Good day, and welcome to the SQM second quarter 2021 earnings conference call. Our participants will be in a only listen mode. Should you need assistance please signal conference specialist by pressing star then zero. After today's presentation there will be an opportunity to ask questions. To ask a question you may press star then one on a touchtone phone. To withdraw your question please press star then two. Please note that this event is being recorded. I would now like to turn the conference over to Kelly O'Brien, Head of Investor Relations. Please go ahead.
Good morning. Thank you for joining SQM 2nd quarter 2021 earnings conference call. 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 the summary of the results have been uploaded to our website, where you can also find a link to the webcast. Speaking on the call today will be Ricardo Ramos, CEO, Gerardo Illanes, CFO, and Felipe Smith, Commercial Vice President, Lithium and Iodine, Asia Pacific. They will all be available to help answer questions after the prepared remarks.
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 the term is defined under the Federal Securities laws. Any forward-looking statements or estimates reflecting the best judgment of SQM based on currently available information 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 United States Securities and Exchange Commission and in our earnings release issued today, 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 Ricardo Ramos, our Chief Executive Officer.
Thank you, Kelly. Good morning. We thank you for joining the call today. Our earnings during the second quarter 2021 were over 76% higher than earnings reported during the same period last year. This was a result of significantly higher sales volumes and prices across almost all our business lines when compared to the first quarter of 2021. We are seeing positive market conditions in all our major markets in which we participate and expect to see demand growth of over 40% in the Lithium market and over 10% in the Iodine market. Our sales volumes will reflect this strong market momentum. As we mentioned in our earnings release, Lithium and Iodine sales volumes this year should surpass 95,000 metric tons and 12,000 metric tons respectively, higher than our original estimates.
Additionally, we believe potassium chloride annual sales volumes will surpass 800,000 metric tons this year, an increase of approximately 10% compared to last year. In addition, we expect prices in the potash market to increase significantly. Our strategy in the lithium market is focused on the long term. Currently, we're producing lithium carbonate in Salar de Atacama at a rate of approximately 110,000 metric tons per year, and we remain on target to reach a nameplate capacity of 130,000 metric tons during the fourth quarter this year. As we mentioned in May, the completion of the next stage of our lithium carbonate expansion in Chile has been moved forward to 2022, and this remains true. We expect to produce approximately 140,000 metric tons next year. In Australia, the development of our 5,000 metric ton lithium hydroxide plant is on track, and we expect to be operating in 2024.
In terms of sales volumes, we plan to continue growing with the market as we have done successfully over the past 18 months. For example, during the first half of this year, we have sold more than double the sales volumes sold during the same period last year. Our average Lithium prices during the second quarter of 2021 were almost 20% higher compared to the first quarter of 2021. Our sales contracts signed last year are expiring, and a higher percentage of our sales are invoiced based on the current pricing scenario. Our average prices during the second half of the year are expected to increase further as the market continues to tighten and the 2020 contracts continue to expire. The fundamentals in the Lithium market are stronger than ever.
We recently updated our 2025 lithium carbonate equivalent estimate to surpass one million metric tons, and we are working to strengthen our position in this market. Thank you, operator. We may now go to the Q&A session.
We will actually now begin our question and answer session. To ask a question you may press star then one on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time we will pause momentarily to assemble our roster Our first question will come from César Pérez-Novoa with BTG Pactual. Please go ahead.
Thank you. Good afternoon, Kelly, Gerardo, Ricardo, Felipe, and congratulations for your sound performance in the first half of 2021. I have a couple of questions, if I may. You upgraded 2021 Lithium volumes to 95,000 tons and are projecting significantly higher prices in the second half of the year, in part because of sound market dynamics, but also because of expiration of old contracts that had lower prices. Could you please provide what percent of the old contracts are set to expire, or how much of the newly priced contracts should we expect in the second half of the year? On Potash, a similar question. You upgraded volumes by an incremental 100,000 tons and seeing higher prices.
If you could assess what is driving this market and also give a glimpse of what we should look in 2022 for SQM's volumes and hopefully, you can shed a little bit more light about the long-term outlook for that market. Finally, I have a qualitative question, perhaps for Ricardo, regarding the political environment in Chile and comments by some lawmakers and media related to lithium royalties and the Salar de Atacama. While most of these statements are political in nature and unfortunately occurring during an electoral year, I would like to hear your thoughts on a very broad level and perhaps tell us where SQM is positioned in all of this and possibly separate fact from fiction. Those would be my questions and thank you very much for taking them.
[Non- English], Ricardo speaking. It's a really long question. A lot of questions but let me try to start with the Lithium first. I would ask Felipe to give you more details about what we are doing with Lithium, and after that, some comments about the Potash industry. Finally, your question about what the situation in Chile is , whatever. Let me go in that order. Okay. Felipe.
Okay. Hello, César. Well, regarding your question, let me start with a small introduction. As part of our strategy of growth, during the second semester last year, we indeed contracted volumes for 2021. If you look at the total volume of 2021, during the first semester, more than three-quarters of the volumes were contracted at prices which were prevailing at that time. For the second semester, it's less than 50%. We are now more and more exposed to the new price environment. All these contracts are expiring in December.
Thank you.
Yes. This is regarding the potash. Of course, now we have a very unique situation in the market where prices are going up, very high. You can expect prices probably during second semester this year, especially fourth quarter, probably at an average close to double than the average prices of second half last year. It means it's a significant increase in prices. We don't know and we don't have enough information today, as we speak, to have long-term projections about what's going on with the potash prices. There's a lot of research about potash. We can check it on it and see. I think there's a lot of uncertainties regarding what's going on in the long term, but in the short term, prices are very good in the potash. We are pushing our volumes.
