Unlike most lithium miners, the world's second-largest producer, Chile's Sociedad Química y Minera (SQM), is ramping up capacity expansion despite the glut in the market, which has crushed lithium prices over the past year.
SQM, which reported this week much lower earnings for Q4 and for full-year 2023, plans $1.4 billion in investments through 2025 to expand lithium capacity projects in Chile as it bets on continued lithium demand and a rebound in prices at some point later this decade.
Following the yearly results and the announcement of expansion plans, SQM's U.S.-listed shares jumped by 9% on Thursday for the biggest daily increase in nearly two years.
In contrast with its rivals, including Albemarle, SQM is boosting production and capacity expansions instead of scaling back plans as most of the other lithium miners do. The Chilean producer bets on having available volumes for sale when the market works through the current inventory backlog.
Although there is a risk of exacerbating the glut by keeping output at full tilt, SQM is positioning itself to supply its low-cost production when demand recovers. Related: This Could Be A Gamechanger For Natural Gas In Europe
This will inevitably come in the cyclical lithium mining industry amid other producers curtailing expansion plans.
This week, SQM reported a 48.5% decline in 2023 earnings to US$2 billion, or US$7.05 per ADR. Fourth-quarter earnings plunged by 82.3% compared to the same period of 2022 amid the crash in global lithium prices.
But SQM sold record-high lithium volumes in Q4.
Total capex for 2024-2025 is set at about $2.4 billion, including $1.4 billion for lithium capacity expansion projects in Chile.
"As we enter into 2024, we anticipate another robust year of growth in lithium market, with global demand increasing by at least 20%, supported by electric vehicle sales growth globally and increasing demand for battery materials," CEO Ricardo Ramos said in a statement.
But the executive acknowledged that "the excess in lithium and battery materials capacity seen during last year is expected to continue during this year, keeping pressure on lithium market prices."
Carlos Diaz, Executive Vice President of Lithium at SQM, said on the earnings call that the company's strategy has been to produce at full capacity so that it would always be prepared to supply more product to the market when it is needed.
Gonzalo Aguirre, head of lithium market intelligence at SQM, said on the call that the company expects global lithium demand to grow fourfold from 2023 levels ten years from now.
SQM's bet on capacity expansion at a time of a lithium market glut could position it to take advantage of the next supply crunch, which may already be in the making after many lithium producers issued early this year profit warnings and project halts.
After warnings of project reviews and moves to preserve cash from U.S. and Australian lithium mining firms, some of China's biggest miners also warned of a plunge in profits and potential asset write-downs.
The crash in lithium prices over the past year is holding back reinvestment in new supply, Albemarle says.
While major lithium suppliers continue to see a surge in long-term demand as the energy transition gathers momentum, the current low price environment is "unstainable," Kent Masters, Albemarle's chairman, president, and CEO, said on the company's earnings call last month.
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The current lithium prices are not in a range allowing projects, especially in the West, to get off the ground, Masters added.
The deferral of new supply developments amid the low prices is setting the stage for the next lithium supply crunch later this decade, executives and analysts say.
Despite the current gloom on the lithium market and the financial struggles it is bringing to the top miners, industry executives are confident in the long-term prospects and expect the current low prices and a lack of investment to create the next big lithium supply crunch.
By Tsvetana Paraskova for Oilprice.com
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