ALB - Albemarle Corporation - Earnings Call Transcript Q3 2021

Operator: Ladies and gentlemen, thank you for standing by and welcome to the Q3 2021 Albemarle Corporation earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, David Burke, Director of Investor Relations. Thank you. Please go ahead.

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

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

Scott Tozier: Thanks, Kent, and good morning, everyone. Let's begin on Slide 9. During the third quarter, we generated net sales of $831 million, an 11% increase from the same period last year. This improvement was driven by strong sales for our lithium and bromine segments. Adjusted EBITDA was essentially flat on a year-over-year basis, resulting from the sale of FCS and increased freight and raw material costs. The GAAP net loss of $393 million includes a $505 million after-tax charge related to the recently announced Huntsman arbitration decision. While we continue to assess our legal options. We have also initiated discussions with Huntsman regarding a potential resolution. Excluding this charge, adjusted EPS was a $1.05 for the quarter, down 4% from the prior year. Now, let's turn to Slide 10 for a look at adjusted EBITDA by business. Third quarter adjusted EBITDA of $218 million increased by 14% or $27 million compared to the prior year, excluding the sale of SCS. The higher adjusted EBITDA for Lithium and Bromine was partially offset by $13.5 million out-of-period adjustment regarding inventory valuation in our international locations impacting all three GBUs. Lithium's adjusted EBITDA increased by $25 million year-over-year, excluding foreign exchange. We were able to offset the limited impact of a 1-month strike in the Salar in Chile, thanks to higher tolling volumes and higher spodumene shipments from our Talison joint venture. Adjusted EBITDA for bromine increased by $5 million dollars compared to the prior year due to higher pricing, partially offset by increased freight and raw material costs. Volumes were flat, given the chlorine constraints in the quarter. In Catalysts, adjusted EBITDA declined $4 million from the previous year. This was due to lower sales and cost pressures, partially offset by higher-than-expected joint venture income, which included a favorable tax settlement in Brazil. Slide 11 highlights the Company's financial strength. That is key to our ability to execute our growth plans over the coming years. Our net debt to EBITDA at the end of the quarter was 1.7 times as below our targeted long-term range of 2 to 2.5 times. This provides us with capacity to fund growth while supporting modest dividend increases. We don't expect the recent arbitration decision to impact our current growth plans. But it could temporarily reduce our flexibility to take advantage of upside growth opportunities. Turning to Slide 12, I'll walk you through the updates to our guidance that Kent mentioned earlier. Higher full-year 2021 net sales and adjusted EBITDA guidance reflects our strong third quarter performance. Net cash from operations guidance is unchanged due to the timing of shipments to customers and increased raw materials and inventory costs. Capital expenditures were revised higher, related to the continuing tight labor markets and COVID related travel restrictions in Western Australia, as well as accelerated investments in growth. Turning to slide 13 for more detailed outlook on each of the GBUs, lithium's full-year 2021 adjusted EBITDA is now expected to grow in the mid-to-high teens year-over-year. That's up from our previous guidance due to higher volumes and pricing. The volume growth is driven primarily by tolling. And our full-year average realized pricing is now expected to be flat to slightly higher compared to 2020. As a reminder, most of our Battery-grade lithium sales are on long-term contracts with structured pricing mechanisms that are partially exposed to the market. We also benefit from stronger market pricing on shorter-term technical grade sales and on spot and tolling sales of battery-grade lithium. Full-year 2021 average margins are expected to remain below 35% due to higher cost related to the project startups and tolling partially offset by productivity improvements. Bromine 's full-year 2021 adjusted EBITDA growth is now expected to be in the low double-digits. That's also up from previous guidance due to the continued strength in demand and pricing for flame retardants. Our bromine volumes remain constrained due to sold-out conditions and a lack of inventory. The outlook for chlorine availability has improved since last quarter, but the market remains tight. And the impact of higher chlorine pricing is expected to be felt more in 2022 than in 2021 due to the timing of inventory changes and shipments. Year-to-date, higher bromine pricing has mostly offset higher raw material and freight costs. Catalyst full-year 2021 EBITDA is now expected to decline between 20% and 25%. That's also an improvement from our previous guidance, owing to the higher-than-expected joint venture income. The year-over-year decline in adjusted EBITDA is primarily due to the impact of the U.S. Gulf Coast winter storm in -- earlier in the year, product mix and the previously disclosed change in our customer's order patterns. Catalysts fourth-quarter margins will also be impacted by product mix, including a greater proportion of lower margin FCC and CFT orders. SCS demand continues to improve with increasing global fuel demand while HPC orders continue to be delayed. Overall, market conditions are improving, but volumes in Catalysts are not expected to return to pre -pandemic levels until late 2022 or 2023. In total, we expect EBITDA margins to be lower in the fourth quarter due to higher raw materials, energy, and freight costs across all three of our businesses. We are closely watching several key risk factors, including global supply chain disruptions, global impacts of the energy rationing in China and chip shortages. Supply chain and logistics challenges are the most immediate. Our teams are working day and night to navigate these port issues, the lack of drivers, and upstream supply disruptions to ensure our customers get their orders on time. We also continued to monitor the global situation with regard to chip shortages. We recognize that the auto industry has been struggling with those shortages. But to-date, we have not seen a direct impact on either our lithium or bromine orders. And with that, I'll hand it back to Kent.

