Earnings Call Transcript - ALB Q4 2021

Operator, Operator

Good day and welcome to the Fourth 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. Operator provided instructions. As a reminder, this call is being recorded. I would like to turn the call over to Meredith Bandy, Vice President of Investor Relations and Sustainability. You may begin.

Meredith Bandy, Vice President, Investor Relations and Sustainability

All right. Thanks, Michelle. Thank you all, and welcome to Albemarle’s fourth quarter 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 albemarle.com. Joining me on the call today are Kent Masters, Chief Executive Officer; and Scott Tozier, Chief Financial Officer. Our GBU Presidents, Raphael Crawford, Netha Johnson and Eric Norris are also available for Q&A. 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 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.

Kent Masters, Chief Executive Officer

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. 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 $3.3 billion, which was in line with our previous guidance. Adjusted EBITDA grew 13% in 2021 to $871 million, 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% and 55% versus 2021, excluding Fine Chemistry Services. To continue driving this growth, we are focused on quickly bringing capacity online with accelerated investments. La Negra III and IV 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 first train at Kemerton. The construction team is now dedicated to the second 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 nonbinding letter agreement to explore the expansion of our MARBL joint venture with increased optionality and reduced risk. Now looking at Slide 5. We introduced this slide early last year to lay out our 2021 objectives designed to support the four 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. 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. 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. We now expect 2025 lithium demand of approximately 1.5 million tons, up more than 30% from our previous estimates. Beyond 2025, we anticipate continued growth with lithium demand of more than three million tons by 2030. 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 six million vehicles from three million in 2020. By the end of the decade, EVs are expected to account for close to 40% of automotive sales. 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 II projects on Slide 8. La Negra III and IV, which will add conversion capacity for our Chilean brine resource in the Salar de Atacama is currently in the customer qualification process. We anticipate incremental volumes and revenue contribution from this project in the second quarter of this year. 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 I 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. 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 III projects, including the announcement of three strategic investments in China. This wave of investments will provide Albemarle with approximately 200,000 tons of additional capacity. That’s up from 150,000 tons of capacity originally planned for Wave III. We’ve also continued to progress our growth options for Wave IV. Based on discussions with our customers, we are analyzing options to restart our Kings Mountain lithium mine and the potential to build conversion assets in North America and Europe. 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 Qinzhou conversion facility in the first half of this year. This transaction is progressing well, and we continue to work through the appropriate regulatory reviews. The Qinzhou plant is currently being commissioned and we have begun tolling our spodumene to assist with that process. We continue to progress the two greenfield lithium conversion projects in Meishan and Zhangjiagang. We have started site clearing at Meishan and expect to break ground at Zhangjiagang later this year. We expect mechanical completion of both projects by the end of 2024. The restart of one of three processing lines at the Wodgina mine is going well, with first spodumene concentrate production now expected in the second quarter. At Greenbushes, Talison continues to ramp production from the CGP 2 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. 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 SAYTEX ALERO, our next-generation polymeric flame retardant. We first discussed SAYTEX ALERO at our Investor Day last year, and I’m excited to say that we have achieved first 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, and 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.

Meredith Bandy, Vice President, Investor Relations and Sustainability

Scott?

Kent Masters, Chief Executive Officer

Scott, you might be on mute.

Scott Tozier, Chief Financial Officer

Hello? Can you hear me now? Okay. Sorry about that. I was on mute. Thanks, Kent, and good morning, everyone. I’ll begin on Slide 12. For the fourth quarter, we generated net sales of $894 million, which is an increase of $15 million 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 fourth quarter net loss attributable to Albemarle was $4 million, 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. Fourth 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. Let’s turn to Slide 13 for more detail on adjusted EBITDA performance. Excluding FCS, fourth 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 Catalyst improved in the fourth quarter as refinery markets continue to rebound and the business saw benefits from one-time items. Our second half sales grew 13% from the first half of the year, following a relatively flat growth since mid-2020. 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 $4.2 billion to $4.5 billion and adjusted EBITDA in the range of $1.15 billion to $1.3 billion. This implies an adjusted EBITDA margin of between 27% and 29%. Adjusted diluted EPS and net cash from operations are also expected to improve year-over-year. 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 three GBUs are expected to benefit from lower-cost inventory sold at prices that have been raised in anticipation of inflation. In the first quarter, lithium also has the benefit of strong shipments from our Talison joint venture to our partner as well as a one-time spodumene sales material produced at Wodgina on initial start-up 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 dynamic. As Kent mentioned, CapEx is expected to increase to the $1.3 billion to $1.5 billion range this year as we accelerate lithium investments to meet increased customer demand. The key actions to meet or exceed this guidance include, first, successful execution of our lithium project start-ups; second, closing the acquisition in China; third, solid performance at our sold-out plants in lithium, bromine and FCC catalysts; fourth, continued strength in our end-use markets and favorable pricing environment; and lastly, solid procurements 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. 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. 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 supported by macro trends, such as digitalization and electrification. Volumes are expected to increase based on the expansions we began in 2021. 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. 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 baseload production of 88,000 metric tons in 2021, which includes Silver Peak, Kings Mountain, Xinyu, Chengdu and La Negra I and II. And you can see that this is virtually a 50/50 split of carbonate and hydroxide. As our Wave II projects come online, output will begin to favor hydroxide. Generally speaking, we expect it to take about two years to ramp to full conversion capacity at a new plant, including approximately six months for commissioning and qualification. Therefore, we expect to reach our full 200,000 tons of conversion production by early 2025. 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 noncore businesses like FCS and reallocated funds to organic and inorganic growth opportunities, like the expected acquisition of the Qinzhou plant. 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. And with that, I’ll turn it back to Kent.

