Earnings Call Transcript - ALB Q3 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2021 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. I would now like to hand the conference over to your speaker today, David Burke, Director of Investor Relations. Thank you. Please go ahead.

David Burke, Director of Investor Relations

Thank you, and welcome to Albemarle's Third Quarter 2021 Earnings Conference Call. Our earnings were released after close of market yesterday and you'll find our press release, earnings presentation, and non-GAAP reconciliations posted on our website under the Investors section at www.albemarle.com. Joining me on the call today are Kent Masters, our Chief Executive Officer, and Scott Tozier, our Chief Financial Officer. Raphael Crawford, President of Catalysts, Netha Johnson, President Bromine Specialties, and Eric Norris, President of Lithium, are also available for Q&A. As a reminder, some of the statements made during this call, including our outlook guidance, expected Company performance, and timing of expansion projects may constitute forward-looking statements within the meaning of federal securities law. Please note the cautionary language about forward-looking statements contained in our press release and earnings presentation. The same language applies to this call. Please also note that some of our comments 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, both of which are posted on our website. Now, I will turn the call over to Kent.

Kent Masters, Chief Executive Officer

Thanks David, and thank you all for joining us today. On today's call, I will highlight our quarterly results, provide an update on our goals for 2021 and discuss the progress of our ongoing expansion plans. Scott will provide more detail on our results, outlook, and guidance. We reported another solid quarter with net sales of $831 million and adjusted EBITDA of $218 million. Sales improved by 11% on a year-over-year basis, while adjusted EBITDA was relatively flat compared to the third quarter last year. Excluding SCS from our third quarter 2020 results our net sales were 19% higher, and EBITDA was up 14%. Scott will get into more detail on our financials in a few minutes, including favorable revisions to our guidance. As we stated in our earnings release this morning, we increased our guidance based on the third quarter results. During our recent investor day, we did a deep dive into our accelerated growth strategy and provided color on how we think about the near-term expansion of our Lithium business, as well as our disciplined investment approach. Since that event in early September, we are pleased to have announced several updates on those efforts. This includes signing an agreement to acquire Guangxi Tianyuan New Energy Materials, or Tianyuan, which owns a recently built conversion plant near Qinzhou. We are testing to ensure the plant operates as advertised and expect to close this transaction in the first quarter of next year. This puts us on track for first sales from this plant in the first half of next year. In addition to this plant, we have signed two recent agreements for investments in China to support two Greenfield projects. Each initially targeting 50,000 metric tons per year. These projects position us for initial added conversion capacity of up to 150,000 metric tons of lithium hydroxide on an annual basis to meet our customers' growing demands. In addition, our Wodgina joint venture announced the restart of the Wodgina lithium mine in Western Australia. On Slide 5, you will see the objectives we set for 2021. When we set these goals, we did so with the intent of challenging ourselves with plans that were aggressive, but achievable. As we approach the end of the year, I'm excited by the significant progress and proud of the effort our team has put into achieving these goals. As you see on the slide, we have accomplished the vast majority of what we set out to do. For example, we are successfully progressing high-return, fast-payback bromine projects at both Magnolia and JBC. These projects will increase our capacity and improve the efficiencies of our operations. We've also made significant progress on our lithium growth projects. Now let's turn to slide 6. First at La Negra 3 and 4, our team continues to execute the plan. I'm excited to announce that we recently completed a major milestone by achieving first lithium carbonate production in late October. Initial production volumes will be used to qualify the plant and the material with our customers to ensure we are meeting their requirements. This qualification process is proceeding on track with first sales expected in the first half of next year. In Western Australia, the ongoing labor shortages and pandemic-related travel restrictions have continued to significantly impact virtually all companies in that region and show no signs of easing in the near-term. Despite these challenges and with herculean efforts, our team has managed to hold Kemerton 1 construction completion to year-end 2021. We now expect Kemerton 2 construction completion in the second half of 2022. While we are facing challenges at these projects, our strategy to consolidate resources and prioritize the first train continues to mitigate additional risks. On Slide 7, I'll highlight the progress we've made on our Wave 3 program since we last spoke to you at our Investor Day. At the end of September, we announced an agreement to acquire Tianyuan for $200 million, including a recently built conversion plant near the port of Qinzhou, designed to produce up to 25,000 metric tons of lithium per year, with the potential to expand to 50,000 metric tons per year. We expect this acquisition to follow a similar path as our acquisitions of Xinyu and Chengdu facilities back in 2016. Following the close of the transaction, which is expected in the first quarter of next year, we plan to make additional investments to bring the Qinzhou plant to Albemarle standards and ramp to initial production of 25,000 metric tons. This acquisition enables us to accelerate conversion capacity growth and leverage our world-class resource base. Together with our partner, we agreed to restart operations at the Wodgina Lithium Mine in Western Australia. Initially, Wodgina will begin one of three processing lines, each of which can produce up to 250,000 metric tons of lithium spodumene concentrate. This resource will be critical as we ramp our conversion capacity in Western Australia with our Kemerton sites. We also signed agreements to invest in two Greenfield conversion sites in China at Zhangjiagang and Meishan. We plan to build identical conversion plants with initial target production of 50,000 metric tons of battery-grade lithium hydroxide at each site. These investments offer additional optionality for future growth and have expansion potential. Investing in China offers capital-efficient, high-return growth with proximity to our low-cost Australian spodumene resources and many of our major cathode and battery customers. We continue to explore global expansion of our conversion capacity as the battery supply chain shifts west. Turning to Slide 8 for a review of our global project pipeline. As you can see, Albemarle is executing a robust pipeline of projects all around the world. For example, our Bromine business is pursuing incremental expansions in Jordan and the U.S. These high-return projects leverage our low-cost resources and technical know-how to support customers and growing and diverse markets, like electronics, telecom, and automotive. In Chile, the Salar Yield Improvement Project allows us to increase lithium production without increasing our brine pumping rates, utilizing a proprietary technology to improve efficiency and sustainability. In Australia, we continue to progress study work on additional Kemerton expansions to leverage greater scale and efficiency with repeatable designs. Finally, in the U.S., we are expanding our Silver Peak facility in Nevada to double lithium carbonate production. This is the first of several options to expand local U.S. production. In Kings Mountain, North Carolina, we continue to evaluate restarting our mine. And at our Bromine facility in Magnolia, Arkansas, we're evaluating process technologies to leverage our brine resources to extract lithium. We'll continue to update you periodically on our pipeline. I hope this gives you a sense of the diversity and optionality Albemarle has as a global lithium producer. I'll now turn the call over to Scott for a look at the financials.

