Albemarle Corporation Q1 2023 Earnings Call
Opportunity for questions and answers at the end if he would like to ask a question. Please press star one on your telephone keypad.
I will now hand, it over to Meredith bandy, Vice President of Investor Relations and sustainability Mis Vandy. Please proceed.
Thank you for and welcome everyone to Albemarle is first quarter 2023 earnings Conference call. Our earnings were released after the close of market yesterday, and you'll find the press release and earnings presentation posted to our website under the investors section at Albemarle Dot com.
Joining me on the call today are Kent Masters, Chief Executive Officer, and Scott Tozier, Chief Financial Officer. We also have Eric Norris President of energy storage method Johnson President of specialties, and Raphael Crawford President of catch and available for Q&A.
As a reminder, some of the questions. Some of the statements made during the call, including our outlook guidance expected company performance and timing of the expansion projects may constitute forward looking statements. Please note the cautionary language about forward looking statements contained in our press release and earnings presentation, which also applies to this call.
Please also note that some of our comments today refer to non-GAAP financial measures a reconciliation of which can be found in our earnings materials and now I'll turn the call over to Ken.
Thank you Meredith.
First quarter was excellent with net sales more than doubling versus first quarter last year and EBITDA of almost four times to one 6 billion.
This reflects the high market pricing for our energy storage business at the end of 2022.
Our specialties business also had a strong quarter up sequentially from last quarter on higher pricing.
Looking forward to the rest of this year, we are adjusting our expectations based on the current lithium market pricing and Scott will go into that in more detail.
We move the business forward in a number of ways during the quarter, including selecting a site for our U S. Megaplex lithium processing facility enrich Berg South Carolina, which is a strategic move that is even more important given the U S and place some reduction of that.
We also announced the restructure of our marble joint venture in Australia, and we announced a separate investment mineral resources limited into two of Albemarle is conversion assets in China.
We expect those two deals to receive regulatory approval and close later this year.
This week, we announced the final investment decision to build Kim or 10 trains three and four in Australia, which will be 100% Albemarle owned.
The fact that we are advancing the Cameron trains in the U S. Mega flex facility points to our confidence in the long term growth and opportunities of the lithium business and in particular, our energy storage segment.
Lithium demand in the EV market continued to grow at extraordinary rates.
And with that I will hand over to Scott.
Thanks, Ken and Hello, everyone.
Let's review, our first quarter performance on slide five.
Net sales for the first quarter were $2 6 billion up 129% compared to last year.
This is a $1 5 billion increase and was driven by energy storage as a result of both higher market pricing flowing through our variable price contracts.
And higher volumes.
Net income attributable to Albemarle was $1 2 billion.
Up almost 390% compared to the prior year.
Diluted EPS was $10 51.
Also up almost 390%, which is another record quarter for Albemarle.
Looking at slide six.
First quarter adjusted EBITDA was almost $1 6 billion.
An increase of approximately 270% year over year.
This $1 1 billion increase was almost entirely driven by higher net sales and energy storage.
Our specialties business unit was up due to increased pricing and some lower freight costs, which were partially offset by lower volumes.
Kitchen declined slightly due to volumes associated with the winter freeze in Texas earlier in the quarter.
And importantly, we saw year over year price increases more than offsetting inflation in the quarter.
On slide seven.
We are adjusting our 2023 guidance to reflect current lithium market pricing.
On average lithium indices are down about 50% to 60% since the start of the year.
Based on our established guidance methodology, we're taking lithium market price indices as of mid April and holding them flat for the balance of the year.
To be clear, we are not predicting lithium market pricing, we're simply taking the current price holding it flat and running it through our contract structure. This is the same way we provided guidance last year.
As a result, we now expect 2023 total company net sales to be in the range of $9 eight to $11 5 billion.
This is up 45% over the prior year at the midpoint.
We expect to see sales for the second quarter to be in line with Q1, and then see a sequential increase in sales in both the third and fourth quarters as ramping energy storage volumes more than offset sequential price declines.
Adjusted EBITDA is expected to be between three three and $4 billion, reflecting a year over year growth of 5% at the midpoint.
