Albemarle Corporation (ALB) Management Presents at Goldman Sachs Chemical Intensity Days Conference (Transcript)

Albemarle Corporation (NYSE:ALB) Goldman Sachs Chemical Intensity Days Conference Transcript March 9, 2021 9:45 AM ET

Executives

Eric Norris - President, Lithium

Meredith Bandy - Vice President, Investor Relations and Sustainability

Analysts

Bob Koort - Goldman Sachs

Mike Harris - Goldman Sachs

Tom Glinski - Goldman Sachs

Emily Katz - Goldman Sachs

Bob Koort

Good morning, everybody. Welcome to our Chemical Intensity Days. I’m Bob Koort. I run the equity research effort here at Goldman Sachs in the chemical space and I have my teammates, Mike Harris, Tom Glinski, and Emily Katz on as well.

The format of the presentation will be, Eric Norris from the President of Lithium from Albemarle will give us an overview of the markets. Then you can move the slides as you see them on the webcast yourselves. He’ll refer to those slide numbers so you can keep track. And at the end, we’ll have a Q&A session. You can submit your questions into the portal. There should be a little chat box there where you can submit those and we’ll ask them on your behalf. And then Eric and Meredith Bandy, who is the VP of IR and Sustainability at Albemarle will join Eric in answering those questions. So we’re going to have about 45 minutes today, which should leave us with ample time for questions after Eric’s remarks.

I’ve known Eric, surprisingly now it’s been a couple decades for us Eric since the ‘90s, who spent time at Roman Haas than at FMC and now, of course, heads up their Lithium effort. And so without further ado, let me turn it over to Eric.

Eric Norris

All right. Well, thank you so much, Bob. Got a little echo there. Hopefully, that won’t persist. Very nice to be here. I want to thank you, Bob. Thank Goldman Sachs for having us join. It’s a pleasure to be here to talk a bit about Albemarle Lithium.

Let me dispense with some housekeeping first. As usual, slide two is a statement of our forward-looking statements and the factors that adhere to regarding some of the forward-looking statements we’ll make are discussed in our 10-K and on our website.

And similarly, on slide three, non-GAAP financial measures we will use -- all of our segment EBITDA, for example, are expressed as on an adjusted basis. So a reconciliation of those is also on our website.

So let’s get into it. So first with a bit of an introduction. So, Albemarle is accelerating its growth to create value. We are entering a really interesting and transformative stage in our history as a company with the potential for significant growth, and more importantly, the chance to play a key role and improving global sustainability.

As many of you know, we have three core businesses, Lithium, Bromine and Catalysts, and have a leadership position in every one of them. We are the world’s largest Lithium producer, powering technologies and facilitating the electrification of the automotive industry. And our Lithium business is vertically integrated with a portfolio of globally diversified, best-in-class resources and a global manufacturing network with clearly defined products to grow our footprint and we’ll discuss a bit of that here in a moment.

This -- all of this includes industry leading conversion facilities. These are this -- the word we use for plants that are downstream from the resources to convert the resource into a value-added Lithium salts or metal.

And a chemistry expertise that we deploy with our customers to keep pace and innovation with the batteries use any of these, as well as other technologies and process know-how we use to continue to innovate within our plants. As a company overall, within all three GBUs, we have a track record of delivering growth and strong financial performance.

So, with that, I’ll change my side of my list [ph] . Let’s take a look at slide five. This is just a quick summary of our diversified portfolio we have with these three businesses. Each of them has above market margins are in aggregate our 2021 sales of $3.1 billion, with about half of that in Asia. In the case of Lithium, more than half that’s in Asia, it’s a very big portion of our business with that being the epicenter largely for EVs today, EV batteries, I should say, today. And then for the -- consolidate on the rest of the company, 25% of our sales have been in North America and Europe.

Again, on Lithium, our margins are in the range of 30% to 40% over the past number of years and at are number of 34% last year, a year in which we saw trough market prices, and of course, a pandemic impact on demand overall. So, a strong performance of the depth for the bottom of the cycle.

Cost savings was a big part, has been a big part and will be a part going forward of us. We generated $80 million last year of savings, which was a target we exceeded 60% higher than we had planned.

And I have -- we’ve done a very, I have to commend our employees around the world, in our plants, in our regions, throughout the U.S., have done a great job of managing through COVID-19. All plants have been able to operate throughout the year and continue to do so. So we’re very pleased with how we’ve been able to manage through these very difficult circumstances.

So a bit on strategy at a high level first slide six. We have a clear strategy to drive sustainable growth and I would -- we would categorize it in four pillars. The first one being to grow profitably and we do this by leveraging diverse world class resources in both Lithium and Bromine. Bromine is also a resource based business. We do it also by executing new growth projects that will be low in capital intensity and align with the requirements of our long-term customers.