Kent Masters: Thanks, Scott. I'll end our prepared remarks on Slide 14. As Scott mentioned, we are disappointed by the outcome of the Huntsman arbitration decision. But regardless of the ultimate outcome of that dispute, Albemarle will continue to focus on the execution of our growth strategy. As we highlighted during our Investor Day in September, we have a well thought out and focused operating model that we are implementing across our businesses. This model, the Albemarle way of excellence, provides us with a framework to execute our objectives effectively and efficiently, and will help us to remain on target as we pursue the significant growth opportunities ahead. And as we pursue these opportunities, we will be disciplined in our approach to capital allocation. Our primary capital priority is accelerating high return growth. This means that we will invest not just to get bigger, but to create tangible shareholder value and maintain financial flexibility to take advantage of future opportunities. Utilizing this approach with our low cost resources, we believe our annual adjusted EBITDA will triple by 2026. Finally, at the core of all of this is sustainability. As 1 of the world's largest lithium producers and innovators, we were able to work closely with our customers to create value and drive better sustainability outcomes for all stakeholders. With that, I'd like to open the call for questions. I'll hand over to the Operator.

Operator: Thank you, sir. And at this time, ladies and gentlemen, if you would like to ask a question during this time, . Your first question comes from the line of John Roberts with UBS.

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

Kent Masters: So after that I think we got to get through mechanical completion then we've got the commissioning qualification. So -- and then I think what we've said is after that and that's about a 6-month process. Then after that, we think we would be able to ramp to maybe 50% in the first 12 months. That's probably a little aggressive, but that -- that's what we're targeting. And then, I think the labor and all those issues are primarily around construction. We've got operators in -- staffed and onboard, and they're helping with commissioning so, I mean, the labor market is going to be tied, and we'll -- we may fight to keep the ones we want, I'm not sure, but the real labor issue is around construction.

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

Scott Tozier: Yeah, I think it's really more -- truly 2. I think partly on the organic side, it's our ability to accelerate or further accelerate our projects. We'll be able to do some of it, but clearly, it's a big drag. And then the second is, any sort of larger type of inorganic would be -- would need some sort of more creative type of financing to do.

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

P.J. Juvekar: Yes. Hi, good morning.

Kent Masters: Good morning.

P.J. Juvekar: So now that you expect lithium prices to be flat to up for this year and sort of down, are you -- must be expecting price gain in 4Q that are well into double-digits. Can you comment on that? And then, even as you look forward into next year, what percent of your contracts will be renewed next year? And do you have any early look into negotiations? Thank you.

Eric Norris: So P.J., good morning, it's Eric. I want to make sure I understand your first question. Your first question was, would they be double-digit in Q4, is that what you said?

P.J. Juvekar: Yes. As well into double-digits for Q4 for your pricing.

