Good day, and welcome to the SQM second quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone, and to withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ms. Kelly O'Brien, Head of Investor Relations. Please go ahead, ma'am.
Good morning. Thank you for joining SQM's earnings conference call for the six months ended June 30, 2022. This conference call will be recorded and is being webcast live. Following this call, you will be able to access the webcast at our website, www.sqm.com. Our earnings press release and a presentation with a summary of the results have been uploaded to our website as well. Speaking on the call today will be Ricardo Ramos, CEO, Gerardo Illanes, CFO, and Felipe Smith, Vice President of Lithium and Iodine Asia Pacific. Before we begin, let me remind you that statements in this conference concerning the company's business outlook, future economic performances, anticipated profitability, revenues, expenses, or other financial items, anticipated cost synergies and product or service line growth, together with other statements that are not historical facts, are forward-looking statements as that term is defined under federal securities laws.
Any forward-looking statements are estimates reflecting the best judgment of SQM based on the current, currently available information and involve a number of risks, uncertainties, and other factors that could cause actual results to differ materially from those stated in such statements, including our ability to successfully implement the sustainable development plan. Risks, uncertainties and factors that could affect the accuracy of such forward-looking statements are identified in our public filings made with the U.S. Securities and Exchange Commission and in our earnings release issued last night, and these forward-looking statements should be considered in light of those factors. We assume no obligation to update such statements whether as a result of new information, future developments or otherwise, except as required by law. I now leave you with our Chief Executive Officer, Ricardo Ramos.
Yeah, Kelly, maybe one extra clarification that also Felipe Miranda, who is the Head of Business Intelligence, is joining the call.
Sure.
Okay. Thank you, Felipe. Thank you, Kelly. Good morning, and thank you for joining the call today. We're very pleased with the results we published. These results were influenced by positive market conditions for fertilizers, iodine and lithium, where we saw historically high prices during the first six months of the year. Lithium represented 73% of our gross profit. This comes at a great moment as this year we are celebrating 25 years in the lithium industry. After decades in the public-private alliance with Corfo, both parties, along with local communities and the country as a whole, are enjoying the benefits of our investment through know-how, R&D, and hard work.
In the lithium industry, we continue to see strong indicators related to demand growth, particularly in China, where it was reported that electric vehicle sales were over double during the first half of 2022, 113% growth when compared with the same period last year. Recent months show that this trend remains. Electric vehicle sales in China were reportedly over 132% higher in June 2022 compared to June 2021. We believe that demand for the year will grow at least 35%, pending there are no negative news related to the pandemic or a global recession. Given all of this, it seems likely that prices will remain relatively stable during the remainder of 2022.
While financial contribution of $2.2 billion will be paid to public funds as a result of our lithium operations during the first half of the year, we are even more proud that we are a leading player in the green revolution through our lithium production, sales and expertise. Our state-of-the-art lithium plant is producing lithium that is used directly in cutting-edge battery technology throughout the world, positively supporting a global CO2 reduction through an electric vehicle transition.
Chuck, we are now ready to open the line to questions.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. The first question will come from Corinne Blanchard with Deutsche Bank. Please go ahead.
Hey. Hey, everyone. Thank you for taking my question and congratulations on the good quarter. I have two question. The first one would be on pricing. It seems you have renegotiated some of the contracts, move away even further from the long-term contracts to move to the shorter term contracts. Can we expect further contract negotiation in 3Q and 4Q? Meaning could we see even closer to 90% or 95% of benchmark index pricing? And then my second question would be on the cost. It seems like there was a significant cost increase in this quarter, so I would like to go into detail on this.
Hello, Corinne. This is Felipe Smith. Hello. We are indeed talking with some of the customers with whom we have a contract that were restricted in terms of moving with the market price. We hope that in the coming weeks we can improve that situation. We have already successfully agreed to modify those contracts. We appreciate also the openness of our customers who understand that it makes more commercial sense to be able to follow the market. Yes, I would say that hopefully we can improve that position in the coming months.
Corinne, this is
Go ahead, Corinne.
Yeah. Just maybe following up on that. Would you expect like going into 2023, are you still going to have any of those legacy or like long-term contracts in next year?