Scott Tozier, Chief Financial Officer

Thanks, Kent, and good morning, everyone. Let's begin on Slide 9. During the third quarter, we generated net sales of $831 million, an 11% increase from the same period last year. This improvement was driven by strong sales for our lithium and bromine segments. Adjusted EBITDA was essentially flat on a year-over-year basis, resulting from the sale of SCS and increased freight and raw material costs. The GAAP net loss of $393 million includes a $505 million after-tax charge related to the recently announced Huntsman arbitration decision. While we continue to assess our legal options, we have also initiated discussions with Huntsman regarding a potential resolution. Excluding this charge, adjusted EPS was $1.05 for the quarter, down 4% from the prior year. Now, let's turn to Slide 10 for a look at adjusted EBITDA by business. Third quarter adjusted EBITDA of $218 million increased by 14% or $27 million compared to the prior year, excluding the sale of SCS. The higher adjusted EBITDA for Lithium and Bromine was partially offset by a $13.5 million out-of-period adjustment regarding inventory valuation in our international locations impacting all three GBUs. Lithium's adjusted EBITDA increased by $25 million year-over-year, excluding foreign exchange. We were able to offset the limited impact of a one-month strike in the Salar in Chile, thanks to higher tolling volumes and higher spodumene shipments from our Talison joint venture. Adjusted EBITDA for Bromine increased by $5 million compared to the prior year due to higher pricing, partially offset by increased freight and raw material costs. Volumes were flat, given the chlorine constraints in the quarter. In Catalysts, adjusted EBITDA declined $4 million from the previous year. This was due to lower sales and cost pressures, partially offset by higher-than-expected joint venture income, which included a favorable tax settlement in Brazil. Slide 11 highlights the Company's financial strength. That is key to our ability to execute our growth plans over the coming years. Our net debt to EBITDA at the end of the quarter was 1.7 times, below our targeted long-term range of 2 to 2.5 times. This provides us with capacity to fund growth while supporting modest dividend increases. We don't expect the recent arbitration decision to impact our current growth plans. But it could temporarily reduce our flexibility to take advantage of upside growth opportunities. Turning to Slide 12, I'll walk you through the updates to our guidance that Kent mentioned earlier. Higher full-year 2021 net sales and adjusted EBITDA guidance reflects our strong third quarter performance. Net cash from operations guidance is unchanged due to the timing of shipments to customers and increased raw materials and inventory costs. Capital expenditures were revised higher, related to the continuing tight labor markets and COVID-related travel restrictions in Western Australia, as well as accelerated investments in growth. Turning to slide 13 for more detailed outlook on each of the GBUs, lithium's full-year 2021 adjusted EBITDA is now expected to grow in the mid-to-high teens year-over-year. That's up from our previous guidance due to higher volumes and pricing. The volume growth is driven primarily by tolling. And our full-year average realized pricing is now expected to be flat to slightly higher compared to 2020. As a reminder, most of our battery-grade lithium sales are on long-term contracts with structured pricing mechanisms that are partially exposed to the market. We also benefit from stronger market pricing on shorter-term technical grade sales and on spot and tolling sales of battery-grade lithium. Full-year 2021 average margins are expected to remain below 35% due to higher costs related to the project startups and tolling, partially offset by productivity improvements. Bromine's full-year 2021 adjusted EBITDA growth is now expected to be in the low double-digits. That's also up from previous guidance due to the continued strength in demand and pricing for flame retardants. Our bromine volumes remain constrained due to sold-out conditions and a lack of inventory. The outlook for chlorine availability has improved since last quarter, but the market remains tight. And the impact of higher chlorine pricing is expected to be felt more in 2022 than in 2021 due to the timing of inventory changes and shipments. Year-to-date, higher bromine pricing has mostly offset higher raw material and freight costs. Catalyst full-year 2021 EBITDA is now expected to decline between 20% and 25%. That's also an improvement from our previous guidance, owing to the higher-than-expected joint venture income. The year-over-year decline in adjusted EBITDA is primarily due to the impact of the U.S. Gulf Coast winter storm earlier in the year, product mix and the previously disclosed change in our customer's order patterns. Catalysts fourth-quarter margins will also be impacted by product mix, including a greater proportion of lower margin FCC and CFT catalyst orders. SCS demand continues to improve with increasing global fuel demand while HPC orders continue to be delayed. Overall, market conditions are improving, but volumes in Catalysts are not expected to return to pre-pandemic levels until late 2022 or 2023. In total, we expect EBITDA margins to be lower in the fourth quarter due to higher raw materials, energy, and freight costs across all three of our businesses. We are closely watching several key risk factors, including global supply chain disruptions, global impacts of the energy rationing in China and chip shortages. Supply chain and logistics challenges are the most immediate. Our teams are working day and night to navigate these port issues, the lack of drivers, and upstream supply disruptions to ensure our customers get their orders on time. We also continued to monitor the global situation with regard to chip shortages. We recognize that the auto industry has been struggling with those shortages. But to date, we have not seen a direct impact on either our lithium or bromine orders. And with that, I'll hand it back to Kent.