This reflects a full year EBIT margin in the range of 34% to 35% for the total company.
Our full year 2023, adjusted diluted EPS guidance is now in the range of $20 75 to $25 75.
Reflecting a year over year improvement of 8% at the midpoint.
We expect our net cash from operations to be in the range of one 7% to $2 3 billion.
And our Capex guidance remains at one 7% to $1 9 billion.
So we still expect to maintain positive free cash flow for the year.
Turning to the next slide for more detail on our outlook by segment.
The 2023 energy storage volume outlook remains unchanged up 30% to 40% year over year.
We now project average realized pricing to be up 20% to 30% for the full year.
And note that our realized prices are expected to be up year over year in the first half including in Q2.
And then down in the second half.
We see volume growth in all quarters, this lease potential upsides and downsides, if the market price shifts during the year.
Adjusted EBITDA for energy storage is expected to be between two seven and $3 4 billion.
Essentially flat compared to 2022.
Beginning in the second quarter, we expect to see pressure on EBITDA margins largely related to the timing of higher priced spodumene inventories.
And the increasing impact of the Marvel joint venture and I'll cover that more on <unk>.
More on that shortly.
For specialties, we are maintaining our guidance range for adjusted EBIT to be up 5% to 10% compared to the previous year.
We expect to see pressure in the second quarter as customers work through their current inventories. However, we expect the second half of the year to be stronger with a recovery of end market demand, particularly consumer electronics.
Catch in 2023 full year adjusted EBITDA is expected to be up 250% to 400% over the prior year.
This increase in outlook is due to higher volumes and better pricing.
When we look at lithium market prices, we need to remember that most of our volumes are sold under long term contracts with strategic customers.
We've updated our expected 2023 sales mix to reflect the recent market pricing.
And there haven't been any changes to our contract structures in Q1.
We expect our energy storage sales to be about 10% on spot and 90% on index referenced variable price contracts. These contracts are typically two to five years in duration.
And are designed to ensure security of supply for our customers as well as to make our sales more predictable.
These strategic customers include partnerships across the value chain, including major cathode battery and automotive OEM customers.
We are more weighted towards the market than we have been in the past. However, we will still have less volatility than a true spot business because of the index reference structure of these contracts typically have a three month lag and have some of them have caps and floors.
As Ken said, our confidence in our long term lithium market is reflected in our ongoing investments in resources and conversion capacity.
As we look at slide 10, you can see we continue to expect year over year volume growth in the range of 30% to 40% in 2023 as we bring on new conversion assets, specifically Cameron and Qin Zhang.
Plus some additional tolling volume.
We still anticipate a 20% to 30% CAGR and Albemarle sales volumes between now and 2027 allows.
Allowing us to maintain our leadership position and keep up with accelerated market demand.
All told we expect to nearly triple sales volumes to more than 300000 tons by 2027.
Long term, we continue to expect normalized energy storage margins in the mid to high 40% range in.
In line with the outlook that we gave in January .
We now expect energy storage margins to be about 40% in 2023, primarily based on revised lithium market pricing and the impact of spodumene inventory lags.
Most of the year over year decline in margins is related to that spodumene inventory lag on average it takes about six months for spodumene to go from our mines through conversion to our customers.
Last year, we saw dramatic increases in pricing for lithium and spodumene and due to that timeline on spodumene inventory, we realized higher lithium pricing faster than higher spodumene cost of goods sold.
As a result, we had unusually strong margins in 2022.
This year is to reverse as prices decline, we are realizing lower lithium pricing faster than lower spodumene costs.
The next item affecting margins of the accounting treatment of the marble joint venture.
We expect to report 100% of net sales, but only our share of EBITDA, resulting in a lower reported margin rate on that portion of the business and.
And finally, our reported EBITDA margins are impacted by tax expense at our Towson joint venture.
Palisson net income is included in our EBITDA on an after tax basis.
Adjusted <unk> results to exclude tax margins would be.
Six points higher than 2023.
Turning to slide 12, we will continue to invest with discipline allocating our capital and free cash flows to support our highest return growth opportunities.
Our primary use of capital remains organic growth projects to leverage our low cost resources in Australia, and the Americas and Ken will speak more about these projects and amendment.