What I mean by that more specifically is in Lithium that means providing a secure supply of high quality battery grade products in exchange for a long-term commitment from our customers for that material. And finally, we build an internal team and capabilities to execute our capital project to drive growth, particularly in the Lithium business on time, on budget.

Second pillar is to maximize productivity. Our focus has been to optimize earnings and cash flow generation across our businesses. That’s instrumental to provide growth capital for Lithium business. And additionally, we’re going to continue to drive productivity through operational discipline. We have an Albemarle Wave Excellence model that we’re rolling out across our business -- our company to drive improvement well into the future and drive continual operational discipline.

Thirdly, third pillar is to invest with discipline. We do this by allocating our capitals on our highest return opportunities, a lot of, obviously, a good number of those are in the Lithium business. We’re continuing to assess the portfolio for opportunities to create value and you’ve seen actions we’ve taken recently in the portfolio to pursue just that aim. And we’re maintaining an investment grade credit rating as well supporting our dividends.

Fourth and finally is -- and I should say, last but not least, because it’s amazing -- it’s the motivation behind the growth in our Lithium business is advancing the sustainability across the entire portfolio. In Lithium, that means increasing sustainability through the value chain from resource to end use products and driving that as a key part of our value proposition to the EV supply chain.

Right now, as a company, we’re in the process of adopting near-term targets for reduced greenhouse gas emissions and exploring science-based targets and all of this being part of a Sustainability Program that we’re rolling out this year in more detail those targets.

Okay, now going a little deeper still. Slide seven takes us into the three GBUs and a bit of a characterization of them. As I just said, we’re dedicated to creating a more sustainable world and enabling our customers to achieve their sustainability ambitions.

In fact, across this customer base greater than 50% of revenues we regenerate come from products that enable reduce greenhouse gas emissions or increased resource efficiency. Our ESG evident -- efforts are really evident across all three of these GBUs here.

Just to give you some examples without going through all the details on the slide. Catalysts help our refineries produce cleaner transportation fuels. Bromine products contribute to safety by preventing fires and electronic equipment. And of course, Lithium products enable reduction of greenhouse gas emissions through the electrification of transportation.

Today and going forward through the rest of the deck, our dialogue will focus on Lithium on the energy storage market and specific that is 50%. If you look at the consumption of Lithium, I’m going to give you a market chart here in a minute, 50% of the world’s consumption of Lithium today goes into energy storage and it’s about a little over that about 60% of Albemarle sales on a GBU level. If you take a look at it on a company level, it’s about a quarter of our sales today.

Our growth strategy is to drive growth in this segment, such that you go out to the middle of the decade, growth in this segment will be resolved in and being more than 50% of the company’s revenues coming from this segment from energy storage and Lithium. So it’s a big part of our growth story and big part of the investment that -- and it’s transformation I was just referring to.

So now an overview for those less familiar with the details of our Lithium business. We have leadership positions in battery, industrial, specialty grade products. About $1.1 billion in sales, as I indicated earlier, 34% adjusted EBITDA margin.

Our competitive advantages include that we’re vertically integrated with access to the largest highest quality resources in the world. We have geographic diversity also in our producing assets and others. So we have our conversion assets are in all major markets and as I -- and these resources I’ve referenced are all major Lithium producing regions.

So we’ve got great product diversity as well, broad range of products that serve multiple end markets. As I mentioned, energy storage, but there are many other end markets we serve that are in the industrial and specialty segment.

We’re able to meet advanced technology requirements and we continue invest in product development, particularly our advanced energy storage for customers. And of course, as I indicated earlier that the advancement of technology it also pertains what we’re doing on a process standpoint, resource extraction, conversion, derivatization.

Now we have -- as I think you all understand a strong business environment for energy storage growth, particularly in EVs, public policy is favorable and it’s accelerating towards e-mobility renewable. The security of supply to support the -- of Lithium to support the significant investments that OEMs are making in their supply chains for vehicle electrification is a key driver and this supply chain is dynamic. I mean, it’s where -- who is buying Lithium? Who is winning the business at the battery level for certain OEMs is changes?

And the important point I’d like to leave with you all is that Albemarle is very well-positioned for this evolving emerging supply chain, because we’ve got the resources, the process and know-how that is really integral to the success of our clients.

So if we go to the next slide, we’re going to take a little dive on slide nine and talk a little bit about the market. As one of the largest and most diversified Lithium business in the world, Albemarle will benefit, no matter which battery or which technology or which EV model wins. That’s the important point of this slide.

I won’t go through every detail on this slide. But it’s an overview of the significant players at the battery level and then to the right at the OEM level, as well as towards the middle center a summary of the battery technology evolution underway, that we could if there’s some questions we could get into.

