appears that we're experiencing more growth related to hydroxide. Consequently, carbonate is not benefiting as much from this trend. We do see some growth in China, where the market has lower prices and is more oversupplied. As Kent noted, there have been mixed signals from reported indices, with some indicating an uptick while others remain flat. The price reporting groups, especially in China, present a confusing picture, showing prices significantly below marginal cash costs. The price of carbonate has decreased more than we anticipated six months ago and is showing an increase in one report. However, based on the supply dynamics I mentioned and the stronger growth on the hydroxide side, it seems that a substantial rise in spot prices for carbonate above marginal cash costs is more likely to be a 2022 scenario. While it's possible for this to happen in 2021, it appears more probable for 2022, although we believe the situation for hydroxide will be different.

Thank you. Regarding Catalysts, the recovery seems to be occurring more slowly than anticipated. While sales are expected to increase slightly in 2021, what kind of improvement are we discussing? Additionally, based on the current pace of recovery in Catalysts sales, do you believe we can achieve the same level of EBITDA in 2022 as we did in 2019?

So, I'll provide my insights and Raphael can add his thoughts. The situation largely hinges on demand and the timeline for the return of driving and travel. It fundamentally revolves around fuel demand and our refinery utilization. From our perspective, we don't anticipate returning to 2019 levels in 2020 until late in 2022; it's likely to be very late 2022 before we achieve that both in terms of fuel demand and our operations.

This is Raphael. I think that's right, Kent. And when we look at the outlook, there's a few things that play in. One is the impact of the pandemic. And when do fuel volumes recover to 2019 levels and that's a volume component, and the other is refining margins. So, there's a lot of pressure on refineries right now, or just total value of refined products from a margin perspective has gone down. And when that recovers, that's going to be dependent on volume, but also on utilization of industry capacity. And so, we wouldn't see that returning until sometime in the 2022 timeframe.

Your next question comes from the line of Mike Harrison with Seaport Global Securities.

Hi, good morning. Coming back to this idea that lithium volumes are sold out for next year, if there is some additional demand pickup or if some of this oversupply or inventory gets worked down, could that put you in a position to drive higher pricing? And can you maybe also comment on whether you have any flexibility to move more volume or to maybe accelerate some of your production, if you do see a demand pickup?

If the market tightens and supply diminishes, prices should increase. We anticipate this trend to happen more with hydroxide than with carbonate, which presents challenges. Our projects were initially delayed due to the uncertainty during the pandemic, but once we gained some clarity, we attempted to resume them as quickly as possible, and we haven't lost significant time. Our capital estimates remain largely in the same range. However, we cannot accelerate our plans beyond what we currently have. At this moment, we do not have excess capacity beyond our expectations. While we might be slightly ahead with our planned projects, the changes won't be substantial.

I think everybody's kind of focused on what's happening here in the U.S. from a political standpoint, but can you maybe talk about Chile and whether some of the political news there could impact your relationship with the government or your rights in the Atacama?

Right. So, while you know what's happening there, they're going to redo their constitution. That's a lengthy process, and so far, it has been relatively smooth. We need to wait and see what that constitution looks like. We don't expect it to affect our rights in the Atacama, but that's something we will have to monitor. I don't foresee it being in their interest to change their engagement with the international community. Chile is well-regarded for upholding the rule of law and maintaining a strong economy in South America; it's a model example. Therefore, I don't think they want to alter that, but we will need to keep a close watch as it develops.

Your next question comes from line of Vincent Andrews with Morgan Stanley.

Thank you, and good morning, everyone. I was wondering about the 60% of your assets that you're focusing on with the new projects. What about the other 40%? Can you provide insight from a medium-term perspective on what it will take to pursue those assets, including the financial resources and capital expenditures required? When can we expect to hear about your strategy and financing plans for that part?

I'm not sure I'm clear on the question. Are you asking about going after the other 40% of the asset?