Kent Masters, Chief Executive Officer

Thanks, Scott. I'll end our prepared remarks on Slide 14. As Scott mentioned, we are disappointed by the outcome of the Huntsman arbitration decision. But regardless of the ultimate outcome of that dispute, Albemarle will continue to focus on the execution of our growth strategy. As we highlighted during our Investor Day in September, we have a well thought out and focused operating model that we are implementing across our businesses. This model, the Albemarle way of excellence, provides us with a framework to execute our objectives effectively and efficiently, and will help us to remain on target as we pursue the significant growth opportunities ahead. And as we pursue these opportunities, we will be disciplined in our approach to capital allocation. Our primary capital priority is accelerating high return growth. This means that we will invest not just to get bigger, but to create tangible shareholder value and maintain financial flexibility to take advantage of future opportunities. Utilizing this approach with our low cost resources, we believe our annual adjusted EBITDA will triple by 2026. Finally, at the core of all of this is sustainability. As one of the world's largest lithium producers and innovators, we are able to work closely with our customers to create value and drive better sustainability outcomes for all stakeholders. With that, I'd like to open the call for questions. I'll hand over to the Operator.

Operator, Operator

Thank you, sir. And at this time, ladies and gentlemen, if you would like to ask a question during this time, please signal by pressing the appropriate key on your telephone. Your first question comes from the line of John Roberts with UBS.

Matthew Konosky, Analyst (UBS, on behalf of John Roberts)

Morning, this is Matt Gawronski on for John. In the past, you mentioned that Kemerton maybe able to ramp to 40% to 50% of capacity in a year following its commissioning and qualification process. Is this still the case for that first line that's supposed to be done with construction at the end of this year? Or is it going to take some additional time due to the constraints going on right now?

Kent Masters, Chief Executive Officer

So after that I think we got to get through mechanical completion then we've got the commissioning qualification. And then I think what we've said is after that and that's about a six-month process. Then after that, we think we would be able to ramp to maybe 50% in the first 12 months. That's probably a little aggressive, but that's what we're targeting. And then, I think the labor and all those issues are primarily around construction. We've got operators staffed and onboard, and they're helping with commissioning. I mean, the labor market is going to be tied, and we'll—we may fight to keep the ones we want, I'm not sure, but the real labor issue is around construction.