Eric Norris: The way to think about pricing is and the flat-to-down comment is that it's progressive throughout the year. Prices were at their lowest point late last year and early this year and have been gradually rising as we've gone through the year due to 2 factors, 1 is the exploration and the concession we gave against a fixed priced long-term agreement. And the second would be just the movement of spot prices for that portion of our business is exposed to that -- those markets, which I'm sure you're aware, know. Those price has gone up significantly and throughout the course of the year. So as the guidance we've given, that Scott gave at Investor Day for next year, was at least 15% to 20% year-on-year increase for 2022 versus 2021. And certainly, that's a progressive trend. So you could certainly see those kinds of increases starting to happen in Q4 versus a year ago.

P.J. Juvekar: Okay, great. And then on marble, you're restarting one of the 3 lines. Rock prices have skyrocketed, so why just 1 line? And then where would you concentrate that rock? Would that be at ? Would that be in China? Can you just talk about that?

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

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

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

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

Laurence Alexander: And then with Catalysts, the recovery next year, how much of your -- should that be lighting or coincident with production ramp-ups at the refineries?

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

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

Mike Harris: Yeah, this is actually Mike Harris sitting in for Bob. If I could, might ask a question around the Lithium business, looking at the energy storage related sales, why is there a potential 1 to 2 quarter lag behind the EV production versus those sales actually, maybe leading?

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

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

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

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

David Huang: Hi there. This is David Huang here for Dave. I guess, 1st, can you talk about your feedstock strategy for that 150K ton of lithium hydroxide capacity you're adding in China?

Raphael Crawford: I'm sorry. So that was the feed-stock strategy for the 150 new projects in China?

David Huang: Yes.

Raphael Crawford: So they'll be said with our coming out of Australia.

David Huang: Okay. And then secondly, are there any incremental headwinds or tailwinds to your 2022 guidance you provided, I mean, , especially for a or do you still standby those guidance?

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

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

Female_1: Hi, this is Bremer (ph) of Joel, thanks for taking my question. Just back on the pricing discussions in 2022, can you just give us a little bit more color on how the discussions with your lithium contract listeners are going? And then, are pricing mechanisms going to be similar in '22 to '21 or is there a move more to benchmark pricing?

Eric Norris: So the -- generally speaking, Bravey (ph), the discussions we're having with our customers are for price increase next year per -- and that aligns with the guidance I gave you in the remarks just a few moments ago. We have a book of contracts we've had under our basket, I should say, for some years now. Those are going back either to -- well, those are -- the fixed portion of those contracts are going back to the original long-term agreement, which is significantly higher in some cases than the average price that we're seeing for 2021. And then there is many of those contracts have a variable component and there is no one contract that looks exactly like the other, but that variable component can. We will also see increases. Some of those variable components are tied to indices. Others are just an annual increase nomination that's possible, a max increase nomination. And then finally, we have a good deal of technical-grade contracts where we'll see rising prices based upon an adjustment to what -- the rises we've seen this year, as we roll into next year. The last piece would be our China spot business. And that -- hard to say that we'd see a pretty big increase on that next year because prices are already extraordinarily high in China right now. But we'll continue to see possibly some upside on a year-over-year basis, particularly in the early part of the year, next year on that. So those are all the components that are driving our increase and types of discussions we're having with our customers which will give us nice leverage, upside leverage to the improving market conditions.

Female_1: Okay, that's certainly helpful. Thank you. And then I guess just like given the large upswing in LFP demand in recent tests of commentary, with that background, I just want to understand how you're thinking about investments into carbonate versus hydroxide. It seems your incremental investments are mostly focused on hydroxide currently.

Eric Norris: We see -- we monitor this very closely, we have a lot of analytics and customer dialogues up and down the supply chain from OEMs all way that back through the battery and cathode producers to assess those trends. What we believed and has been confirmed in our discussions with customers is while there is an uptake in LFP demand, there has also been an uptake in vehicle production outlook as well for electric vehicles. And where LFP is occupying a sweet spot is in the lower cost range, lower costs and lower driving range portion of the vehicle mix. For some automotive producers that will be a larger percentage of their mix than others. Bottom line, we see strong growth in both of those products, albeit we see still pretty -- the growth rate in hydroxide will be higher over the coming 5 years. And hence, we feel we're extremely well-positioned. We're bringing on 40,000 tons of carbonate capacity as we speak. And we have the hydroxide expansion strategy in addition to the Kemerton ramp that they can't earlier describe and feel we're well-positioned to meet both LFP demand and rising high - nickel demand for cathodes.