Albemarle has -- is well positioned here. We’ve got the commercial relationships with the major battery producers listed here. We’ve got increasingly now similar relationships with the automotive OEMs. We have the expertise and capabilities to supply advanced battery chemistries, as we move through the legacy chemistries up to we’re referring to as next frontier that enable increased energy density and that could be specific products like high purity advanced hydroxide for cathode technologies, pre-lithiation products for both anode and cathode. And then ultimately, sort of the big jump in technologists, solid state chemistry, we really talking about a full Lithium metal anode. So we’re invested and have capabilities now support all of that going forward.

Finally, as I said, we’ve got process know-how. We have -- we are very proud of how sustainably we recover and process Lithium and we’re extending that know-how now increasingly into another resource we would refer to as the recycled battery resource, right, as a feedstock going forward for Lithium as we see it. So like I said, a lot of details, point is, no matter what happens, we feel we are well-positioned through this very dynamic marketplace.

Now, let’s talk a little bit about on slide 10 just some of the other environmental factors that are the backdrop for all of this. It’s really been hard for any of us to miss these, be it a social or consumer preferences or the government support and regulations and incentives that are being put in place. We are seeing certainly an acceleration of that shift by our customers and our customers’ customers.

As an example, GM will offer 30 all electric models globally by mid-decade and 40% of the company’s U.S. models offer will be battery electric vehicles by the end of 2025. That’s a big step change for GM in this year, very short period of time. Daimler and VW have announced multi-billion dollar investments in electrification and the list goes on.

When we turn to regions, really EU has set stringent targets for the automotive industry that can only be achieved and fines associated there with that can only be avoided by switching to auto production, switching all auto production EVs.

China continues its roadmap to new energy vehicles with a target of 100% all vehicles to be new energy vehicles by 2035. And in the US, the Biden ministration is expected to put incentives in place as well. So it’s around the world a favorable backdrop that’s occurring.

Look at slide 11. We’re going to a little bit more of what this -- we think this means for Lithium itself. As I noted that the environment is very favorable and it’s all the things we’ve just discussed on regulatory, technology and the investments that are being made in infrastructure.

All of that has led to really strong growth and rebound that we thought was much stronger than we would have thought at the depths of the pandemic last year. By through the end of last year, EV sales were up 45% versus the prior year and they’re expected to increase by over 70% in 2021 by most estimates.

So very exciting acceleration here and as we look forward the estimates vary, but the consensus is for significant growth in the coming years. If you look at the left panel and the bar charts that are in that left panel, talking about mid- to upper-teens penetration of light duty vehicles by 2025 and a consensus of most external analysts getting closer to that 1 million metric tons marked by 2025, which versus today is just under 300,000 tons and are -- I should say, 2020. So a very steep growth curve.

The driver for this growth in the Lithium tonnage is playing out in the far right-hand panel. That blue -- dark blue bar gets very large as you got to ‘25 and an increasingly large by 2030 and it’s -- that’s the EV bar, it’s all about light duty electric vehicles.

Now, if we look at Albemarle forecasts, you can see it there and then somewhat right center of the page and I’ll go into a bit more detail in a moment, we are more optimistic. We expect demand to reach more than 1.1 million tons by 2025, although we were at 1 million tons a year ago. So things have started to change. We are increasing our forecast even though we through a pandemic here or some of the reasons, the macro factors I’ve just discussed.

Let me get into more depth on that outlook. So that would be slide 12. For our outlook, we have an analytics team. Within the Lithium business, they take external estimates, internal forecasts, discussions we have with our strategic customers and their customers to generate very detailed demand forecasts.

It’s a pretty sophisticated group, kind of well above my head. They apply machine learning techniques, advanced algorithms and compare the S curve, the type of adoption we see here to other S curve like technology adoption curves.

And the result is a forecast that we provide each year and shown here, and we feel pretty confident based on how we’ve been able to -- the convergence around the forecast we had last year, it makes us feel confident that we are doing the right things here. We’ve got some of the right inputs. And while today that forecast we’re providing you as above third-party, some third-party estimates, it’s below some of the more ambitious targets set by our customers and many automotive OEMs.

As just a quick example or maybe you’ve heard the Tesla’s talking about a vision of 3-terawatt hours of battery production by 2030 and that will translate to about 2.3 million tons of Lithium. And by most people’s estimates, that’s the size of the entire market by 2030. So that’s a very strong ambition that Tesla has, which suggests that our forecast isn’t really that aggressive.

Demand on just pure numbers expected to grow 30% if you look at what we have here from 2020 to 2025 driven by EV’s and that category alone, EVs Lithium consumption is expected to grow by 47% per year.