My question is when should we expect the other 40% to come online and what will it cost to achieve that?

From a resource standpoint, are you talking?

Correct.

Yeah. Okay. So, we have access to those resources. So, it's just about building conversion capacity. So, we've kind of started that process. So, La Negra and Kemerton are part of that. So we're building that out. We'll sell those plants out and then we'll layer in additional capacity to go after. I mean, that's our strategy and our plan longer term. We haven't necessarily laid out a CapEx program publicly over time. But that's the plan as we build capacity and then we sell it out and then we reinvest.

Sorry. As a follow-up then, to the earlier question about market share, how do you think about the medium term in terms of not per se having a suggested timeline for that other 40% of production versus how fast do you think the market's going to grow? Do you think you'll be able to bring that 40% on in conjunction with market growth, or is it possible that it'll lag?

Well, we'd be layering in that capacity. So, what we're trying to do is kind of get it just right. So we add capacity as the market grows and bring that on as it's required. And it's a matter of how well we execute and how well we forecast the market, but we think we can. That's what we're trying to do.

Your next question comes from line of John Roberts with UBS.

Thank you. Nice progress on the cost savings efforts. The backstop indicates some uncertainty here in the divestment process for fine chemicals and catalyst additives. Are we expecting one buyer for both or two? And do you think both will be announced before year-end?

Hey, John. This is Scott. We expect to have two different buyers for those two separate businesses. Discussions are progressing positively for both. It's still a bit early to say when we might announce a deal for either one, but we're working hard to make that happen. The backstop is connected to economic uncertainty, so we need to navigate through the winter and the rising COVID cases, along with the government's response, to fully grasp where we will stand in 2021. It's essentially a precautionary measure in case things don't go as planned. The banks have been very supportive of us, and we are grateful for their contributions.

And then you mentioned in the third quarter, the benefit of a timing, Callison, and shipments to Tianqi, was that a catch-up from Q2? It doesn't sound like it's a pull forward from the fourth quarter, given the strong fourth quarter guidance.

Yeah. You've got it right, John. It was really a catch-up from the Q2 shutdown that they had. And just from an accounting perspective, when Tianqi takes more product, we ended up getting that equity income immediately. So, it helps our bottom line.

Your next question comes from Arun with RBC Capital.

Great. Thanks for taking my question. Good morning. Congratulations on the results. It's definitely nice to see the cost reductions having an impact. I wanted to ask about the contracting side for Lithium. I believe you offered concessions to some of your customers in 2020. Did you find it necessary to extend those concessions in 2021? Could you comment on the contracting environment? Thanks.

We are currently engaged in discussions with our customers. You are correct that we made one-year concessions in late 2019 for the 2020 period. Currently, market prices are lower than they were at the time we made those concessions. We are discussing what the contracts will look like for 2021. At this stage, it is too early to provide detailed guidance on what that will entail, as these discussions are ongoing.

Your next question comes from Laurence Alexander with Jefferies.

Hi. Could you give a sense for your current thinking around inventory management? How much of an inventory build you need to do next year to prepare for the growth curve you expect in 2022 to 2023?

Okay. I'm assuming you're asking about Lithium, which is where all the inventory questions arise from. To clarify, the inventory is likely in the channel, and we don't think it has changed much from what we reported last quarter. Demand has increased and appears more favorable, but we lack data to indicate that inventory levels have decreased compared to last quarter. This still needs to be addressed. Given the demand outlook for 2021 and our limited capacity, we do not expect inventory levels to increase. Instead, we anticipate being able to work down our inventories. We are also managing what we consider standard inventory in the channel, and from our perspective, we do not see inventory building throughout 2021. We see ourselves reducing inventories.

Can you discuss the factors impacting the expected improvement in Bromine next year, considering the trends in the end markets?

Netha, you want to make a few comments on that?