Matthew Konosky, Analyst (UBS, on behalf of John Roberts)

Thank you. And then, Scott, you mentioned the Huntsman arbitration issue could impact your ability to opportunistically take hold of growth opportunities. Is that organic or just inorganic opportunities?

Scott Tozier, Chief Financial Officer

Yeah, I think it's really more two-fold. I think partly on the organic side, it's our ability to accelerate or further accelerate our projects. We'll be able to do some of it, but clearly, it's a big drag. And then the second is, any sort of larger type of inorganic would need some sort of more creative type of financing to do.

Operator, Operator

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

P.J. Juvekar, Analyst (Citi)

Yes. Hi, good morning.

Kent Masters, Chief Executive Officer

Good morning.

P.J. Juvekar, Analyst (Citi)

So now that you expect lithium prices to be flat to up for this year and sort of down, you must be expecting price gains in Q4 that are well into double-digits. Can you comment on that? And then, even as you look forward into next year, what percent of your contracts will be renewed next year? And do you have any early look into negotiations? Thank you.

Eric Norris, President, Lithium

So P.J., good morning, it's Eric. I want to make sure I understand your first question. Your first question was, would they be double-digit in Q4, is that what you said? The way to think about pricing is the flat-to-down comment is that it's progressive throughout the year. Prices were at their lowest point late last year and early this year and have been gradually rising as we've gone through the year due to two factors. One is the expiration and the concession we gave against a fixed priced long-term agreement. And the second would be just the movement of spot prices for that portion of our business that is exposed to those markets, which, as you're aware, has gone up significantly throughout the course of the year. So as the guidance Scott gave at Investor Day for next year, we communicated at least a 15% to 20% year-on-year increase for 2022 versus 2021. And certainly, that's a progressive trend. So you could certainly see those kinds of increases starting to happen in Q4 versus a year ago.

P.J. Juvekar, Analyst (Citi)

Okay, great. And then on Wodgina, you're restarting one of the three lines. Spodumene prices have skyrocketed, so why just one line? And then where would you concentrate that rock? Would that be at Kemerton? Would that be in China? Can you just talk about that?

Kent Masters, Chief Executive Officer

Yeah. So P.J., I think we're going to get started on one and we'll ramp other facilities over time, but it's really our capacity to convert. We're not really mining rock to sell spodumene into the market; we're mining rock to convert spodumene into finished products. And we'll do that at Kemerton. Initially, I guess we haven't worked out exactly what the logistics are. So that product may go to China and other products go to Kemerton. So we just have to balance our sourcing of facilities, but that's the next tranche of our product in that part of the world.

Operator, Operator

Your next question comes from the line of Laurence Alexander with Jefferies.

Laurence Alexander, Analyst (Jefferies)

Good morning. First, on the bromine pricing, can you discuss how much of that you feel was transitory versus sustainable given the demand trends you're seeing? And can you give any sense of the magnitude of the chlorine headwind for this year, so that we have some better context for the larger-than-this-year headwind next year?

Raphael Crawford, President, Catalysts

I think, in terms of the pricing, we could probably figure most of that is transitory. It's based on the raw materials pricing that we pay and our ability to manage as we price forward. And in terms of the chlorine impact, it's more of a timing issue. We're going to get more chlorine next year, probably at a different price than we're getting this year. So you'll see that really impact us starting in Q1 next year throughout the year.

Laurence Alexander, Analyst (Jefferies)

And then with Catalysts, the recovery next year, how much of that should be coincident with production ramp-ups at the refineries?

Raphael Crawford, President, Catalysts

Hey, Laurence, the FCC business is very ratable to miles driven and that correlates to refining output. So I think FCC, as is mentioned, will continue to improve sequentially from a volume standpoint. So that one you would see first and there's usually a lag on hydroprocessing, which is a 12 to 18-month lag as conditions improve in refineries to get more capital availability and then reinvest in changeouts for HPC. So that has more of the lag effect. But overall, we see sequential improvement; we see refining conditions improving. We're very tied to that with our performance products, so we see that as a favorable outlook going forward.

Operator, Operator

Your next question comes from the line of Bob Koort with Goldman Sachs.

Mike Harris, Analyst (Goldman Sachs, on behalf of Bob Koort)

Yeah, this is Mike Harris sitting in for Bob. If I could, might ask a question around the Lithium business: looking at the energy storage related sales, why is there a potential one- to two-quarter lag behind the EV production versus those sales actually leading?

Eric Norris, President, Lithium

Yes, Mike. It's simply a factor of the length of the supply chain. Lithium is consumed in the cathode material, which then is formulated into an electrode that's put into a battery. The battery is then assembled and then put into an EV. So it's just the length of time that takes and the geographies involved. Most of the cathode production and a good amount of the battery production still is in Asia. And of course cars are produced at various points around the world. So it's just the length of the supply chain. We see that lag, but recall we're well-positioned; we're able to supply anywhere in the world. So we are well-positioned to grow with the industry, but that lag is likely to remain there, given the length of the supply chain.