Couple of the other drivers other than just adoption of EVs is a larger battery size. This is -- this coming about as economies of scale and costs are driving down the cost per kilowatt hour. And manufacturer ever put larger batteries into their cars are effectively enabling longer driving ranges, which what consumers -- we feel really -- one of the key factors they need to see in order to buy these vehicles.

We’re also seeing similar innovations that are driving shorter charging times which then coupled with government infrastructure investments that we see happening around the world around charging stations enables that minimization of anxiety in the past round range, which has been a key sort of activation point to get over to really accelerate adoption.

Our outlook importantly does not assume a major shift in battery technologies over the next five years. In fact, that shouldn’t be too surprising for those who know the automotive industry. The types of commitments they make to a vehicle platform are generally five years in nature. So the visibility out in that five-year period, drive trains and batteries, the models is pretty set.

But what we see happening in the five years after that is the enablement of solid state chemistry and it might even come sooner. And that could really increase Lithium intensity of this decade and that you’re now having Lithium in the cathode and the anode, the overall you’re dropping the costs of the battery, you’re getting a higher energy density per pound of the battery and therefore increased Lithium is used.

So that’s a bit on demand. Let’s now turn to -- where I am on here slide 13. This is going to talk a bit about what we’re doing to meet that demand. Let set just a little history here. Since 2015 we’ve nearly tripled our nameplate capacity to 85,000 metric tons. We have underway now we’re calling Wave 2. That will double our current capacity to 275,000 metric tons and that doubling happens next year, I suppose the projects we’ve been talking about they come on this year, we’ll be able to sell from them next year. It includes the La Negra III, IV projects in Chile and the Kemerton I, II projects in Western Australia.

Now, again, for our strategy, I describe earlier, we’ve engaged customers for long-term buying commitments before execution of this portfolio projects and our customers now asking us to repeat that model for future waves of expansion.

Those next couple of waves of expansion start with obviously Wave 3, but we’re putting in Wave 3 are several components, one, a conversion plant in China, which would be part of the Albemarle joint venture, a smaller expansion, which we’ve already announced and started to undertake at Silver Peak to leverage the Brownfield capability that we have at Silver Peak, Nevada.

Another plant in China, which like the Greenfield site as part of a mega site we would build, mega site for us -- is 100,000 foot a metric ton site that you can build repeatedly on and get economies of scale.

And then finally, building out at Kemerton III and IV, which, again, Kemerton you think of is the same concept of mega sites Brownfield expansion gives good economics and that -- when we talked about the equity we raised earlier this year that’s what we’re driving to get to and that’s then drives a scale of earnings capacity and cash flow generation, which we believe can internally fund Wave 4, without -- and in fact, we expect the GBU by this point kind of we flip those [ph] sufficiently generating cash flow to support its own growth.

And we identified opportunities and wait for which will flex because there’s -- they are earlier in their process include expansions in Australia, China and/or Southeast Asia. Everything we do in that part of the world is leveraging a supply basis coming out of Australia. It’s the rock capacity we have coming out of Australia.

A restart of the mine and conversion facility at Kings Mountain in North Carolina, which is also rock based. And then options we’re looking at to support our customers regionally in some of the growing EV markets, for example, what we could do is take some of the growing feedstock of carbonate we have and direct it towards further processing hydroxide and build such hydroxide plants near to our approximate to where the batteries being manufactured like North America and Europe as we go into the middle of the decade. So that’s what we’re doing to align ourselves and enhance the utilization of our resource base.

Let’s talk a little bit now about what that means, just to give you a sense of footprint and how this is integrated and aligned to everything we’re doing. So our Wave 2, 3 and 4 expansions are strategically well located and complimentary to that footprint, as you can see here. As an example, our Australian and Asia conversion capacities which include Xinyu, Chengdu and shortly Kemerton, they’re all based on hard rock coming from Western Australia. And in Australia, we’ve accessed the world’s largest and highest grade quality hard rock at Greenbushes and at Wodgina, Wodgina of course currently in an idle state.

Then if you move to the left to South America, carbonate produced from our brine operations of Salar Atacama, it’s the highest quality brine resourced in the world and can be sold -- that carbonate produced there from can be sold directly to cathode, which is what we do today. The large carbonate market which is still present, still growing despite the uptake in hydroxide for technical purposes. But then that -- that carbonate could also in the future be deployed the hydroxide conversion facilities for high nickel catalysts for Lithium hydroxide.

We also have access in South America to Antofalla, Argentina, which we believe to be the largest in Argentina, largest resource in Argentina. It provides further long-term optionality for additional resource capacities, but it’s at a very early stage. So it’s -- you won’t see that showing up in many of the Wave 3 and 4 plans we have, but it’s a long-term option.