Sure. I think that the biggest impact for us is the overall macro economy. We tend to be driven by global GDP. So that's really the limiting factor for us is how fast this thing's going to come back. And this is going to come back in a stable, consistent way or is it going to be lumpy. And right now it's just a little bit unclear how that recovery is going to take place across the globe in 2021.

Your next question comes from the line of Joel Jackson with BMO Capital.

Hi. This is Robin on for Joel. Can you provide some more order of magnitude around the guidance of the Catalysts EBITDA you expect next year? Is it reasonable to be about halfway between 2020 and 2022? Was it more likely to be above or below that level? If you can just kind of walk through some of the key building blocks to get there.

Hey, Robin. This is Scott. Let me make a quick comment and maybe Raphael can give some additional color. It's really going to depend on refinery utilization rates as well as transportation fuel demand. And given what we're seeing in projections right now, it's likely in the bottom half of that range that you just gave versus the top half. But maybe Raphael, you can add some more color as to what you're seeing.

Hi, Robin. I think Scott characterized it correctly. But over the next six months, I think we'll have a much clearer picture as to what that recovery will look like. As we see demand recovery, we see margin progress as refineries, we will have a better sense of that. But I wanted to at least give you a sense that while it's going to be a challenging 2021, better than 2020. The business is still very focused on the right steps to return to growth in the future, with a focus on chemicals, with a focus on refineries East of Suez, where demand continues to grow. So, while we have a challenge, we also have good strategies to establish us for long-term recovery and growth.

That's helpful. Thank you. Just to follow up, did I hear correctly earlier in the call that Lithium EBITDA is expected to be flat for next year? I assume the cost savings or Lithium's share of those savings is balancing out the slight pricing changes, is that correct?

Yeah. Robin, this is Scott. I think you had about right. It's really a little bit early to call exactly what the number is going to be. But Lithium EBITDA should be flat to maybe down a bit, just given the dynamics that we're seeing.

Your next question comes from the line of P.J. Juvekar with Citigroup.

Yes, good morning. It seems like you have limited capacity growth and may lose some market share next year. Why couldn’t you increase inventories in the fourth quarter to avoid losing share? Additionally, some of your capacity, like the Wodgina mine, is still not in use. What would it take to restart that operation?

Kent, would you like to take?

I'll start by addressing the first question regarding inventory. There is a limit on inventories of hydroxide, and currently, we have more in the channel than usual. To manage that, we have temporarily shut down some facilities since hydroxide has a limited shelf life. It's important to be cautious with our inventory levels, and we expect to work through them over the next year. We anticipate selling more than we will produce, which we are already doing to some extent, but our capabilities are restricted by the life of hydroxide. Regarding Wodgina, our limitation is in conversion capacity. Although Wodgina is not in production, the primary issue is our inability to convert the material. The Kemerton facility will help us move in the right direction, but we need to effectively manage resources between Wodgina and Callison. Ultimately, our constraints are more about conversion capacity, and we will need to enhance that capacity to fully leverage our resources.

We are currently selling all the hydroxide we can produce and are sold out for this year. We have made some price concessions and leveraged our planned volumes, which is why we have increased our guidance for the fourth quarter. We are achieving our targets and expect an increase in overall volumes year-over-year, even as the industry is expected to decline. This will make for a strong year for Lithium. Looking ahead to next year, we need to focus on our conversion capacity. Our ratio of mining capacity to conversion capacity is currently about one to one, indicating a need for more conversion assets. We are being very disciplined in managing our cash flow and profitability as we increase our conversion capacity in the market. While next year is expected to be flat, we will introduce significant capacity in 2022 and will be in a position to recover any lost momentum with our customers. Additionally, we have started negotiating new contracts with customers for that volume next year.

Thank you for that insight. It's interesting that you mentioned conversion capacity as a limitation, Kent. Can you provide an update on the situation with conversion capacity in China? I recall that back in 2015 and 2016, they faced constraints due to overbuilding. What is the current status of conversion capacity utilization in China? Additionally, can you discuss the possibility of shifting some of your volumes to third-party conversion in China? Thank you.