Beyond organic growth, we continue to evaluate a broad range of inorganic opportunities to expand capacity to meet our customers' future needs.
Our primary targets are in three areas.
Lithium resources extraction and processing technology and battery recycling.
We intend to maintain our track record of a disciplined M&A approach that improves returns preserves our financial flexibility with our investment grade credit rating.
In line with that strategy and as previously disclosed <unk> submitted an indicative proposal to acquire Lion town resources, a development stage spodumene resource in Australia.
We believe this potential transaction would be consistent with our long term growth strategy and disciplined approach to capital allocation to.
To date, the Lion town Board has not meaningfully engaged and progressing the transaction, we will provide updates if and when we have more information.
Our balance sheet flexibility is a competitive advantage that allows us the opportunity to grow both organically and through acquisition as well as support our dividend.
And with that I'll turn it back to Kent for a market update and closing remarks.
Thanks Scott.
On slide 13, the global outlook for full year <unk> sales remains robust after slowness early in the first quarter due to China's reopening from Covid Global EV sales were up 26% year over year through March base.
Based on seasonal trends, China EV sales are on track to achieve full year growth of 30% an increase of more than 2 million vehicles over 2022.
Outside of China, North America had a strong start to the year with 53% year over year <unk> sales growth.
Demand has been boosted by government support the supply chain and increased model availability.
In Europe <unk> sales through March are up 7% versus prior year, a slower start due to supply bottlenecks and the phasing out of German plug in hybrid EV incentives.
Lithium spot prices in China, particularly for carbonate have fallen primarily due to destocking of inventory in the battery supply chain.
Outside of China index prices for lithium hydroxide have remained relatively strong amid continued demand and less inventory pressure.
Global lithium hydroxide prices are 15 to $20 per kilogram above Chinese carbonate spot prices the largest spread on record.
We have also started to see initial signs of tightening in the supply chain.
Unlike Albemarle non integrated lithium converters purchase spodumene on the open market.
Year to date spodumene pricing is down 30%, while lithium carbonate pricing is down more than 60%.
As a result, some of the non integrated producers are cutting production after their margins turned negative during the quarter.
Following several months worth of Destocking customers have recently started to return to the spot market and as a result, Chinese carbonate pricing appears to have stabilized with spot prices up about 7% over the past week.
We continued to expand our global lithium resource in conversion capacity based on our confidence in the long term outlook for lithium.
On Slide 14, you can see our expanding presence in the U S as well as our plans for our lithium conversion and recycling facility in the European Union.
We recently announced the site for our U S Mega effects megaplex processing facility and rich Burgh South Carolina.
Strategically placed in the growing southeast EV and battery ecosystem.
Yeah.
We are also strengthening our resource production.
In the U S. Our expansion at Silver peak is ahead of schedule and our studies for the Kings Mountain mines are moving forward as planned.
Our project in Chile to improve the yield at our solar to add a commerce site is on schedule for mechanical completion this quarter.
Recently, Chilean President Borage proposed a new national lithium policy.
The government has repeatedly made it clear it would honor current consensus.
Chile has always under the rule of law and we did not see the new policy as a threat to our current concession which runs through 2043.
In the future the proposal if enacted may offer opportunities to expand our operations using new technology.
We are proud of our more than 40 years of successful operations in Chile and value. The good working relationships, we have with the government and other leaders in the region.
Elsewhere in the World, we are expanding both resources and conversion capacity.
In Australia, the various trains of our kitchens and convergent facility are moving forward.
<unk>. One we are pleased to have reached the specified battery grade product milestone and look forward to product qualification with our customers.
<unk> two is progressing through commissioning with first product expected the third quarter of 2023.
We have prioritized train load activity and this has had some impact on the schedule for train two.
Kim or 10, three and four now have final investment decisions that we are planning the construction schedules.
Note that we will have 100% ownership of trains three and four.
In China May Shawn construction is progressing on budget and on schedule with mechanical completion expected in 2024.
Our resource expansion in this area of the World is progressing both at <unk> and Green bushes at Green bushes. The tailings re treatment project completed last year as improving recoveries to increase spodumene production capacity.