Kent Masters, Chief Executive Officer

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 II expansions and progressing Wave III expansions to grow lithium conversion capacity and volumes. We’ll also focus on safely and efficiently starting up those facilities. Next, we will continue to maximize productivity, and this is even more important in today’s environment with rising cost for raw materials. We will leverage our operational discipline to offset inflation through manufacturing excellence, 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 cost as we work to achieve adjusted EBITDA margin of between 27% and 29%. We will invest with discipline. 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 fresh water 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. So with that, I’d like to open the call for questions, and I’ll turn it back to Michelle.

Operator, Operator

Operator provided instructions. Our first question comes from David Deckelbaum with Cowen. Your line is open.

David Deckelbaum, Analyst, Cowen

Good morning guys. Thanks for taking my questions. I was curious if you could talk a little bit about the lithium pricing outlook. You raised your outlook to 40% to 45% increase in 2022. 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? And I guess, in conjunction with that, would you expect that you would see further pricing increases into 2023 based on your outlook today?

Eric Norris, President, Lithium GBU

Good morning, David, this is Eric Norris. So our pricing outlook – let me start first with the composition, what we see in 2022. We have, as Scott and Kent indicated in the 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 tied 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. 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, but I think you need to consider that the indices we’re using largely are the global indices, not the China indices, where you see much higher prices 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 does. 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 – with prices where they are in China, one could only speculate what they would do. And could they go down? We don’t know. So there’ll always be some variability on that 10% of our business that’s in China.

David Deckelbaum, Analyst, Cowen

Appreciate that. Thanks for the color there. My follow-up is just on the capital raise, a $200 million 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 more color around that? And when do you expect to see some of the volumetric impact relative to your original outlook?

Kent Masters, Chief Executive Officer

Okay. So I’m not sure, volumetric impact – so you’re talking about our Wave III expansions when we see those volumes coming on? Is that what you mean? So, we brought it forward because of the Meishan, Zhangjiagang and the acquisition Zhangjiagang. So that was not – we were hoping to do an acquisition. The hand plan didn’t have that nailed down at the time when we did the equity raise and the comments that we made then. So that 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 two greenfields we think will be on by the end of 2024.

David Deckelbaum, Analyst, Cowen

Thank you all.

Operator, Operator

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

Bob Koort, Analyst, Goldman Sachs

Thank you. Good morning. Kent or Eric, I was wondering if you could talk about your strategy on contracting to 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?

Kent Masters, Chief Executive Officer

Yes. So I’ll just – at a high level, and 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. It’s becoming probably a bigger part. We’re probably fighting to make sure that we keep the portfolio the way we envision it.

Eric Norris, President, Lithium GBU

I don’t have much to add, Bob. You heard how I answered David’s question just before you on the mix. We’ve seen an influence that to have up to about 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, an amount that we can play in the spot markets. And that gives us excess 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, and that’s becoming in this market a very important topic, that security of supply.

Bob Koort, Analyst, Goldman Sachs

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

Kent Masters, Chief Executive Officer

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

Operator, Operator

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

Jeff Zekauskas, Analyst, JPMorgan

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?

Eric Norris, President, Lithium GBU

Well, Jeff, as Kent described — this is Eric, good morning, first off. As Scott described, Wave III is hydroxide-based and spodumene-based in that regard. Those are — that’s a higher cost of production than 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.

Jeff Zekauskas, Analyst, JPMorgan

And I think Scott said that the first quarter of 2022 would have the highest EBITDA total of the year. Why is that given that lithium production would be much greater in the second half?