So, Eric, you want to …

In China, as you know, there are Chinese converters that do not own a resource and rely on the market for their supply. Many of these non-integrated producers have had to buy their raw materials, and several mines have reduced operations, with Alterra being the most recent affected by low market prices. Consequently, the supply of raw materials has diminished, and they have been relying on existing inventory. Additionally, their current carbonate prices are at a breakeven point, with most operations running at a loss, as we notice spot prices in China are below their marginal cash costs. This presents quite a tough economic environment for these producers. We anticipate that as the market recovers, some of this capacity will return, and China will remain a strong market for lithium in the future. There will still be opportunities for these producers. Regarding our strategy, we are actively exploring ways to grow our capacity, considering both purchasing and building options. This will influence our path for expansion, similar to how we established our current conversion capacity in China. However, we are less inclined to engage in toll processing for hydroxide due to the complexity and proprietary knowledge involved, which we would be wary of losing. Therefore, our preference leans towards acquiring capacity.

Great. Thank you. Your next question comes from the line of Mike Sison with Wells Fargo.

Good morning. It was a strong quarter. If I remember correctly, you have $40 million in carbonate and $50 million in hydroxide coming in 2022. How much of that is already contracted, and how long do you expect it will take to sell those out?

Your numbers are correct. However, we won't reach those capacities immediately; there will be a gradual increase in our manufacturing processes to achieve full capacity. They won't come online all at once with the flip of a switch. Unfortunately, it doesn't operate that way. Eric, would you like to discuss the sales ramp relative to production?

We are engaged in negotiations for additional contracts, particularly in the tighter hydroxide market. We already have long-term contracts that are linked to our capacity, and we signed one recently to boost the utilization of our plant. While I can't disclose the specifics yet, a significant portion of the Kemerton capacity is already accounted for from a sales perspective. The carbonate market is evolving differently, primarily in China, which has a shorter-term contracting approach. We are actively maintaining relationships with existing clients and exploring opportunities with leading Chinese producers to grow our business. Discussions are underway regarding committed volumes, and the contracting nature will vary. We will be closer to market with the carbonate before finalizing prices for those volumes. However, we remain competitive since we operate at the low end of the cost curve, making it an attractive business, even if it lacks some of the long-duration contracts seen with Kemerton.

Right. Great. Thanks. And then a quick one on Catalysts, any thoughts on pricing for FCC heading into 2021?

Raphael, you want to comment?

Sure. Mike, this is Raphael. I think pricing in FCC has been challenged in 2020 for non-contract volumes. Non-specialty non-contract volumes have been under the most pressure in response to decisions by refineries to look for perhaps less specialty catalysts in order to help their near-term economic pain. Going into 2021, I think the trend would continue. I mean, I think we'll continue to see pressure on non-contracted volumes, but where we create a differential value, namely in areas like high propylene yields, I think we'll continue to hold onto price and remain strong in that area.

Great. Thank you.

Your next question comes from the line of Chris Kapsch with Loop Capital Markets.

Good morning. Thank you for taking my question. I wanted to follow up on Eric's detailed comments regarding the changing approach to contracts, particularly in relation to the anecdotal insights about hydroxide versus carbonate. It seems that the oversupply is more pronounced in carbonate compared to hydroxide. Additionally, there appears to be a conflict between customers seeking immediate pricing adjustments and those who are more concerned about long-term supply. I'm curious if these discussions indicate a divide between hydroxide and carbonate preferences. Furthermore, as this situation evolves, could you elaborate on whether hydroxide customers are more likely to prefer fixed prices and security of supply, while carbonate customers seem more open to volatility?

Sure. Any advance comments Kent, before I dive in?

No. Go ahead.