We have talked a lot over the past year about our durable competitive advantages.
Including our scale is one of the world's largest lithium producers.
Our geographic diversity, our world class brine and spodumene resources, and our vertical integration from resource to battery grade lithium.
The current lithium market conditions have tested these advantages and proven how durable they are and the difference they make for Albemarle.
We are a company that looks to the horizon.
Our sustainability commitment is an integral part of our long term strategy and our customer value proposition and we continue continuously measure our progress against sustainability goals.
Our 2022 sustainability report will be issued on June 5th and we will hold a webcast on June 20th to discuss the key highlights from the report, including our initial reporting and alignment with the task force on climate related disclosure recommendations progress on environmental and Eni targets and.
<unk> new goals around scope III and air quality.
In summary, we had an exceptionally strong first quarter.
Lithium prices have pulled back.
Team continues to focus on the things that are within our control, we're delivering volumetric growth and executing our projects. We are confident in our strategic delivery and the future of the EV market.
Bringing all of these factors together, we anticipate 2023 sales to be up 45% over last year.
We remain a global leader with World class long term assets and a diversified product portfolio that highlights broader opportunities in the mobility energy connectivity and health markets.
Innovation remains core to our business as we deliver advanced solutions tailored to our customers' needs.
Our strategy is clear and disciplined and enables us to accelerate profitability and to advance sustainability.
And with that I'd like to turn the call over to the operator to begin the Q&A portion.
Secondly, if you would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like to remove that question. Please press star followed by Tim again to ask a question press Star one.
A reminder.
A speaker phone please remember to pick up your handset before asking your question also please bear in mind. This Q&A session is limited to one question and one follow up.
Alright. Thanks.
Our first question comes from the line of Colin Rusch with Oppenheimer. Colin Your line is now open.
Colin maybe you're on mute.
Thats correct.
Thank you Alan.
Oh.
Oh, sorry about that guys can you talk a little bit about what youre seeing in terms of order size in this.
Spot market.
How that inventory is clearing and at this point are you seeing any real meaningful change here in the last three or four right.
Okay.
Good morning, Collin This is Eric so youre talking about.
I didn't catch the first part you said order size in stock clearing is that what you asked.
So yes, okay connectivity market.
Yes, well look I mean, yes.
Yes, I think what what really transpired in mice cant referred to in his prepared remarks, we saw a significant destocking happen in China.
Which affected the spot market or contract customers around the world.
I continue to buy at their contracted volumes as Ken pointed out we've seen up close to 30% growth in EV sales in the first quarter.
Across the industry.
Over 50% in the U S a little weaker in Europe overall markets.
Performing largely as we thought it would have a strong year with what we think will be tight supply as well, but specifically in the first quarter with that Destocking, we saw the spot market.
Well be practically nonexistent at times during the quarter Theres very little activity going on as these stocks were drawn down stocks were drawn down to levels at the cathode level.
In battery level in China, lithium stocks to and.
And in some cases below a week.
Clearly not in the long run a level that's sustainable for sustained operation to your question and what we've seen in the past couple of weeks, we've seen spot buyers return we've seen.
And we believe that's partially what's affecting the price that is pop has leveled and then started to rise within China.
And we can and we see no change in what our projected sales for the year in Evs are about 30% growth anticipated in China.
Closer to 40% for the overall market.
I think the spot orders be premature for me to say how large they are but they are beginning as these cathode producers now start to restock and prepare for a more stable operation for the balance of the year.
Okay.
That's super helpful. And then in terms of the competitive landscape.
The refining side as.
As we've seen some some new entrants into the space are you seeing any real meaningful evolution in terms of the technology piece of this and how folks get to the quality spec.
Across.
On the landscape.
No.
Asking my question in context of <unk>.
That's on the naval and Chemistries that we're seeing.
Preparing to go into production.
Yes, I don't think we have visibility of that so we've not seen the specs have not changed the way that people are getting qualified taking longer to get qualified with some of this.
The newer facilities.
Maybe that's coming to delays that we see but we don't have visibility, whether it's about qualification issues or just about production issues.