I would say that first of all we will try of course to have the maximum possible amount of contracts following the market. As you know, SQM has a very good position in terms of cost. So for us it makes a lot of sense to have contracts that can follow the market. This also gives us flexibility, and we feel comfortable with market index price contracts. I think it makes sense also, again, to our customers to have something that can offer that possibility. Now some of these contracts of course will still remain, some of the, let's call it, restricted contracts will probably remain over the next years, but it will be a very small portion.
Thank you.
Corinne, regarding your question about the costs. Well, the main contributor to the unit cost you are seeing is related to the payments we make to Corfo. Let me explain. We pay to Corfo as a function of our exports from Chile and the average sales price to third parties. As we keep on increasing capacity and we keep on producing more, we're exporting more volumes from Chile that's used in the near future. These sold to customers as product reaches the different markets in which we participate. Remember that our integrated operations of value-added lithium products are located in Chile, while the main markets are in the other end of the world, in Asia. The effect was particularly relevant this quarter as we exported close to 53,000 metric tons, while our sales were approximately 34,000 metric tons.
All of this, coupled with other payments and contributions we make under the public-private alliance with Corfo, had an accounting impact on our reported cost of goods sold in the lithium business line. Bear in mind that part of this was also reflected as an increase in our cost of inventory. If prices keep on increasing as dramatically as we saw during the first half of the year, or if the ratio between the sales and exports during each quarter doesn't change, we may see impacts like this, in the future. Anyway, our only cost, that is cash costs and depreciation, is around $3,500 per metric ton, slightly higher than last year. This is despite, I mean, this cost is despite inflationary pressures that we are all seeing, quality improvements that we're making on our production and our ESG initiatives.
Great. Thank you. I appreciate the color.
The next question will come from Joel Jackson with BMO Capital Markets. Please go ahead.
Hi. Good morning. Or, yeah, good morning or good afternoon. A few questions. This question you sort of touched on a little bit, but how much visibility do you have into first half of 2023 pricing right now? You have a little bit of fixed pricing that sticks around. Otherwise the rest is all gonna be market based, so you don't really have visibility or do you have some visibility into the first half of the year? Thank you. On lithium pricing.
Hello. Well, look, first of all, I would like to comment that the demand this year has shown to be very strong. Actually, we are estimating that demand will be 30% higher than last year, which is a little bit above our previous estimations. At the same time, we have seen some delay in the supply of lithium in the new capacities coming on stream. So that is what is explaining today the upward pressure on the price. Okay. Now, it is of course, I could speak maybe for the coming months of this year, that we believe that this pressure could probably remain to some extent, but it's difficult to predict what will happen next year. One thing for sure is that demand will remain strong.
As a matter of fact, if we look at 2025, we are expecting that demand will be well above 1 million metric tons, and by 2030, around 2.5 million tons. This is something we cannot deny. Demand is very strong, and it will depend on how the supply can catch up with this demand, what will be the price. Maybe one additional piece of information. We are estimating that by 2025, around 40% of the supply will need to come probably from junior or newcomers. This represent, of course, some risk to the supply.
Ricardo, thank you for that. My next question would be. You got some customers, some OEMs, I guess, to agree to reprice up lithium pricing that had already been settled in a fixed contract that I guess was really low, below 10,000 tons, whatever you want to tell us. You got them to do that. What did you give them in return for them paying a higher price right now? Did you commit to some volume next year at a certain price? Did you commit to some volume, maybe not at a price, but guaranteed volume over a few years? What did they get? What did the customers get for paying more now?
Well, first of all, I would like to comment that this contract that you're asking for represent a small portion of our business, as you saw in our release. Most of our contracts today are following market prices. Okay, as you can imagine, we are seeing a tight market situation in the coming months, and there are some risks if you look to the long term. Volume is probably the most important asset for any customer today. I mean, our customers need volume to grow. The way we can have a good understanding and a good win-win solution with these customers is by offering more volume. This is the best way we have been able to renegotiate this contract.
Okay, that's helpful. My next question would be this. It would seem that, you know, lithium demand can't be any tighter than it is right now. You have OEMs now running around making deals with lithium companies. Some are non-binding MOUs, as you know. Some look more legit and have some upfront payments. Can you talk about a couple of things, the leverage that you now have with OEMs and customers that maybe you never had before? Then is there even gonna be enough lithium in the short term to satisfy demand, therefore EV forecasts over the short term need to go down?