Last but not least, turning to the U.S. The prototype for carbon to hydroxide conversion I’ve referred to several times as a plant that exists already and has existed for 10 years at Kings Mountain, North Carolina. It’s our Lithium battery Lithium hydroxide plants on the map here produces currently to global cathode and battery producers.

The carbonate feedstock of that product currently comes from Silver Peak, Nevada, where we are the only Lithium company in the entire U.S. with a producing resource in the U.S. Additionally, in North Carolina, we have another resource, we have the continents highest quality spodumene resource and it’s not currently operational, but I referenced that as part of Wave 4 as part of our growth plans.

Finally, we have explored initiatives in clay Nevada and I’ve had done the same in Magnolia Arkansas, which is where we extract brine currently.

So some important notes just as a -- to anchor this slide. When we talk about resources, we say high quality, that is called for low cost base that gives us the stability we need and the cost structure we need to continue to invest and earn very strong returns. These are resources at the left hand side of the cost curve.

Albemarle operates, as I’ve just illustrated, both resources and conversion assets, fully integrated, all of the conversion assets use resources produced by the company itself and that differentiates ourselves from many competitors.

Additionally, we produce from multiple resource types on numerous continents. So we have the process, operating, supply chain experience in numerous places and no other producer has that today. So it’s a real strength that we intend to leverage as we grow to meet our customers’ needs.

And finally, we have as noted here on the right hand side, the dry powder, our resource capability are either in the ground, idled or soon to be added in the case of some of the expansions and balancing are equal about twice our Wave 2 conversion capacity, twice the conversion capacity will have next year. And so, now what we’re doing with this investment plan Wave 3 and 4 is investing to align those two to fully utilize the resources we have.

So that’s our picture, just a quick update. These are the two projects, keep referencing the Wave 2 completion projects. Quick update La Negra III, IV, we’re adding carbonate capacity at the very low end of the cost curve. It’s on track for completion in mid ‘21 and Kemerton I, II, the new hydroxide Greenfield plant in Western Australia are on track for mechanical completion by late ‘21. So in good place there going forward.

Importantly, I talked about our cost position and our capital execution to drive higher returns, that’s going to result in well the capital execution and how we go about and result in reduced capital intensity. Beginning with our Wave 3 projects, we expect a 40% reduction in capital intensity to support compelling economic returns.

And there are three sort of underlying factors, why that is going to happen. One is, we’re leveraging experience we built to-date in project execution building optimized standardized plants with economies of scale.

Secondly, we’re moving from Greenfield to Brownfield economics, increasingly looking to mega sites as are referred to earlier, like what we have, for example, like Kemerton.

And finally, we’re either going to buy or build additional facilities in low cost jurisdictions like China, as we’ve done in illustrating the past we’ve done successfully in China with our current Xinyu plant. We are well poised to drive strong investments through this approach.

All right, coming in the homestretch here, I want to make sure we talk about and I alluded to this throughout sustainability. It is -- we are taking a leadership role around transparency on how we produce this and it’s a core value driver for our customers.

IRMA in particular, the initiative for Responsible Mining Assurance is a certification standard for assurance of responsible mining. It offers objective, independent third-party verification of industrial-scale mine sites. It operates in a multi-stakeholder governance structure with provisions like Albemarle and Anglo American, as well as automotive OEMs like BMW, Daimler and Ford. It involves community organizations, labor organizations and even NGOs like Earthworks and Human Rights Watch.

Albemarle’s Salar site was the first. We’ve recently completed the IRMA self-assessment for Lithium mine. We were first to do so in Chile. Our next steps are to take that site into a third-party audit and certification of the Salar. And then we’ll rollout that self-assessment to additional sites around the world.

It’s important to note, we talk a lot about this that while Albemarle is taking this leadership approach is certainly beneficial to those of you here looking for the ESG play in equities like Albemarle. The driver for this is that as a source of differentiation and value creation for our customers. For whom -- when it comes to EVs it’s essential to have a green value proposition that enables their clean energy promise to their customers.

So, to wrap it up on slide 18, we finished a great year in 2020 despite the pandemic and are excited about the opportunities ahead of us in 2021. We continue to execute our strategy. We’ve got Wave 2 coming into completion. And then these new expansion projects in Lithium and in Bromine, we are going to maximize productivity with additional operating discipline across our businesses. That includes cost reduction, but I referenced sort of the Wave Excellence Operating model we have its focus on lean principles and continuous improvement and project execution excellence.

We have got $75 million of productivity savings coming in -- again in 2021. We’re going to be very disciplined about how we deploy capital and high return investments and we’re going to continue to implement improve sustainability across the company.