I don't think we have visibility of that.
Now in terms of the competitive landscape now that I would tell you in terms of the expectations of customer of US. It is a moving ball expectations go up on quality, particularly in the higher energy higher energy density Chemistries, which tend to be that in the nickel demonstrates we've recently completed.
Grades in some of our workhorse plants like Virginia to drive even higher quality standards.
For it to remain a leader in that area and that in that in that.
Regard.
So it is it is something that is a and as a barrier.
For any new entrant to be able to achieve and to get to for sure.
Thanks, so much guys.
Thank you for your question.
Our next question comes from the line of David Begleiter with Deutsche Bank. David Your line is now open.
Hi, This is David <unk> here for Dave just going back to the spodumene cause can talk about where that lower cost parts remains coming from in Q1 and probably how.
Much was the benefit to margins in Q1, and also as that higher cost of spodumene from the research Woloszyn, our exit from Green bushes.
Yes.
Lower cost spodumene is really from the both <unk> as well as <unk> and just as or Green.
Sorry Green bushes.
Just as a reminder.
Minder.
Even at lower cost is because of the timing lag.
The rapid increase and then now decrease in spodumene prices, it's really not the operating cost of the of the of the minds itself. That's causing this issue in Q1, the benefit was probably in the kind of 15% to 20 percentage point type of range.
That we were seeing in Q1 and again, we will see that reverse as we go through the rest of the year and it will be a margin rate pressure on the business.
Okay, and what was the final costs for <unk>, <unk> and I guess, what will come of Teng ramp forecast.
So we haven't we haven't disclosed the total amount so it's probably in the one five to $1 $7 billion range for timber to one and two.
Cameron.
Three and four will be in a similar type of range.
Partly because we've got it.
And employment village that we're putting in place to help with the labor issues ultimately.
Okay. Thank you.
Thank you for your question. Our next question comes from the line of David <unk> with Cowen David Your line is now open.
Good morning, Ken Eric and Scott, Thanks for taking my questions today.
I wanted to just ask about long term planning, particularly for you Scott how you think about the move to be spending I guess about.
$4 2 billion in 2007 versus one eight this year.
You pointed out obviously your guidance always just illustrates pricing if you held conditions sort of flat today.
You talked about this year spending within cash flow.
If these.
Conditions, obviously persists that you would be outspending cash flow. If you followed that Capex plan.
How do we think about that planning cycle, while you maintain sort of a.
Our long term structurally bullish view on the market you are expanding your conversion quite a bit to get to those capex numbers I guess, how do we think about that capex trajectory every year and should we expect it to be governed by sort of the beginning of the year outlook for organic cash flows.
Yes, so I think as we said when we laid out our investment plans.
We look at the market and we'll adjust.
As we go through this so what we put forward in January those are our plans.
Market and our view of the market changes dramatically or significantly we'll adjust to that so short term cycles. If our our view is right, we'll maintain and invest through those but.
If our view of pricing changed longer term, then we would adjust our investment profile.
Profile.
And I would just add that.
Given our volumetric growth.
At these kind of pricing levels, we will continue to be generating significant cash flow to be able to fund that kind of capex growth. So the Albemarle story is not really about the price it's about the volumetric growth.
And the cash.
Generation Thats coming from this is significant so.
No I appreciate that.
In your prepared remarks, you talked about the minimal impact for now of the Chilean governmental moves, particularly.
Particularly given your contracts expiring in 2043.
You also I guess highlighted.
Looking at things like extraction technologies processing technologies.
I guess the moves change any of your long term strategy in the country and you might have to accelerate some of the investments or.
I guess exploration around direct lithium extraction and applications in Chile.
Yes, So I guess, we were surprised by the announcement that came out of Chile, we knew they were moving in that direction couple things, we learned in that but our plans around DLA and our discussions with the government about using that and the <unk> are consistent now than before.
Working to progress that as quickly as we can and will do it in a number of places, but there is an opportunity to utilize that in the salon as well. So I guess our view is that.
Our concession goes through 2043.
Government has.
Gone out of their way to assure us that that's valid.