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

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

Scott Tozier: Well, I think it depends, as you might think, Jeff, on conditions. There's a portion of our business that is exposed to market -- pure market conditions. The majority of our business, even while there is on these long-term contracts, there's a variable component that the anchor around that is going to be around the fixed price, which is also going up because of the exploration of the concessions we gave. So at this point, it's probably too early to say what we think about price above 15% to 20%, because our guidance was at least 15% to 20%,

Eric Norris: Right.

Scott Tozier: So we'll have to provide you as the quarter wears on and the discussions continue that guidance as we get into the February call -- earnings call that we'll have in February.

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

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

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

Ben Kallo: Thank you guys, and good morning. One of the things that we are thinking about is -- I love to hear your perspective with materials maybe being a bottleneck for EV production sales. If that's -- how you guys view that as a risk? Just overall -- meaning, is there enough lithium reserve, enough copper reserve, enough nickel? And then, how are customers, I guess, approaching you and your competitors for security in the supply chain. Does that -- does your scale and your diversity of your resources give you an advantage there over other people Will be more wrap up. Thank you.

Kent Masters: We talked a little bit about lithium, so copper, nickel, I don't know that we will want to weigh in on that, but we just talk -- I'll make a few comments, and then Eric can add some detail to it, but we 're investing heavily to keep up with that demand and maintain our share, which has been our strategy. And so we're investing along with our customers and security supply has always been a key part of the value proposition from Albemarle to their customers. And particularly around lithium. As you mentioned, the diversity of resources, the diversity of locations where we produce, and the -- we have carbonate and we have hydroxide today, and then we'll continue to evolve those chemistries as the market shift over time. So I think the network that we build is really a lot of that is focused around security of supply, and part of the key value proposition that we talk about constantly with our customers.

Eric Norris: Then I'll just add on the lithium side of material risks. There's enough material, there's enough lithium out there. The issue is the investment required to get there and the fact that it's going to be at a higher costs. The cross curve is upward sloping as you go to lower quality lithium resources that are out there. The discussions we're having with our customers are ones of deep desire for commitment and partnership. That's both the existing ones we've had, and as we bring on new capacity, new ones that we would look to target. And that's at various points in the value chain, but I would tell you that the most significant and urgent discussions around security are the closer you get to the automotive OEM. And so I think our track record of executing gives us that advantage for sure. And I think that's where the discussions land as us being sort of a base load partner for many of these automotive and battery firms. So I do think that's an advantage we have for sure.

Ben Kallo: Thank you, guys. It's about to get too ahead ourselves here, but are you at a point that you are allocating to customers? So you're picking your customers more than they are picking you or is it not like that? And thanks, guys.

Eric Norris: So I would say that's the merit of the partnership and why we have the discussions we do, because anyone -- any buy in who is not committed to us in a long-term way, so that could be a spot buyer on the battery side, that could be a tech grade buyer on the industrial side is -- does risk not getting the volume that they would like as we roll into 2022. So that's the basis for the partnership discussions that we're having is that desire for securities supply, given the points in time in that supply in the coming 5 years where things will be tightened, they are quite tight right now.

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

Male_1: Hi. This is to you on for Vincent. Thank you for taking our question. Just back to the Huntsman arbitration, curious. What other alternatives are there in terms of discontinued process. I know you mentioned you've started to have discussions around settlement. So what other -- from a legal perspective, what other alternatives are there? And then how should we think about the timing of all of this?

Kent Masters: Well, I think it's -- it's a range. And we're not going to get into too much because there's an active process. So it is either through the arbitration process or from discussions that we've initiated that we would be able to -- that we could potentially reach agreement and resolve that matter. But it's a pretty -- those are the options and it's the time frame is pretty wide.

Male_1: Understood. And then as we think about Kemerton and your ability to fulfill those contracts particularly Kemerton 2 given the longer delay, will those be fulfilled through more tolling or how should we think about the volume and how that will be allocated in terms of -- as we think about next year, 2023, would that be less volume overall or just lower margin from tolling?