Kent Masters, Chief Executive Officer

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 first quarter, 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. So that inflation catches up to us in the back half of the year, and we’ve already implemented pricing. So that’s one dynamic. 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. In the first quarter, we’re selling out of inventories, which have 2021 costs. In 2022, those cost increases come through the P&L. And 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 minority interest, which gets added to EBITDA, but on an after-tax basis. So those are the really the two drivers for why the first quarter is the highest EBITDA level.

Jeff Zekauskas, Analyst, JPMorgan

Great. Thank you so much.

Operator, Operator

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

P.J. Juvekar, Analyst, Citi

Yes. Good morning. How quickly do you see the Wodgina ramp-up? And is that limited by available conversion capacity in Australia and China? And then talking about conversion capacity, your potential North American/European conversion capacities in Wave IV, what does it take to move it to Wave III?

Kent Masters, Chief Executive Officer

I’m going to take the second question first and then probably talk to Eric for the first. But what we define — 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 IV to III, because III 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 IV. But we would look to accelerate those, but they’ll still remain in Wave IV.

Eric Norris, President, Lithium GBU

And P.J., on your first question about Wodgina, we are only with our joint venture partner ramping up the first train of Wodgina with 50,000 tons of 6% spodumene, a little over 30,000 tons on an LCE basis. We look at the China growth in conversion capacity and hydroxide from Wave III that Kent described as 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 chemical conversion plant, which tends to ramp over two years. A spodumene plant can come up within six months, plus those trains are already built. So, we would expect by midyear to see spodumene flowing from that and put it into the assets that we talked about in Wave III. And the balance, we’d consider looking at tolling for the balance. And then as we continue to progress Wave III and other expansion activities, we’d look down the road. We’ve made no decisions yet on the second and third train at Wodgina, but those would be for down the road, giving us plenty of dry powder to support our growth as we continue to build out conversion capacity.

P.J. Juvekar, Analyst, Citi

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?

Eric Norris, President, Lithium GBU

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 were doing that. But underneath that are the practical realities of capacity limitation. So the guidance we’ve given, P.J., speaks to — we give you dates of when we think these plants will come online. We first have that qualification point. We have a six-month period before it can be qualified, and then we have about a two-year ramp to reach full capacity. When you back-calculate that math, that’s on our fixed base of 88,000 tons last year. 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.

P.J. Juvekar, Analyst, Citi

Understood. Thank you.

Operator, Operator

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

Christopher Parkinson, Analyst, Mizuho

Great. Thank you very much. Just two quick questions. 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, near to intermediate term? Any color would be helpful. Thank you.

Eric Norris, President, Lithium GBU

Good morning, Chris. So by that, you’re referring to Western OEMs’ view of new lithium competitors coming into the market who are trying to bring capacity to market. Look, I mean, I think you’d have to ask their view on things. I will say this, security of 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 supplied 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 or in Europe as well, underwrite big investments. So they are looking for lithium wherever they can get it. I think the offering that Albemarle brings and is 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 localize capacity in North America and Europe. On battery chemistry for electric vehicles, we still see over the five- and 10-year view — or put another way, over the 2025 and 2030 view that we’ve characterized in our growth charts in the earnings deck — that we still see high nickel being the key to higher range. And we further see innovations on the anode side in prelithiation and new technologies that will further allow more energy density and cost-effectiveness of those nickel chemistries with parity to internal combustion engines in an 18- to 24-month period. That being said, it’s pretty clear and our projections would show that LFP for lower energy density, lower-cost vehicles is going to remain a segment of this market, not only now, but through this 10-year period. It’s a low double-digit percentage of the market, but most of the growth will be hydroxide.

Christopher Parkinson, Analyst, Mizuho

That’s helpful. And just a quick follow-up. Just what would just be your latest thought process on the demand front, battery technologies and energy density? Any color on what you’ve seen in terms of new model launches and advancing high-nickel cathode chemistries? That would be very helpful. Thank you.

Eric Norris, President, Lithium GBU

We see continued innovation and adoption. High-nickel chemistries are advancing for higher range vehicles, and innovations on the anode side will complement those cathode developments. LFP will continue to serve a meaningful segment of the market for cost-sensitive vehicles, but most long-term growth in demand for lithium hydroxide will be driven by higher energy density chemistries, including high-nickel formulations.

Christopher Parkinson, Analyst, Mizuho

Thank you very much.

Operator, Operator

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

Alex Yefremov, Analyst, KeyBanc

Thank you. Good morning everyone. I think as I look at your pricing guidance for lithium segment, it was very strong. If I even assume some level of cost inflation, that 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 spodumene and Talison dynamics that you already described in terms of cost that we should keep in mind for 2022?