But expansions and getting additional concessions will probably will require us to use new technology, and probably partner with the government as well around that so we see that as an opportunity.
Beyond our current concession.
Appreciate the answers guys.
Thank you for your question. Our next question comes from the line of Josh Spector with UBS, Josh Your line is now open.
Yes, hi, Thanks for taking my question I was wondering if you could talk about your thoughts around the EBITDA margin cadence in energy solutions through the year I assume <unk> is probably going to see the biggest compression.
Can you get back to that mid to upper 40% range in fourth quarter or can you even get there with where spodumene prices are today, what that does it roll through.
Yeah, So just with the with.
Whereas spodumene prices are and.
Projection that we've made using the mid April prices will be below that kind of mid 40% range.
In the second quarter, all the way through the fourth quarter. So it's really again, the pressures coming from that that price being lower as well as that spodumene price drop.
Our cost drop that is putting the pressure on the margins. If you were to stabilize that I think it ended up being more at the long term expectations of mid <unk>.
Low 50% range. So really this mark just as just.
As a reminder, in repeated again this margin pressure is really just driven by the.
Velocity and the change in the spodumene price.
Flowing through our P&L.
Okay, and just to make sure I'm unclear is this in your pricing assumption I mean.
Are you assuming that your contract step down with the lag in the next couple of quarters.
Along with that or are you assuming your current contract mix extents.
Yes, so what we do is we're taking our current contract mix as of today or let's just say mid April we're at.
Applying the market indices that are referenced in those contracts.
Knowing that through and that generates what we think what the revenue will be.
And so as you look at that on a sequential basis, we'll see price reductions each quarter.
And as you look at it on a year over year basis, our first half of the year, we actually see price increases in the second half of the year, we're seeing price decreases on a year over year basis.
And again Thats, just really just reflecting how those contracts are structured and the lags that are built into them in a couple of the contracts have.
Caps and floors that you have to take into account.
Okay. Thanks for that.
Thank you for your question. Our next question comes from the line of Mike Sison with Wells Fargo. Mike. Your line is now open.
Yes.
Hey, good morning, guys nice start to the year.
In terms of inventory Destocking and I understand.
There's been some in the industry, but your volumes are up in the first quarter. So.
Are you not so destocking from customers is that a risk.
Get into the second third and fourth quarter.
Hey, good morning, Mike. So this is Erik the way I would qualify that is again that the destocking has happened specifically in one country. It's China now happens to be the largest country in the market, where almost all the spot buying activity is.
10% of our mix as we've described on an annualized basis.
All of our contracts are everywhere else around the world, including even some long term contracts that are sourced into China.
Are all operating according to the <unk>.
Projected plan prior to beginning of the year prior to any destocking that happened in China, meaning the EV growth stories intact everywhere.
All of that's happening in China as a destocking spin.
Specifically, there and everywhere else volume continues to fall. So we're not seeing destocking is a widespread phenomenon just something in China and specific to the spot market.
Got it and then when.
When you think about the volume growth as you head into the second half of the year.
It doesn't sound like there's a lot of risk that on year, NOI customers want that product and <unk>.
So within your contracts.
Is the risk.
Volume in your second half if any.
Okay.
This is everything that's happened.
And that we've talked about on Destocking has to do with a temporal effect in China. It has nothing to do with fundamentally the demand that we've seen it is true the year started out a little weak in China on demand recover.
Cover rapidly by the end of March so we.
We saw a weak start in Europe , but that's a hangover effect, we believe from what has been expiring.
Sensitives largely in Germany, and the U S to start off with a bang for the year all of that is consistent with our look our view at the beginning of the year. Our view now that we're looking at a 40% year on year growth in demand our customers need the supply and frankly, we see the market is still being tight for the balance of the.
A year. So this is a market that's that's healthy in that regard independent of what's going on with price now.
The supply demand fundamentals are very favorable.
And Mike I would just add to that as you look at our projection I mean, it's really an operational risk.
So because we are ramping our new plants right. So it's really just our ability to ramp those plants and we think we have it dialed in but things can go wrong. So I think thats really the.
The risks and also potential opportunity because if things go better then we'll have more volume.
Okay.
Alright, thank you.