Kent Masters: Well, I think you'll see us -- you will fill that with tolling, and with this acquisition that we've done, and we expect to get that up to speed relatively quickly. I mean, there will be some -- we expect to do make rights to get it to our standard and the quality that we want. But we'll be aggressive around that. Those will be the two methods that we use to stay on our plan.

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

Cory Murphy: Hi, good morning. This is Cory Murphy on for Kevin. I wanted to follow on -- I think it was PJ's question earlier about Wodgina, you said you were starting up one line and it looks like it's going to start production maybe in the third quarter of 2022. Can you help me understand what the delays are or why the restart process seems to take maybe upwards of 6 to 10 months? And then given spodumene prices, why wouldn't you startup or try to start up all three lines? Are you able to sell the spodumene on the spot market or is it that there's contractual reasons not to?

Kent Masters: Well, it's -- on the selling spodumene, it's really strategic reasons, is that we want to convert it and sell the finished products to customers where we'd make commitments and we have long-term arrangements. So we might sell some spodumene here in there, but that's not our strategy. And then the starting up -- I mean, we might -- we're going to do -- start to first train then other. It's really neat to be in line with our conversion capacity. And then that timeline that you referenced where 6 or whatever the timeframe is to get it going, you've got labor issues in Western Australia, we face the same things there that we do at Kemerton to some degree, and really the lead time is on some of the big equipment that's necessary in mining, some of the yellow -- we call it -- they call it yellow equipment, that's necessary in operating these mines and the lead time on that.

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

Eric Norris: Right. Well, I would say tolling is a strategy we use for bridging. That is correct. We do that. We expect to continue to toll next year for the purposes of La Negra, but also for the purposes of Kemerton. Look, I mean, I -- it's a bridging strategy, but the market is extremely strong right now. And because Kemerton has been delayed, there's spodumene that we can take advantage of. And as long as we have qualified tolling partner that is someone with -- we have a good relationship, we trust our quality. We have a business relationship where we can collaborate together, then we'll take advantage of that, both to bridge and take advantage of the strong market that's before us. So I think it's a variety of purposes. When it rolls off, it's hard for me to say, but we will have it as part of next year for sure.

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

Colin Rusch: Guys, thanks so much for all of these information. I'm curious about the order patterns from your customers. And this is a cross the you . If you're seeing any sort of double ordering that you can track or track all of the sell-through for those individual customers. Just it seems like that there may be some folks trying to build some inventory or really trying to give character or any other incremental demand that they could mean.

Eric Norris: Colin, Eric, from a Lithium perspective, I would say that there is -- we're very -- we touch all aspects of the supply chain. And so I don't see any double ordering. And furthermore, to buttress that remark, I would say that the discussions we have with our customers, we know they don't have any inventory. They are hand-to-mouth. So we know that because when -- with this crisis existing around the global supply chain, you can imagine we're not always able to precisely target the week or the day at which a shipment's going to arrive, and that causes pain for the customer. If it causes -- if it does for us, it does for them as well. So it's a very tight market still in lithium.

Netha Johnson: Hi, Colin, bromine. We're not seeing any double ordering court. Customers are not trying to build inventory at their sites in anticipation of supply chain disruptions. Supply chains are tight and things are difficult, but we've been able to manage it to a certain extent to where we can deliver within a window that they can live with. So we're not seeing those double orders or customers try to build-up inventory by ordering more than they need right at this time.

Raphael Crawford: Nor in Catalysts, either, Colin.

Colin Rusch: Okay. Thanks, guys. And then just on the lithium content per kilowatt hour, are you guys seeing any real trend lines on that? Certainly as some of these battery chemistries change. And folks are looking to figure out how to optimize some of the materials. Are you seeing lithium content increase, decrease, hold steady? And where would you peg that level right now?

Eric Norris: For the most part, I think as we sit here and look at the year 2021, we've seen any material change. Certainly we would expect it over a period of years as prelithiation enters the equation on the anode side. As further as our progress on solid-state or lithium metal anode technology progresses. That's definitely going to increase the content as it does, obviously the energy density, which is the whole point of those technology innovations. But as you sit here today, I think the technology trends are alive and well, but it's on a quarterly basis during 2021, and really I haven't seen significant change necessarily in that.