Mike Harris, Analyst (Goldman Sachs, on behalf of Bob Koort)

Got it. Okay. That helps. And then also, just as a follow-up, when I think about lithium recycling, can you give me an idea of what kind of assumptions you guys have made around recycling and perhaps the potential impact on your business, if any at all?

Eric Norris, President, Lithium

Recycling is a phenomenon that follows the end of life of batteries and further still you have to factor in potential reuse of batteries. Given the 10-year life-cycle that is warranted on most batteries produced for automotive production, that's the kind of lag you're looking at. So batteries being produced today wouldn't even be considered for recycle until ten years from now. When we look at that, we see recycling becoming important as the decade wears on, but still, by the middle of the decade it will be a fairly small amount of lithium needed in the supply chain and maybe reaching a low double-digit amount coming back into the stream by 2030.

Operator, Operator

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

David Huang, Analyst (Deutsche Bank, on behalf of David Begleiter)

Hi there. This is David Huang here for Dave. First, can you talk about your feedstock strategy for that 150,000 tons of lithium hydroxide capacity you're adding in China?

Raphael Crawford, President, Catalysts

So the feedstock strategy for the 150,000 tons of projects in China will be fed with our spodumene coming out of Australia.

David Huang, Analyst (Deutsche Bank, on behalf of David Begleiter)

Okay. And then secondly, are there any incremental headwinds or tailwinds to your 2022 guidance you provided, I mean, particularly for a guide, or do you still stand by those guidance assumptions?

Raphael Crawford, President, Catalysts

Yes. We haven't updated our guidance since the Investor Day. We're going through our annual operating plan process right now. In fact, our next meeting is next week and we'll give you a more definitive guidance in our fourth quarter earnings call.

Operator, Operator

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

Female Participant (Bremer), Analyst (BMO Capital Markets, on behalf of Joel Jackson)

Hi, this is Bremer on for Joel, thanks for taking my question. Just back on the pricing discussions in 2022, can you just give us a little bit more color on how the discussions with your lithium contract customers are going? And then, are pricing mechanisms going to be similar in '22 to '21 or is there a move more to benchmark pricing?

Eric Norris, President, Lithium

So generally speaking, the discussions we're having with our customers are for price increases next year and that aligns with the guidance I gave you earlier. We have a book of contracts we've had under our basket for some years now. Those that have a fixed portion date back to the original long-term agreements, which are significantly higher in some cases than the average price that we're seeing for 2021. Many of those contracts have a variable component; no one contract looks exactly like the other, but that variable component can increase. We will also see increases. Some of those variable components are tied to indices. Others are just an annual increase nomination with a maximum increase. Finally, we have a good deal of technical-grade contracts where we'll see rising prices based upon the increases we've seen this year as we roll into next year. The last piece is our China spot business. It's hard to say we won't see a pretty big increase there next year because spot prices are already extraordinarily high in China right now. But we'll continue to see possibly some upside on a year-over-year basis, particularly in the early part of next year on that. So those are all the components that are driving our increase and the types of discussions we're having with our customers which will give us upside leverage to the improving market conditions.

Female Participant (Bremer), Analyst (BMO Capital Markets, on behalf of Joel Jackson)

Okay, that's certainly helpful. Thank you. And then I guess just given the large upswing in LFP demand in recent months and commentary, I just want to understand how you're thinking about investments into carbonate versus hydroxide. It seems your incremental investments are mostly focused on hydroxide currently.

Eric Norris, President, Lithium

We monitor this very closely; we have a lot of analytics and customer dialogues up and down the supply chain from OEMs all the way back through the battery and cathode producers to assess those trends. What we believe, and what has been confirmed in our discussions with customers, is while there is an uptake in LFP demand, there has also been an uptake in vehicle production outlook for electric vehicles. LFP occupies a sweet spot in the lower cost and lower driving range portion of the vehicle mix. For some automotive producers that will be a larger percentage of their mix than others. Bottom line, we see strong growth in both carbonate and hydroxide, albeit the growth rate in hydroxide will be higher over the coming five years. Hence, we feel we're extremely well-positioned. We're bringing on 40,000 tons of carbonate capacity as we speak, and we have the hydroxide expansion strategy in addition to the Kemerton ramp. We feel we're well-positioned to meet both LFP demand and rising high-nickel demand for cathodes.

Operator, Operator

Your next question comes from the line of Jeff Zekauskas with J.P. Morgan.