So, Bob, that’s the prepared stuff. I’ll turn it over to you for questions. I know Meredith Bandy of Investor Relations and Sustainability leadership for Albemarle is going to join me in that.

Question-and-Answer Session

Q - Bob Koort

Perfect. Thanks very much. Very comprehensive there. We’ve got a bunch of questions here. And a reminder, if folks have additional questions, you can submit them into the chat box there on the webcast. First one asking how you think about your mix of battery grade carbonate and hydroxide and should we expect that the South American operations will largely stay on the carbonate side and the Australian rock will largely target hydroxide or is that too simplistic?

Eric Norris

I don’t know that that’s too simplistic. I -- the strategy today, the market today has very strong demand for both products, for carbonate as well as hydroxide. The lowest cost carbonate in the world is produced out of the Atacama and the lowest cost hydroxide through the rock process produced out of Western Australia using our Callison resource. So we feel we can get optimal returns meet the markets as they are and grow. I think what’s important to note though, is we have the flexibility. There are ways to shift that supply chain as our customers demand or technologies may shift.

Bob Koort

Question here about LFP, the rise of LFP, which maybe puts a little shade on the hydroxide or high nickel batteries. Can you talk a little bit about what you’re seeing in the market and how that affects if at all your strategy?

Eric Norris

Yeah. I -- the rise of LFP, because it’s a good way, I don’t know, that was my word, the way the question was asked now that I’m saying it. That’s an important and interesting development. So technology has been around for a while and been optimized largely in China.

And I -- we view it as additive, that is adding to an already strong growth picture, because now you’re talking about technology that is used to -- for shorter range, lower costs, largely -- we would consider intercity driving, maybe very at propo [ph] or clearly very at propo to the China market, potentially in some other markets around the world, at the low end, right, giving an entry point at the low end.

It’s not going to have the range, it’s not going to be able to compete and forward the space of the customer buying today and internal combustion engine or the person that drives 10,000 miles, 12,000 miles a year here in the U.S. or in Europe. That’s going to be a high nickel range and those models aren’t being cannibalized by the low end as a distinct segment. We view it as additive and representative of the broader shift to EVs that is underway.

Bob Koort

I don’t know if this is in your purview, but I’d be curious in your answer somebody asking, given the opportunities in Lithium and the moves away from ICE vehicles. Why should Albemarle stay in the Catalyst segment? Why not split the company up and optimize for Lithium, where all the exciting growth is?

Eric Norris

Well, we’ll leave the portfolio questions we can, but I’ll tell you what we see from just a pure market standpoint, right? From a pure market standpoint, the shift is happening to EVs, but it’s going to take time. I think the figure I show was the consensus was 16% penetration that means another 84% are internal combustion engines and they need to be fuel efficient. They -- those vehicles need to meet standards of emissions that are increasingly stringent. What we do in our Catalyst business enables that.

So we would view ourselves as sustainability transportation play of all kinds. Yeah, EVs are very beneficial to the Lithium business for its growth and that’s why we’re investing. But so too are the sorts of things we’re going to see in internal combustion engines.

And let’s not forget that you’re still -- and they order several billion vehicles out there and so on and installed base that are still in the internal combustion engine. So this is a transition and we’re facilitating it and playing in both areas for the benefit of sustainability.

Bob Koort

And next, I’m going to paraphrase a little bit, but it talks to your experiences at La Negra and the expansions. I guess some of the historical expansions took a lot longer, maybe a little more troublesome. So what were the learnings or takeaways, how do you rectify those historic problems in terms of the ramp path that you see in front of you in South America?

Eric Norris

Yeah. There are numerous in nature, Bob. I mean, certainly, one of the factors in the La Negra II expansion was, it was at the time of acquisition by Albemarle, a partially built plant already. So there were engineering -- engineers that we had to bring in to think through what it would take to get completed and get it to capacity.

So we’re dealing with an already partially assembled using an automobile analogy or car, we’ve got to build out the rest of it, right? So and there were challenges in that, because we were not a part of the original design, right? It was not -- we were -- it was not -- our team was not involved with that.

We got through that, but I think there are other learnings that came along the way. One was that, that how to contract in that part of the world, where every region has strengths and every region has deficiencies in terms of its supply chain for certain materials and engineering capabilities learned a lot there.

I think, generally, what we’re learning in project execution is pre-work upfront with a --very rigid detailed process now to how we deploy capital and doing your homework upfront, locking down design and then moving in a sort of stage gate like methodical process through design and something that we’ve taken the learnings of Chile and built them into what we’ve done in Xinyu, which was a very successful scale up and the same now in Kemerton III, IV and now La Negra -- or Kemerton I, II, as well as La Negra III, IV. So I think some of the things we’re deploying on a learning basis.