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

Arun Viswanathan: Great, thanks for taking my question. I guess I had a question just on the contracting process here. What are you hearing from your customers as far as length? Are those contracts in lithium extending out now to 4 or 7 or 10 years? And then when you when you do those contracts, how do you kind of bridge the divide between this huge spot price of $28,000 plus per ton and something more reasonable and more in line with the increases from where you are on the contract side. I guess I'm just asking. Are you -- have you seen a material rise in the cost curve that would justify contracts going closer to spot? Thanks.

Eric Norris: I would say that there is -- the duration of requests from customers are increasing. I think we've characterized in the past, and on average it's about 3 years in our current mix. The new contracts under discussion, which would be slated to supply against the China expansions that Kent described, or future Kemerton expansions, or even down the road expansions we could have in the U.S. Those discussions are either 5-year plus or they don't even start until 2024, 2025. So we're having discussions with certain customers who are contracting for increments of time into the future, say '23 to '26, or '24 or '28. Those are the kinds of durations that people are thinking about and that's largely driven by the investments made on the automotive side. From a pricing standpoint, you can imagine because prices are rising, there's certainly a desire on behalf of those buyers to see what they can to not have to pay spot prices. But the reality is they either -- the discussion is either towards a much higher fixed price if they want some stability in their pricing term, or we're pricing against an established index so that it will rise with time. Now, remember the price you gave was a spodumene price when you said $2,800 a ton, the pricing in China is, on a U.S. basis is in the high 20s, close to 30 on a delivered basis. When you look at many of the indices around the world, most of these people are buying against a blend, and so the pricing around that is not quite as high, but it's still well into the high teens, if not the low 20s of what a lot of those pricing indices are. So we continue to have a discussion with customers and -- but those are some of the dynamics at play, which are leading us to long-term contracts with significantly higher price potential than what we're -- we've seen in the past.

Arun Viswanathan: Great, thanks for that. And then, I guess, just wanted to ask about the -- if there's any risk that you see on the political front in Chile -- yeah, it's a broad question -- I guess in the next month or two or so?

Kent Masters: There's a lot happening in Chile, so there's definitely political risk in Chile. They rewrite the constitution and things are changing. And we watch it closely and we operate there. So we -- and we're pretty close, we're close to the government. We see what's happened, but they are rewriting their constitution and there'll be changes in Chile. I think Chile wants to participate in lithium industry. They're looking to expand their participation. The contracts -- the agreements they have with us are very progressive, so they participate as prices go up. So that's an upside for them. So I believe they're going to -- they want to participate in that economically. But there's a lot happening in Chile at the moment, and we're watching it very closely.

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

Matthew Deyoe: Thank you. So we touched a bit on tolling. I want to delve a little bit into it a little bit more because I know you said it's a bridging strategy and maybe we can be opportunistic. But you're sitting on a fair amount of latent capacity at Greenbushes. And the read seems to be that converters are struggling to find enough merchant supply of spodumene to actually continue to operate in some respect, so why not get more aggressive on the volume? I have to think: 1. Prices right now are really attractive but, 2. Almost somewhat concerning as it relates to the potential for over-investment and overheating in markets and things like that etc. I feel like if you -- with your volume, you might have an ability to kind of regulate this a little bit.

Kent Masters: Yeah. So I'll make a comment, and Eric can add some color on it. We don't -- we can't just turn a toller on because we -- they are going to our customers, we have to qualify them. So there is a process there. And not all of those tollers would qualify with our customers. So it's not -- we can't just turn them on. It's not quite that simple, even if we had the products. So now we're ramping and getting more spodumene going. It could give us optionality from a spodumene standpoint going forward, but we still have to make sure we choose the ones, and Eric talked about it, before they're people, they're tollers that we have relationships with that have been previously qualified or currently qualified with our customers. So you have to fit in all of those elements into it to really ramp it up. It would be a -- it's not a 6 months strategy. It's going to take a little longer to implement that.

Matthew Deyoe: Okay.