Jeff Zekauskas, Analyst (J.P. Morgan)

Thanks very much. You've described your lithium prices as perhaps being up 15% to 20% or more next year. Is the 15% to 20% representative, given market conditions, could it be up 30%?

Scott Tozier, Chief Financial Officer

Well, I think it depends, as you might think, Jeff, on market conditions. There's a portion of our business that is exposed to pure market conditions. The majority of our business, even while it's on long-term contracts, has a variable component that is anchored around the fixed price, which is also going up because of the expiration of concessions we gave. So at this point, it's probably too early to say what we think about price above 15% to 20%, because our guidance was at least 15% to 20%. We'll provide more detail as the quarter wears on and the discussions continue and we'll update guidance as we get into the February earnings call.

Eric Norris, President, Lithium

Right.

Jeff Zekauskas, Analyst (J.P. Morgan)

Then for my follow-up, when I look at quoted bromine prices in China, maybe since August they're up 60% or so. Is that a representative price for what's going on in the market or it's not a representative price? Can you speak to bromine pricing in Asia and where it's been and where you see it going? What's driving it?

Netha Johnson, President, Bromine Specialties

That's a reflection of a couple of things. First of all, demand is up clearly across the market, and raw material prices are up to produce brominated products that are being required. So what you're seeing is that's what's driving an enormous amount of price increase in the Chinese spot price.

Operator, Operator

Your next question comes from the line of Ben Kallo with Baird.

Ben Kallo, Analyst (Baird)

Thank you guys, and good morning. One of the things that we are thinking about is materials maybe being a bottleneck for EV production. How do you view that risk? Is there enough lithium reserve, enough copper, enough nickel? And then how are customers approaching you for security in the supply chain? Does your scale and diversity of resources give you an advantage there over competitors?

Kent Masters, Chief Executive Officer

We are investing heavily to keep up with demand and maintain our share, which has been our strategy. We're investing along with our customers and security of supply has always been a key part of the value proposition from Albemarle to our customers, particularly around lithium. The diversity of resources, the diversity of locations where we produce, and the fact that we have carbonate and we have hydroxide today — and then we'll continue to evolve those chemistries as the market shifts over time — give us an advantage. The network that we build is focused around security of supply and is a key part of the value proposition we offer customers.

Eric Norris, President, Lithium

On the lithium side of material risks, there's enough material and lithium resources. The issue is the investment required to get there and that it's going to be at higher cost; the cost curve is upward sloping as you go to lower quality lithium resources. The discussions we're having with our customers are ones of deep desire for commitment and partnership. That's both with existing customers and with new capacity customers. The most significant and urgent discussions around security are closer to the automotive OEMs. Our track record of executing gives us that advantage. I think that's where the discussions land: us being a base-load partner for many of these automotive and battery firms.

Ben Kallo, Analyst (Baird)

Thanks, guys. Are you at a point that you are allocating to customers, so you're picking your customers more than they are picking you, or is it not like that?

Eric Norris, President, Lithium

That's the merit of the partnership and why we have the discussions we do. Any buyer who is not committed to us in a long-term way, such as a spot buyer, runs the risk of not getting the volume they would like as we roll into 2022. So that's the basis for the partnership discussions: the desire for security of supply given points in time over the coming five years where things will be tightened. They are quite tight right now.

Operator, Operator

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

Male Participant (Vincent Andrews), Analyst (Morgan Stanley)

Hi. Thank you for taking our question. Just back to the Huntsman arbitration, curious: what other alternatives are there in terms of dispute resolution? I know you mentioned discussions around settlement. What other legal alternatives are there? And how should we think about timing?

Kent Masters, Chief Executive Officer

Well, I think it's a range and we're not going to get into too much because there's an active process. The options are to continue through the arbitration process or to reach a negotiated resolution through discussions we've initiated. Those are the options and the time frame is pretty wide.

Male Participant (Vincent Andrews), Analyst (Morgan Stanley)

Understood. And then as we think about Kemerton and your ability to fulfill those contracts, particularly Kemerton 2 given the longer delay, will those be fulfilled through more tolling, or how should we think about the volume and how that will be allocated in terms of next year and 2023? Would that be less volume overall or just lower margin from tolling?

Kent Masters, Chief Executive Officer

I think you'll see us fill that with tolling and with the Tianyuan acquisition that we've done, and we expect to get that up to speed relatively quickly. There will be some investments to get it to our standard and the quality we want, but we'll be aggressive around that. Those will be the two methods we use to stay on our plan.

Operator, Operator

Your next question comes from the line of Kevin McCarthy with Vertical Research.