Kent Masters, Chief Executive Officer

So, I think you have to appreciate we’re bringing on new plants. And when we bring them on, they’re not loaded. So there’s a lot of fixed costs associated with lower volumes. But other than that, the pricing movements have been pretty aggressive and pretty consistent. We’ve moved our portfolio quite a bit and we’ve increased our exposure to market pricing. So you have to keep in mind the fixed cost piece about bringing on new facilities that are not loaded.

Alex Yefremov, Analyst, KeyBanc

Okay. Appreciate it. And then I wanted to follow up on the pricing side. Given approximately 50% of your volume has these indices, would any of these indices reset during the year? And could you end up above the 45% upper bound of your lithium price guidance?

Eric Norris, President, Lithium GBU

They are all based on indices that continue to move. Recent movement has been upward in the past three months. Again, China prices are the tip of the spear, significantly higher. If those prices remain high, we could definitely be at the higher end of our range on price. These indices aren’t fixed through the year; market moves can happen during the year.

Alex Yefremov, Analyst, KeyBanc

Understand. Thanks a lot.

Operator, Operator

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

Steve Richardson, Analyst, Evercore

Hi, good morning. I was wondering, again, just back on the capital piece. 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 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, I appreciate that you’re dealing with a lot of fixed costs in terms of some of these new project starts. 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?

Kent Masters, Chief Executive Officer

Let me take the first part of your question and then I’ll kick it to Scott to talk about the margin piece and conversion costs. Looking at the change in our capital forecast, it’s at least half acceleration. We have had additional cost executing projects in Western Australia during the pandemic; that has been a challenge for us, and we’ve had additional costs as well as extending the projects. 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 half acceleration and half additional costs associated with inflation and pandemic-related cost.

Scott Tozier, Chief Financial Officer

Hi, Steve. As you look at the lithium margins going into this year, the two factors are these plant start-ups and not being at full capacity. And that’s probably a $100 million 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 million. So those are the two biggest kind of movers as you look at the lithium margin.

Steve Richardson, Analyst, Evercore

Thank you very much.

Operator, Operator

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

Joel Jackson, Analyst, BMO Capital

Hi, good morning everyone. Some years ago, you guys had talked about kind of a 40% EBITDA margin for lithium as kind of being what I think you make it over the course of the cycle. We’re now at the 34%–35% range over the last three 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 or for a long time. 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?

Kent Masters, Chief Executive Officer

I think what we’ve said in the past in the long term is we stand by that. You have to understand as spodumene prices go up, that impacts our EBITDA margin because of the nature of the JV. EBITDA effectively becomes tax-affected to some degree because of the product we purchased from Talison. And that will impact the pure EBITDA margin, but it still flows through the P&L once you get fully to the bottom line. So I think to answer your question, we still stand by the guidance that we’ve provided in the long term.

Joel Jackson, Analyst, BMO Capital

The next question is, it’s great to have a 3 million-ton demand forecast for lithium for 2030. 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 eight years for 3 million tons, right? You’ve got to have new resources, 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 we’re never going to get to 3 million tons. Would you agree with that? And if that’s the case, what’s going to happen? Does that mean the EV acceleration has got to come down, OEMs have to change your plan? Or do I have it wrong?

Kent Masters, Chief Executive Officer

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 some of that. We think we’re probably as experienced as anyone at doing these large conversion facilities and bringing on new resources. But it’s a combination of resource and conversion capacity. It is a stretch, and 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.

Joel Jackson, Analyst, BMO Capital

Thank you.

Operator, Operator

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

Vincent Andrews, Analyst, Morgan Stanley

Thank you and good morning everyone. Kent, just wondering if you could mark the Wave III total CapEx for us. I think you originally said it at $1.5 billion, and I think you mentioned half of the increase for 2022 was related to inflation. But it seems like maybe some of that was transitory if COVID indeed calms down. So how would you tell us to think about Wave III now versus the original $1.5 billion?

Kent Masters, Chief Executive Officer

It has stretched a little bit because we’ve accelerated and we’ve had inflation. Even if inflation eases later, we’re building projects in the next couple of years, so there is an impact. We’ve accelerated because there’s additional capacity associated with that. So half of the difference is acceleration and half is inflationary. I don’t want to estimate exact numbers here, but you should expect Wave III to be up from $1.5 billion, and that increase includes both acceleration and inflation impacts.

Vincent Andrews, Analyst, Morgan Stanley

So if we thought of something like it was going to be like a $1.8 billion to $2 billion now instead of $1.5 billion, is that good for a ballpark number?