Thank you for your question. Our next question comes from the line of Arun Viswanathan with RBC capital markets Hi, Ryan Your line is now open.
Great. Thanks for taking my question.
Appreciating that it's a <unk>.
Ari volatile market.
Constant evolving could you just kind of review some of the drivers that you think are influential on price.
Lithium spot prices and <unk>.
Maybe just give some perspective on the market.
The declines that we saw were very swift and <unk>.
And what would indicate.
Stocking and very high inventory levels, especially in China, I know that theres been some other factors like discounting on ice's vehicles over there but.
Maybe you can just provide your own perspective on what you're seeing thanks.
Okay.
Yes, it's difficult to say whats really happening in the spot market kind of the fundamentals we rely on our the supply and demand balance. We spent a lot of time working on that making sure that we understand that.
We think we understand that and it kind of works.
It's a tight market for pretty long period of time.
The previous question.
More concerned in this year about volume and being able to produce the volume as opposed to the demand that's there for the product.
The spot market in China, and the movement that we've seen.
A lot of that is about destocking.
That volume running down and shifting to different areas in the supply chain between the battery makers the cathode makers and then the overall lithium salt providers like ourselves.
And converters that sit in the market as well so its moved around within those within that space and then it's been there's been a lot of destocking in that that's really driven the pricing, but it's in the spot market and as we've said before it's about 10% of our portfolio.
It has a big impact on the broader portfolio because we index.
Our prices index to those with a lag, but it does have a bigger impact on our portfolio than just the 10% debt that we represent Erik do you have.
Additional color no I mean, I think the market is changing as well at the at the automotive level I mean, there is there.
There is now more models more vehicle producers aggressive competition for share so thats, a dynamic thats going on within our customer base.
But that's that's the industry are rising up to meet the demand. That's there for these these vehicles and it doesn't change the need for us to execute well in order to meet our customers' expectations.
And as Ken said the market for spot material is isolated largely to China.
And so what Youre seeing now is some dynamics playing out in China, which when you think about an inventory drawdown its temporal in nature with strong demand.
We are going to pretty soon go to a point, where many of much of the supply chain needs to start restocking.
In addition to just meeting its growth before it.
Oh.
Great. Thanks for that and then just as a quick follow up then you also noted that.
There potentially are some observations of a supply response and that some of the newer capacity that's potentially at higher cost levels may not come on or is being delayed could you just elaborate on that what are you seeing there is that is that meant to also imply that maybe the mid <unk>.
<unk> is the marginal cost system of that new capacity.
How should we think about that thanks.
Okay.
Yes, I'm not sure we didnt, we werent talking about new capacity coming on that's been delayed we were talking about converters in China that we're shutting down because the math didn't work any longer between lithium prices in spodumene prices. So I'm not sure I'm not aware of anyone who has delayed a new project as a result of the current market pricing, although that could be the case.
Aware of that.
No I don't know that we have any intelligence that says our new project is delayed there is still a fair amount of interest in bringing supply in order to meet the demand, which we believe will be necessary given the shortness in supply.
But we know because we both compete of course in the China market against some of these converters, who buy spodumene on the open market, but also toll with some of these individuals from the behavior that we have in that market, we've seen that market we know.
Clearly that more tolling capacity is available because they cannot make money on existing spodumene conversion when they buy the spodumene themselves. So that's part of the evidence package we have it.
Some capacity has been leaving the market at current prices.
Okay. Thanks.
Thank you for your question. Our next question comes from the line of Vincent Andrews with Morgan Stanley . Your line is now open.
Thank you and good morning, Scott I'm wondering if you can just help us.
On the inventory on your balance sheet, just looking at the end of the year. It was a little south of $2 1 billion and then at the end of the quarter. It's almost $3 2 billion. So what are the mechanics of that.
Increase I'm sure some of it's price, but how much of it is volume and then I think you made the accounting change at <unk> in terms of how you are.
You deal with the <unk>.
Unrealized profits from your JV and I think those now reduce inventory. So if you could just help US bridge the increase from 12, 31% to $3 31, that'd be great.
Yeah, Vincent I think so.