Cory Murphy, Analyst (Vertical Research, on behalf of Kevin McCarthy)

Hi, good morning. This is Cory Murphy on for Kevin. I wanted to follow on Wodgina — it looks like you'll start one line and maybe start production in mid to late 2022. Can you help me understand what the delays are or why the restart process seems to take six to ten months? And given spodumene prices, why wouldn't you start up all three lines? Are you able to sell the spodumene on the spot market or are there contractual reasons not to?

Kent Masters, Chief Executive Officer

On selling spodumene, it's really strategic: we want to convert it and sell finished products to customers where we'd make commitments and have long-term arrangements. We might sell some spodumene here or there, but that's not our strategy. On the timing, we are subject to similar labor issues in Western Australia that we face at Kemerton, and there's lead time on some of the big yellow equipment that's necessary in mining. That equipment lead time is a factor in the restart timeline.

Cory Murphy, Analyst (Vertical Research, on behalf of Kevin McCarthy)

Understood. And then I just wanted to ask about tolling as well. It sounds like there's more tolling due to labor shortages or strikes in Chile. How would your volume trend without tolling? And when do you anticipate rolling off the tolling contracts related to the La Negra startup? I think you said you're bridging some capacity with that.

Eric Norris, President, Lithium

Tolling is a strategy we use for bridging. We expect to continue tolling next year for La Negra and for Kemerton. It's a bridging strategy, and the market is extremely strong right now. Because Kemerton has been delayed, there's spodumene that we can take advantage of. As long as we have qualified tolling partners — partners that meet our quality standards and with whom we have a trusted relationship — then we'll take advantage of that both to bridge and to take advantage of the strong market. It's hard to say exactly when it will roll off, but we will have it as part of next year for sure.

Operator, Operator

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

Colin Rusch, Analyst (Oppenheimer & Co.)

Thanks so much for all of this information. I'm curious about order patterns from your customers across the business. Are you seeing any double ordering or customers trying to build inventory? It seems like some folks may be trying to build inventory in anticipation of supply chain issues.

Eric Norris, President, Lithium

From a lithium perspective, I would say we're not seeing double ordering. We touch all aspects of the supply chain and we know our customers don't have inventory — they're hand-to-mouth. With the ongoing global supply chain challenges, shipments are sometimes uncertain in timing, causing pain for both us and our customers. So it's a very tight market in lithium.

Netha Johnson, President, Bromine Specialties

For bromine, we're not seeing double ordering either. Customers are not trying to build inventory at their sites in anticipation of supply chain disruptions. Supply chains are tight and things are difficult, but we've been able to manage delivery within windows that customers can work with. So we're not seeing double orders or customers building up inventory by ordering more than they need right now.

Raphael Crawford, President, Catalysts

Nor in Catalysts, either.

Colin Rusch, Analyst (Oppenheimer & Co.)

Okay. Thanks, guys. And then just on the lithium content per kilowatt-hour, are you seeing any trend lines? As battery chemistries change and folks optimize materials, are you seeing lithium content increase, decrease, or hold steady? Where would you peg that level right now?

Eric Norris, President, Lithium

For 2021, we haven't seen a material change in lithium content per kilowatt-hour. Over a period of years, as prelithiation on the anode side or lithium metal anode technology or solid-state progresses, you could see changes that increase lithium content as energy density increases. But as of today, we haven't seen significant change on a quarterly basis in 2021.

Operator, Operator

Your next question comes from the line of Arun Viswanathan with RBC Capital Markets.

Arun Viswanathan, Analyst (RBC Capital Markets)

Great, thanks for taking my question. I had a question on the contracting process. What are you hearing from customers as far as contract length? Are those lithium contracts extending out to four, seven, or ten years? And when you do those contracts, how do you bridge the divide between the huge spot prices and something more reasonable for long-term contracts? Have you seen a material rise in the cost curve that would justify contracts closer to spot?

Eric Norris, President, Lithium

I would say the duration of requests from customers are increasing. On average today our contract durations are about three years. The new contracts under discussion for China expansions, Kemerton expansions, or future U.S. expansions are often five years plus, or commitments that start in 2023 and extend to 2026 or beyond. Those are the durations customers are thinking about, driven by automotive investments. From a pricing standpoint, because prices are rising, buyers want to avoid paying spot. Discussions trend toward either a much higher fixed price if they want stability, or pricing against an established index so the price rises over time. The $28,000-plus number referenced is a spodumene metric; pricing in China on a delivered basis is in the high 20s to close to 30. Many buyers are buying a blend via indices, so the effective price is not always at the very high spot numbers but still elevated. We're negotiating long-term contracts with significantly higher price potential than in the past in response to these dynamics.

Arun Viswanathan, Analyst (RBC Capital Markets)

Great, thanks for that. And then, is there any political risk in Chile we should be thinking about in the next month or two?