Kent Masters, Chief Executive Officer

I think that’s not a bad estimate. I’m focused on the inflation part, but overall that’s probably in the right direction.

Vincent Andrews, Analyst, Morgan Stanley

Okay. Thank you. And just on the Salar de Atacama technology projects, can you just talk to us about what milestones are left to hit on that so that you’d be confident that you’ll be able to execute it?

Kent Masters, Chief Executive Officer

We’re just getting into the real execution phase of that particular project, but it’s not as complicated a project as a conversion facility. We feel pretty good about executing on that. We have lost a little bit of the float we had in the schedule, but we’re still on plan and on the schedule that we had, though with less contingency than originally built in.

Operator, Operator

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

Kevin McCarthy, Analyst, Vertical Research

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 strategic review?

Kent Masters, Chief Executive Officer

We’re going through the strategic review process and it’s going well. The timing we had said, we think we’ll have an answer by the middle of the year. I don’t really want to front-run it or comment too much on it beyond that. Raphael, please comment on pricing.

Raphael Crawford, President, Catalysts GBU

Yes. 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 2021 into this year, particularly around natural gas. That’s building momentum. We expect to see north of $10 million worth of pricing in our forecast. Again, that’s really to offset what we’ve seen on raw materials. As you know, we produce performance products and 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. 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.

Kevin McCarthy, Analyst, Vertical Research

Thank you for that. And then second, Kent, I think you mentioned in your prepared remarks you’ve begun to build some relationships with the incoming administration in Chile. Can you talk through what has changed in that country, politically, and also the ongoing effort to rewrite the constitution? What in your mind will be fixed or 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 III in country versus alternatives you may have in Australia, China, U.S. or other countries?

Kent Masters, Chief Executive Officer

There’s a lot going on in Chile. The new administration is not fully in place, and we’re building relationships with our local team there. Discussions around rewriting the constitution and mining royalties have been happening for some time. We’re trying to stay close to the new government. We don’t anticipate a wholesale change in the direction that the government goes with respect to extractive industries, and we don’t see a material impact to our existing business or royalties. We believe Chile remains progressive on lithium royalties and extractive industry policy, and we expect to have a clearer view of policy direction before making any major new capital allocation decisions in Chile. For now, La Negra III is completed and we’re ramping; we don’t need to make a significant capital allocation decision there immediately.

Operator, Operator

Our final question comes from Chris Kapsch with Loop Capital Markets. Your line is open.

Chris Kapsch, Analyst, Loop Capital Markets

Good morning. Thank you. Slightly more nuanced follow-up on pricing and then also the security of supply concept, something that Eric mentioned a couple of times. 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 1.5 million and the 3 million ton demand scenarios by 2025 and 2030. So at your Analyst Day in September, you talked about how the industry’s cost curve will be steepening. And even your own portfolio, you’re going to experience that. But as you ramp Wave III, 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 at reasonable prices. So my question really is, are they coming to a big and well-established and reliable integrated supplier like Albemarle and saying the pendulum is swinging back towards the concept of being willing to pay higher fixed costs in order to ensure that supply? I know you’ve gone from those floor pricing contracts to more of a variable structure. But I would think, given how acute this potential shortage is shaping up to be that they’d be more motivated to do that. Is that something you’re considering? Any more color around that would be appreciated. Thanks.

Kent Masters, Chief Executive Officer

I’ll take the first shot. Security of supply has always been a key part of our value proposition. It may not have gotten the attention it deserved in the past, but it’s increasingly front of mind for OEMs and battery manufacturers. Albemarle’s portfolio — multiple resources, diverse geographies, vertical integration — is unique in the industry and attractive to customers looking for secure supply. We’re having those conversations and exploring different pricing structures. The portfolio shift we’ve made is something we started a couple of years ago. We paused when prices were low, but we’ve been able to implement more variable structures now and will continue to evolve our contracting approach in line with customer needs for security of supply and their growth plans.

Chris Kapsch, Analyst, Loop Capital Markets

And just one follow-up: regarding your decision to sell some spodumene, I thought you had explained in the past that that would be for captive conversion to hydroxide, but now you’ve elected to, it sounds like, opportunistically sell some of the spodumene into the market. Could you comment?

Kent Masters, Chief Executive Officer

I wouldn’t read into that as a change in strategy. It was opportunistic; the material was in inventory and had been produced some years ago and was available. We took an opportunity to sell into the market where it made sense. It’s opportunistic and not reflective of a strategic shift toward selling spodumene broadly into the market.

Operator, Operator

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

Kent Masters, Chief Executive Officer

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. Thank you.

Operator, Operator

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