<unk> amount of that increase is due to due to price so as the prices moved up.
Obviously, there is there is an impact on on our on the on the value also we've got increase in volume.
As we ramping both.
Expansion of Green bushes, as well as <unk>, so youre going to see increases coming from that and to your to your point. We did have an accounting change where we've changed how we're recognizing the profit and inventory.
That now is reflected in our inventory line as opposed to our investment line.
That reduces the effect so those are kind of moving pieces.
Okay and then the other follow up I had was just on spot Youre spodumene cost.
Very easy to understand what youre, what and how youre, assuming with the <unk> prices.
Recent spot carbon prices have been.
So generally speaking, Chris where we view a pellet producers is tending to be more integrated producers from mineral resource of a patent right all the way through conversion or comments on what we're seeing and who will be tolling with obviously those who consume spodumene.
And and who have to buy spot on the market two to run their business, that's where our comments were focused on.
Got it thank you.
Yeah.
Thank you Mr caps.
Our last question is from Ben <unk> with Baird you May proceed.
Yes.
Thank you very much for fitting me in.
And.
If you could give us some help on marginal cost of the industry.
To this point about integrated.
Marty versus.
Version, but how do we think about.
The marginal cost of the overall industry.
Any way you can frame that for us because I think that's the biggest question Louise when everyone's looking at price.
How low can it go.
The cost leader.
At that price.
Theoretically.
I have a follow up.
Yeah, So Eric can probably add.
Detailed this but I would say I mean, we look at it we look at it and we think you should look at it I mean, there are integrated producers or producers that are not integrated that they probably set the marginal cost right.
The ones that arent integrated so you can spodumene price you can see for the most part it's pretty transparent around that and conversion on top of that to make a margin that those are the marginal producers.
I guess it moves around depending over spodumene ships, but you can you can see that in probably can determine that.
Yes, I'd, just add Ben that as as when the spodumene when the when the battery grade carbonate price spot price in China on the various indices Cros and from the <unk> into the <unk> you started to see that paint we started to hear more producers who are having trouble operating you're starting to see even more activity within.
In China to try to find ways to thought that from falling further you can tell we could tell from the market sentiment that that was up a point of pain from any of these producers and it substantiates, what we've said for some time that prices need to be at least in the twenties for this industry to operate if not higher.
Yes.
As new resources come on and new technology comes to play.
Could very well move out that cost curve as well as lower quality resources come to market with different technologies that cost curve kind of grows.
Thank you and then just on.
I think we see this already to some extent.
Bifurcation.
What's the right word.
Pricing that comes out of China.
Versus elsewhere, and then if you wanted to go elsewhere too.
Specifically in the U S I know Theres a lot of.
Volume that comes out of the U S.
In your discussions how much of a difference.
Pricing.
Across different regions.
Where.
Whether it's.
Spodumene or carbonate or.
Or.
Or what have you.
The difference in pricing.
Based on reason.
Yes, yes.
China is a big part of the market and historically, it's kind of set that all of those price at that pricing.
Historically, I think as the other regions grow and we start shipping volume into other regions thats going to change and it will start bifurcated.
And being different around the world, but I would say now it's primarily it's kind of one market, it's kind of it looks like its wanting to separate a little bit, but I would call. It one still and it's particularly true spend for carbonate 70, or 70, 80% of the world's carbonate is consumed.
In China, and so if China's destocking, that's going to have a disproportionate impact on carbonate.
In China.
So the IRA.
<unk>.
In terms of <unk>.
Youll move supply chain at all China has started impacting market pricing.
Yes, there is no there is no real consumption turnaround that at the moment, but it's there.
The speculation around it has started but there's not a lot of volume shift that's changed since that law came into effect.
Thank you Mr Cola.
That is all the time, we have for questions I will now pass it back to Kent Masters for closing remarks.
Okay. Thank you and thank you all for joining us today so.
It's clear we are a growth company that continues to provide added value to our markets.
As a global leader in minerals that are critical to our mobile connected healthy and sustainable future. We remain the partner of choice with customers and key stakeholders.
Thank you.
Yeah.
This concludes today's conference call. Thank you for your participation you may now disconnect.