Well, I think that my first comment would be that, SQM has been successfully increasing, production capacity. We are reaching 180,000 metric ton per year capacity now in this moment. We are going to start our next stage of expansion to reach 210 next year. In terms of lithium hydroxide, we are also reaching 21,000 metric ton capacity in Chile, and we're also going to start the next phase. I start commenting this because SQM has been one of the few players in the market that have been able to deliver, more lithium. This is of course something that all the customers, big and medium and small customers are valuing from us. Our value proposition today is volume. Okay?
This is the way we are discussing with our customers, is because we can commit to volume and we feel that we can deliver.
Thank you.
The next question will come from [inaudible] with Bank of America. Please go ahead.
Hello, everyone. Thank you for taking my question. Just one quick question on SPN. You said on the press release that you expect volumes to fall by 10% this year, right? At the same time, we see volumes going down more than that in the first half of the year. If you could explore a bit, what is the outlook for the second half, and are you expecting some pickup in terms of volumes or do you expect a change in terms of the market share the company has in that division? Thank you.
Okay, thank you. Let me try to give you a global view about the fertilizer, what we see today. As you may know, the whole industry is being affected by the war in Ukraine. On the one hand, we have the lack of gas in Europe that significantly affect the local production of fertilizers. Of course the limitations on potash exports from Russia to Belarus, under the Russia that have affected the market for potash worldwide. Considering all of the above, it is very difficult because are very unique situations to have a prediction of the trend of the industry in the medium term. In any case, if you go to the potash first, as you know, we sell an important volume of potash even though we are very small in the market.
In the last month, we have observed a lower demand for potash. It is likely that prices for the second semester will be lower than the prices of the second quarter of this year. That's what we expect. In the case of the specialty fertilizer, Europe, as you know, is one of our main markets, and current price environment have affected the demand growth. That's a true statement, situation. It's the growth being affected by the current price environment.
Again, it is very difficult to have a medium-term projection. However, we think that the situation with the specialty fertilizers is different than potash, and we believe that prices are likely to remain relatively constant during the second half of the year. Volumes we think will be similar to those we've seen during the first half of the year.
That's very clear. Thank you.
The next question will come from César Pérez-Novoa with BTG Pactual. I'm sorry. Go ahead.
Yes. Good afternoon, everyone. Again, congratulations for your results. Just a basic question here on your ongoing capital investments. When will the 180,000 metric ton lithium carbonate capacity be completed? What specific milestones do you require for final tie-in? Would this maybe perhaps restrain some production into the third quarter? Then on the incremental 30,000 metric tons that you're expecting to deliver, has there been any alteration to the $250 million cost associated with this expansion? Perhaps provide a timeline for final completion. That would be my question. Thank you.
Hi. First, it's about the lithium, the milestone for the 180,000 is a continuous increase in production capacity every month because we are improving the production in every step of the process. That's why there's no key one milestone that we are expecting in order to be in the 180,000. I do expect that it will be a continuous production close to the 180,000 metric tons probably September onwards. Keep in mind that some months we reach these 180,000 metric ton capacity, some months just a little bit lower because we're in the fine-tuning in order to meet the 180.
That's why my best guess is that we will be close to 180 as a total capacity September, second half of September onward. About the 210,000, I think in the CapEx program you have, it's already imputed the investment in order to reach the 210,000. The one that we announced will be producing during first half next year. Anyway, we are working in a new three-year CapEx program. We are working as we speak. I expect next conference call to inform the market what is gonna be the new CapEx for the next three year because the ones we have is 2021, 2022, 2023. There's no run, that's for 2024. We will have this new update probably after the results of September results.
Again, it's where we will be in this in the same way trying to increase capacity, probably increasing the quality, increasing the capacity of the lithium hydroxide. We have a lot of initiatives we expect to announce in the next CapEx program. Plus, we are in the final step in order to have a final agreement in order to move forward in Australia, in order to move from 50,000 to 100,000 metric tons. I expect we will publicly announce together with Wesfarmers this increase during this year anyway.
All right. Thank you very much, Ricardo, for sharing that information. Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Ms. Kelly O'Brien for any closing remarks. Please go ahead.
Thank you everyone for joining. Before we close, I wanted to remind you that we will hold an Investor Day on September 15th, so please visit our website or contact us for more details. Have a good day.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.