Kent Masters: anything?

Eric Norris: I think you handled that well. I mean, if -- don't think of these conversions doesn't -- there are people who are in the industry, but there's only several that we would consider as being partners or meeting our standards for serving our customers. So that's why there's a length involved that in the qualification process. So if there's opportunities, we'll take advantage of them, but we're very discriminating in how we approach that from a -- when it comes to serving our customers.

Kent Masters: Yeah. And key for us is, for me, that -- again, security of supply quality for the customer. The customers have to trust us. So if we're going to toll, we have to make sure that product meets our specs and our customer's standards as well.

Matthew Deyoe: Fair point. And we almost got there with Jeff's question. But if you look at Chinese bromine price, I know in the past it's been comments or maybe it's not correct on an absolute basis, but directionally it's consistent with what you're seeing. So given the move, should we think of this move as real and capturable in any capacity? And if so, is this a 2-year process, a 1-year process, a 3-year process? It would seem like there's a lot of room to offset higher chlorine costs as well. But I'm not sure if that's the case or not.

Netha Johnson: Yeah. This is Netha. Yes, those prices are real and they are really driven by demand. The demand is outstripping the supply. It takes almost 2 years to really bring on additional bromine supply in a meaningful way, so you'll continue to see that demand outstripped supply. It's similar to what we said in our Investor Day for the next planning period that we use, and we think that will continue. The question's by how much. We've announced processes and things we want to add, and I'm sure others have as well. But right now it's not complex. Demand is really exceeding supply and that's what's driving the Chinese bromine price up.

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

Harris Fein: Hi. This is Harris Fein on for Chris. Thanks for taking my question. Turning back to Wodgina, so how should we be thinking about the cost that's associated with bringing that back into production and then understanding that Greenbushes is in a class of its own when it comes to cost per ton. How should we be thinking about the relative cost of spodumene that comes out of Wodgina?

Scott Tozier: This is this is Scott. I think, as you said Talison spodumene, world-class, right? Low costs in the world. Wodgina, we haven't operated yet, but we do believe it's going to be relatively close. Ultimately, it does have a lower concentration, so it won't meet it, but it will be relatively close.

Kent Masters: Maybe say, in the ballpark. And I think, Scott, the costs for this, Harris was asking about how to there. We've captured them in the guidance we provided, both capital and cash flow. It's largely joint venture capital costs to acquire this yellow equipment that we've talked about and ramp the JV.

Harris Fein: Got it. And then a lot of the Wave 3 announcements that you've made so far, actually all of them that have been disclosed, are really planned in China. So I'm curious what the strategic rationale was to focus so much on China. And I'm wondering whether it was a matter of lower capital costs or whether or not you see the Chinese market drifting more towards high nickel. And whether or not you expect most of those tons to stay domestic or make their way into other markets.

Kent Masters: Yes. So I mean, I think it's -- I mean Eric can get into detail, but kind of at the high level, I mean, it is -- I mean, we do see lower capital costs there. That's probably not the driver. The driver, that's where the market is today. And then that product can either serve Chinese market or be exported as well. And then as we anticipate seeing the battery supply chain shifting to the west, and then we will invest ahead of that. But for the near-term, we see that market in China today. And then we see that -- as we go forward, you hear us talking about North America and Europe to some degree, but we see that moving west. And then we will invest with it. Eric, you want to?

Eric Norris: You know, I mean, I think if you look at the percent of production of cathode on the world market, China is well over half of it today and that will increase between now and the middle of the decade. So China is the center of the world for all cathode technologies. Now, many of those are being developed. The supply chain is being developed prospectively to come into and match up to battery production ultimately in North America and Europe. And that's why we have a wave 4 plan that addresses that and we will speak to those opportunities to localize supply and it's an active program with us. But as we've said many times, wave 3 is largely Asia - centric, heavily China focus because that's where the market is. And we will build that repeatability of capital design and execution there that will serve us well as we continue to grow around the world. It's also where a large -- more of our resources are in Asia -- a bit Australia, but in the Asia region as opposed to the Western part of the world. So those are all the elements that play that strategy. And we look forward to growing with our customers as they expand into the West.

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

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

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