I believe it's important to note that there is a distinction between carbonate and hydroxide. Moving forward, a larger portion of the carbonate market will be based in China. Currently, I do not observe a similar commitment to securing supply through contracts, whether with us or others, to manage that volume. The market seems to prefer shorter-term agreements, relying on the assumption that resources and capacity will continue to be available. Additionally, there's a divergence in purchasing decisions; more of these decisions are shifting closer to the end-users, specifically battery and automotive producers. Given their significant investments in the supply chain, whether for carbonate or hydroxide, they generally seek more assured long-term supply. While not all are approaching it this way, an increasing number are recognizing the importance of such arrangements, which also influences who we engage in long-term contracts with.

Thank you for that. As a follow-up, could you provide an update on the inventories in the supply chain that you mentioned last quarter? Additionally, are there any changes to the timeline regarding the idling of your hydroxide conversion facility in North America? Thank you.

Yes, I'll reiterate what Kent mentioned. The process of evaluating inventory levels in the channel is not perfect. We conduct surveys with our customers, which provide some insights, but we lack visibility into our competitors' inventory levels, and some of them have significant amounts. Overall, the inventory levels in the channel remain roughly the same as they were three months ago, around five months of supply. However, there has been a shift, with more carbonate in inventory compared to hydroxide, which has decreased somewhat. While we might not be entirely accurate, we believe this assessment is directionally correct. The situation doesn't seem drastically different, and there appears to be a slight improvement in hydroxide demand. Now, do you have the second part of your question, Chris?

The timeline of your idling of your hydroxide conversion facility?

We are currently in the process of restarting the Kings Mountain hydroxide facility. Employees are returning sooner than anticipated due to the improvement in demand expected for next year and the earlier inquiries about increasing volume. We are ramping up that plant, which is small and has a limited impact on overall volume growth. Additionally, the Silver Peak feedstock plant, which supplies carbonate feedstock to the hydroxide plant, will restart on schedule at the beginning of 2021.

Your next question comes from the line of Colin Rusch with Oppenheimer.

Thanks so much, guys. Can you give us a sense of how mature the conversations are on the financing side? It sounds like things are going pretty well and there's some pretty meaningful opportunities to reduce your cost of capital going forward. But just curious how far down the road you are on that?

Yeah. No, we're well advanced in those discussions. So, feel comfortable about where we're heading.

Excellent. And then the Lithium mark has been pretty well belabored. But I'm just curious if you're seeing any consolidation in terms of battery OEMs, given where we're seeing capacity efficiency. It looks like there's going to be a handful of folks that really stride out here. And if there's any consolidation kind of below that with some of the cathode producers, as you look out over the next three to five years?

Eric?

Yeah. Sure. Thanks, Kent. So, on the battery OEMs, I'd be interested to see what you see, Colin, because we don't see that. In fact, I've seen the opposite. You've seen new players come into the market not very recently, but companies like Tesla come into the market for Europe, and many other multi-nationals who have played around this space in the past, I think looking to come in to support the growth of the European market. So, I see more players coming into the market on the battery side, not less, and some of that's being supported and driven by the automotive OEMs. So, I think want more opportunities. They want some negotiating leverage, right? They want more options, or they want more localized options for in the case of Europe. On the cathode side, it is constantly changing, right? This is the part of the market that has, as I said, is not necessarily directly involved in the person decision as much anymore, is being told what to make either by the automotive OEM or the battery makers. So, they're losing some of their power in the decision channel. And so, I do expect some change consolidation. I can't point to any obvious ones now, but there's disruption. There's people gaining share and losing share. And so, I think we'll continue to see evolution in that part of the channel. And also some backward integration, right? You have some battery makers now are building their own in-house cathode capabilities.

At this time, we have no further questions. I will now turn the conference back over to Ms. Bandy.

All right. Thank you all for your questions and your participation in today's conference call. As always, we appreciate your interest in Albemarle, and this concludes our earnings conference call.

This does conclude today's conference. You may now disconnect.