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Morningstar | SQM Will Benefit From Multiple Low-Cost Lithium Production Sources 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 over the long term, it plans to grow its carbonate capacity to 200,000 metric tons from 70,000 in 2018. SQM is also investing in lithium hydroxide production capacity in Australia through a joint venture with Kidman Resources called Covalent Lithium 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 is a market leader 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. 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. After higher-cost supply reduced production and SQM achieved its market share goals, the company is now acting as a rational player as prices have increased in 2018.