Tom Glinski

Eric, this is Tom Glinski from the chemicals team here. So just one question from a client is, just how much will Lithium anodes increase Lithium content per kilowatt hour battery or whatever relevant metric you want to use? And when would we actually see that play out, is that going to be two years from now or is that going to be in the back half of this decade? Just what’s your view there?

Eric Norris

Yeah. Well, there’s a -- first of all, Tom, it’s a continuum. So solid state is sort of the ultimate end game where you have the anode, which today is a graphite anode, 100% Lithium metal. In between now and then, there are incremental steps being taken to take conventional anodes and load them or doped them with Lithium. That’s the concept of pre lithiation, to get moderately increased energy density.

And then there’s obviously a lot of innovation and some of the public companies and technologies that are out there and some of the investments that are going on venture backed and even some stacks now sponsoring companies to get back to that solid state endgame.

We see that taking a while. I mean, if you look at automobiles today, they aren’t in -- look, they might start to show up in consumer electronics before it shows up in automobiles from a safety concern. In some cases in China, I think it already is on an experimental basis.

But if it’s not in an automobile vehicle platform today, you’re not going to see it until the middle of the decade at least, right, just because the way those timelines work. So we see it as a second half a decade, provided technology keeps pace and we see the type of investments that are going on and what we know from material science thinking pretty interesting.

And now to the punch line for us, I mean, if you take the Lithium content, we measure on a kilogram per kilowatt hour basis. It’s somewhere in that depends on the efficiency of the manufacturer, but on average between 0.8 and 0.9 kilograms per kilowatt hour that could go about 1 with -- where if you start loading the anode with the full Lithium anode battery or anode.

Bob Koort

Got it. And just sticking on the battery chemistry side, so this would be more anecdotal in nature at this point, I’d assume, but just in your conversations with customers? Are there any concerns around availability of raw material supply for other raw materials, say, executing Lithium down the road, say, cobalt or any other raw materials that are essential for continued battery evolution?

Eric Norris

Yeah. I can tell you, what are the dialogues in the market with our customers? There is appropriately recent concern about Lithium for sure. In terms of co-materials, I’d say nickel is one that’s talked about a lot. I mean, certainly cobalt is challenging as given its supply chain and it’s some of the issues around that supply chain.

Nickel is just a matter of is there sufficient investment of the nickel braid required to meet demand? And over the past couple of years, not just recently, there has been some questions about whether there is not, I think, that is starting to shift, but that’s in that nickel we’re probably the number one thing I hear most about.

Bob Koort

Got it. That’s helpful. And then you talked a bit about this in your overview of the business, but Lithium EBITDA margins right now are mid-30%. And I think at your Investor Day in 2019, you talked about getting margins above 40% without really any price improvement just based on cost savings. Obviously 2020 was not a year anyone was expecting in 2019. But just how should we -- the longer term trajectory of margins? Are you comfortable with that we can see north of 40% margins in most environments that aren’t 2020 or just what’s your view there?

Eric Norris

Well, I won’t be able to pinpoint into an exact number for you. But at this notion, as we discussed at Investor Relations Day in 2019, moving closer to the high end of that 30% to 40% range on scale alone happens as a result of the fact that two things, one, I just said the word scale, you’re operating larger plants at full utilization and fully utilizing what’s on the site, right?

So as an example, La Negra, the III, IV is we’re building on that site. So the cost we -- you seen in the last two years actually is starting to include some of the costs of the larger site wrapped up on only the existing production volume. As you now bring on double that production volume, you’re spreading that cost across a larger asset and that’s the benefit of the so called mega sites we’re talking about.

The same thing we think will be important in Australia, because we all know Australia isn’t necessarily a low cost operating part of the world. So enabling that scale, benefit at Kemerton you see and then continue to have a portion of our business in China, where there is labor and infrastructure costs are much lower than us when the world is important as well.

So that’s one dimension. The second dimension is just getting better at operating. We aren’t having been if you look back as lean as we could be. I don’t mean that we’re -- and that means that you effectively are have costs to take out, but it’s more about rate, yield, increased uptime, maintenance excellence, so that when you are running, you’re running at high rates, you’re running consistently, your maintenances are anticipated -- outages are anticipated at rather than reactive and you get more throughput for them.

So it’s very volume based. But I think there is operational improvement we can make and are making there as well. Those are the two factors I talked about getting those margins towards the northern end of that range we’ve talked about without a significant improvement in price.

Bob Koort

And then on Lithium hydroxide conversion capacity and just how are you thinking about where -- how that will shake out geographically? Do you think we’ll continue to see conversion getting built in Australia alongside China and potentially some more coming on in North America do you think? The OEMs really want to see localized conversion close to their sites? Are they comfortable shipping hydroxide in from overseas? Just what is your view on kind of that whole equation?