Kent Masters, Chief Executive Officer

There's a lot happening in Chile. They are rewriting the constitution and changes are happening. We watch it closely and operate there; we are close to the government and see what's happening. Chile wants to participate in the lithium industry and is looking to expand participation. The contracts they have with us are progressive and allow them to participate as prices go up. We believe they want to remain economically engaged in the industry. There's active political change and we are monitoring it carefully.

Operator, Operator

Your next question comes from the line of Matthew DeYoe with Bank of America.

Matthew DeYoe, Analyst (Bank of America)

Thank you. We touched on tolling; I want to delve further because you have latent capacity at Greenbushes and converters are struggling to find merchant spodumene to operate. Why not be more aggressive on tolling volumes given the attractive prices? You might have ability to regulate the market a bit. Also, on Chinese bromine prices — are these moves real and capturable? If so, over what timeframe?

Kent Masters, Chief Executive Officer

We can't just turn tolling on because the tolling partner has to be qualified with our customers. Not all tollers would qualify. So it's not simply a matter of production; there's a qualification process and customers' trust in quality that matters. We may have optionality going forward, but qualifying partners and customers' acceptance take time; it's not a six-month flip. It takes longer to implement.

Eric Norris, President, Lithium

If there are opportunities we'll take advantage of them, but we are very discriminating when selecting tolling partners to meet our standards for serving customers. So while we can be opportunistic, we'll only work with partners that meet our quality and commercial standards.

Matthew DeYoe, Analyst (Bank of America)

Okay. And on Chinese bromine prices, should we think of this move as real and capturable in any capacity? Is it a one- to two-year process to capture pricing, or longer?

Netha Johnson, President, Bromine Specialties

Yes. These prices are real and driven by demand; demand is outstripping supply. It takes almost two years to meaningfully bring on additional bromine supply, so you'll continue to see demand outstrip supply in the near term. We've announced projects we want to add, and others may as well, but right now demand exceeding supply is driving the Chinese bromine price up.

Operator, Operator

Your next question comes from the line of Christopher Parkinson with Mizuho.

Harris Fein, Analyst (Mizuho, on behalf of Christopher Parkinson)

Hi. This is Harris Fein on for Chris. Thanks for taking my question. Turning back to Wodgina, how should we think about the cost associated with bringing that back into production, and how should we think about the relative cost per ton of spodumene from Wodgina relative to Greenbushes?

Scott Tozier, Chief Financial Officer

As you said, Talison spodumene from Greenbushes is world-class and low cost. Wodgina hasn't operated recently under our ownership, but we believe it will be relatively close in terms of cost structure. It does have a lower concentration, so it won't be exactly the same, but we expect it to be relatively competitive. The capital and restart costs have been captured in our guidance; much of it relates to joint venture capital to acquire yellow equipment and to ramp the JV.

Kent Masters, Chief Executive Officer

And to add, those costs and timing are included in our guidance and capital plans. It's largely joint venture capital costs to acquire necessary equipment and to ramp operations.

Harris Fein, Analyst (Mizuho, on behalf of Christopher Parkinson)

Got it. And a lot of the Wave 3 announcements so far are planned in China. What's the strategic rationale to focus so much on China? Is it lower capital cost or do you see the Chinese market shifting more to high-nickel and will most of those tons stay domestic or be exported?

Kent Masters, Chief Executive Officer

At a high level, China is where the market is today for cathode and battery production. It's capital efficient and provides proximity to major customers. That said, we anticipate the supply chain shifting west over time and we will invest ahead of that. Wave 3 is largely Asia-centric, heavily China-focused because that's where cathode production and demand are concentrated today. Wave 4 will address localization opportunities in North America and Europe as the supply chain shifts.

Eric Norris, President, Lithium

If you look at cathode production globally, China represents well over half today and that percentage will increase into the middle of the decade. China is the center for cathode technologies and many production decisions are being made there. Wave 3 builds repeatable capital and execution capability in that region that will serve us as we continue to grow globally. Many of our resources and customers are concentrated in the Asia region, so it makes strategic sense to expand there now while planning for future localization in the West.

Operator, Operator

There are no further questions at this time. I would now like to turn the call back over to Mr. Kent Masters for closing remarks.

Kent Masters, Chief Executive Officer

Okay. Thank you. And thank you all again for your participation on our call today. As we approach the end of the year, I'm extremely pleased with the progress and the focus our team has demonstrated. I look forward to updating you in February when we announce full-year results and provide more detail on 2022 objectives and outlook. This concludes our call and thank you for your interest in Albemarle.

Operator, Operator

Ladies and gentlemen, thank you for your participation in today's call. You may now disconnect at this time.