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Morningstar | SQM Should Benefit From Low-Cost Lithium Carbonate Capacity Expansions as EV Adoption Increases

Through its access to high-quality mineral deposits, the Chemical and Mining Co. of Chile, otherwise known as SQM, is a large, low-cost producer of lithium, iodine, and nitrates used in specialty fertilizers.SQM’s crown jewels are its geologically advantaged lithium and caliche ore assets. SQM’s low-cost lithium deposits in the Salar de Atacama boasts the highest concentration of lithium globally and benefits from high evaporation rates in the Chilean desert. As electric vehicle penetration increases, we expect mid-double-digit annual growth for global lithium demand, one of the best growth profiles among commodities. SQM is a major supplier in the lithium carbonate market and should benefit from the higher capacity that it has built up in recent years. The company is also investing in lithium hydroxide production capacity in Australia through a joint venture with Kidman resources that will mine and produce spodumene then convert the spodumene into lithium hydroxide. The project should boost profits in the next decade, as the unit costs of the project should sit on the bottom half of the lithium hydroxide cost curve.SQM holds just under half of the market share in potassium nitrate, a specialty fertilizer used in high-value crops, including fruits and vegetables. Specialty potash demand should benefit from the shift in emerging market diets to higher-value foods. While specialty fertilizer prices tend to move in line with commodity potash prices, they have been less affected by movements in commodity potash prices. SQM is also a small player in commodity potash.SQM is the world's largest producer of iodine, used in x-ray contrast media, pharmaceuticals, and LCD films. Global iodine demand has grown 3% annually over the past decade and should continue to grow at this pace as healthcare spending rises with aging populations. Over the past couple of years, SQM increased its market share to 35% by the end of 2017 through a volume-over-price strategy, which caused iodine prices to fall. With higher-cost new entrants having reduced production and SQM achieving its market share goals, the company is now acting as a rational player prices have increased in 2018.