Eric Norris

Yeah. It’s a multi-part answer. So quickly here because I know we’re running out of time. I’d say that, everything that’s based on hard rock is bias towards that part of the world, the eastern hemisphere, right? Because it’s just the notion of moving rock much further than that and the types of chemical operation, we’re talking about putting that at spots around the world and shipping rock just doesn’t make a lot of sense. So that’s -- there what we’re talking about is what is the from a political social economic risk standpoint, what is the balance in and outside of China?

When you go to the U.S., there is ample -- there is quite a few resources in the U.S. They’re not as high grade. They’ll be slightly higher costs. But we see through Kings Mountain, potentially through expanding our operation in Silver Peak and potentially more explorative things around clays or even brines like Magnolia brines that North America would be promising and that’ll give a local flavor to the supply chain here over time.

The big question is Europe. There are resources in Europe. They’re not high grade. They’re not sufficient environments known today to support that growth. So the question will be how much of the supply chain put in Europe. Knowing that at some point there will be a need to import materials into Europe we believe just there isn’t enough on the ground there.

So we tend to think within our supply chain that’s Chilean carbonate either as used as carbonate or subsequently converted to hydroxide in the EU might make sense. It’s evolving. I’ve watched the space. We’re better understanding what OEMs want and are in the middle of evaluating that now.

Bob Koort

And let me just sneak one last one in and maybe Meredith would be best to answer, but there is a question about the environmental profile or sustainability of brine pads versus hard rock, obviously, the brine is very low cost, but has maybe some water issues versus hard rock that might have higher energy intensity. Can you talk about how you see that and does that affect at all your customer base in Lithium, which type of product they would prefer production path?

Eric Norris

You want to start the answer, Meredith?

Meredith Bandy

Yeah. I’ll start and then I’ll turn. I know Eric is obviously very well familiar with that as well. So I think from our point of view, you know the brine pad and the spodumene pad are very valid ways to process the Lithium. In some ways, the brine is actually even more environmentally friendly than the spodumene, in the sense that for us we are not using freshwater in the production of Lithium at the Salar. We’re able to use passive solar energy in the production of Lithium. So that gives it a very good environmental footprint. But I’ll turn it over to Eric, especially to talk more about what customers are looking at.

Eric Norris

Yeah. So, I mean, it’s -- I think there was initial perception that maybe the way and it’s important to know, Bob, that different people process brine differently. We don’t use any fresh water in the actual brine production process, okay? We use some water to run the camps and we use some water to wash equipment. But in the process, that’s just brine, it’s 10 times saltier than seawater. There is no portable water use. It’s getting evaporated, right, to concentrate the brine and crystallize out the Lithium.

Now to use some water downstream in La Negra. But we have -- we’re going to double our capacity with no increase water usage, because we have got a thermal evaporator. We’re getting very efficient on reuse of water within the downstream manufacturing carbonate.

But when you take that whole package, right, that’s a very, very low water and very low greenhouse gas footprint. And so it’s -- I think what we’ve been working hard to do is convince and demonstrate that why that is the case and I think automotive OEMs are now begin to understand that the shocking headlines of we are pumping water from the Salar initially now with a better understanding that’s not actually what we’re doing. We’re pumping brine.

And when you look at the other supply chain, Iraq’s supply chain, it is by definition, it has slight as higher greenhouse gas associated with that, there is much more energy intensive. I think the important thing to note is that Albemarle has moved towards natural gas, moved to renewables and its power use. And as by our measures far ahead of the competition in terms of the efficiency that we have, particularly for many of the Chinese producers, who are larger running on coal and so our aim is to continue to make improvements there.

I guess the punch line in the end is, yes, there is inevitably some greenhouse gas emissions which use to generate these products. But the statistic we use is that and believe it’s about one -- for every 1 kilogram of CO2 emitted from our processes and its production phase, once you put Lithium in the use phase in a battery, you enable a greater than 50 times reduction in greenhouse gases there just because of the -- you’re avoiding the use of fossil fuels in those operations. So I think it’s a key enabler for our customers and a key driver for us to continue to reduce and improve.

Bob Koort

Perfect. Unfortunately, we’ve run out of our time. Really appreciate your presentation and the Q&A, both you Eric and Meredith. So thanks so much…

Eric Norris

Thanks, Bob.

Bob Koort

…and we’ll talk to you in the future.

Eric Norris

Yeah. Take care of yourself.

Meredith Bandy

Thank you, Bob.

Bob Koort

Great. Thank you, Eric.

Eric Norris

Cheers.

Meredith Bandy

Thank you.