As we put in our press release, we will try to increase our volumes during the second half, and we will, and gaining the benefit of the better price environment. It means that margins from Potash second half will be significantly higher than first half and significantly higher of any half of the last three years, maybe. We are very positive about what's going on in the Potash industry for second half this year. For me, it's too early now to give you an outlook about the volumes for next year. As you know, we have this mixed production of Lithium and Potash in the Salar de Atacama. We are now working on our business plan and operational plan in the Salar in order to know what is going to be the total volume of available Potash for sale next year.
Keep in mind that the main use of our Potash, and the most important one, is to be raw material of potassium nitrate, and we are working on our business plan for potassium nitrate next year. Both prices of Potash are going in the right direction. Of course, potassium nitrate is going in the right direction, too. As we mentioned before many times, we're not as volatile as Potash. It means when Potash goes down, we don't go down in the same level, and we don't go up in the same level. Anyway, prices of potassium nitrate second half this year are going to be significantly higher than first half. That's very good news, but I expect to have more information or more data regarding what we expect for next year in the next conference call after September.
Regarding your last question, that is more an easy question, the political situation. As you mentioned, we are in the middle of an electoral year in Chile. It's reasonable to hear many statements on many different issues. In my opinion, it's no problem for companies to get involved in political discussions, of course not. However, I think it's important to remember some key facts, in my opinion, about SQM and the Salar de Atacama operation. Very few. The first one, or the first point in my opinions regarding what we think is the Salar operations and its origins. As you may remember, it's an old story. The Salar de Atacama project was offered internationally by CORFO in the mid-1980s. If I'm not wrong, it was in 1986 or 1985, something like that.
Was also awarded by a U.S. and Chilean company at that time. The U.S. company, if you remember, was AMAX. AMAX was, I remember, one of the largest mining company in the U.S. at that time, and the Chilean company, if I'm not wrong, was Minera. The main conditions to operate Salar de Atacama were set in that process, 1986. SQM, of course, was not involved at all. After seven years, more or less seven years of this investment, research and development, whatever, in the project in 1983, I'm sure it was 1983, these companies decided to sell their participation in the project, which is when SQM bought the project. Of course, inheriting the same conditions agreed by these companies with CORFO seven years ago.
Finally, as you may remember, in 2018 during the previous government, an amendment to the contract was signed between CORFO and SQM, mainly increasing the lithium quota. That was the idea we were looking for. Of course, in exchange of a heftier economic conditions in favor of CORFO. Currently, as you know, the lithium industry in Chile pays taxes and delivers resources to the country according to the agreement with CORFO, which are close to 50% of the gross margin generated by this business. To be clear, there is no other economic activity in Chile that pays more taxes and contributes with higher resources as a percentage of its margins. That's the real situation of the project today. The second point I want to be very clear is that we add a lot of value to the minerals in the Salar de Atacama on a sustainable way.
As everybody know, we are one of the few lithium producers in the world that is integrated in the mining extraction and subsequent refinement of the product into extremely high-quality lithium carbonate and lithium hydroxide. We add value in such a way that it can be used directly in high-tech industries such as electric vehicles. As you know, most Australian players extract the mineral and then send the raw material to China, where the value-added process of producing refined lithium products is done. In less than two years, we have more than doubled our capacity and are already working to almost double in just a few years at the same time. At the same time, we're reducing our brine extractions, increasing yields in what is an unprecedented way. We are very proud about it. Finally, let me tell you, César, that we will keep working on initiatives like this.
We are committed to producing lithium in all our products, and all our products in a sustainable way, adding value to all our stakeholders. Thank you.
Right. Thank you very much Ricardo for the thorough explanation, and good luck in the subsequent quarters.
Our next question will come from P.J. Juvekar with Citigroup. Please go ahead.
Yes, hi. Good morning. I should say good afternoon. Your majority of Lithium goes to Asia, mainly to China. How has the shipping tightness impacted you, and what is shipping and transportation as a part of your COGS?
Yes. Hello, P.J. How are you?
Yes, good. How are you?
Well, yeah. I think that indeed, as you mentioned, there is a general overall problem with the container shipment everywhere and port congestions and so on. As I was saying, P.J.,that w e recognize that there is indeed an overall problem with the supply chain. As part of our strategy, we have established local warehouses and storage points in the main markets. That gives us good flexibility to supply our customers and to absorb part of these possible interruptions or delays. From that point of view, we are in a good position. Regarding what is the cost of a very small percentage of our total cost, what has to do with logistics and transportation.
Thank you for that. My second question is, would you like to get bigger into the Lithium refining business, getting into hydroxide business, and going downstream? Can we just talk about why or why not? Would you look at potential M&A to, if you decide to go into it, would you potentially look at M&A in China to get into hydroxide business? Thank you.
Hi, PJ Ricardo Ramos speaking. As you may know, we are fully integrated today with reduced lithium carbonate and lithium hydroxide. Of course, we are looking forward for doing much better than today. Yes, we are looking for different alternatives to increase our lithium hydroxide, for example, capacity. As I mentioned in the previous conference call, I expect during this year, I hope it's going to be during the conference call of September, to announce what is going to be our target in terms of lithium hydroxide capacity. So far, it's 30,000, we are looking forward to increasing our capacity. You're right in terms that we are looking for different alternatives, not only in Chile but outside Chile. We are a big player in the Lithium. We are going to be in the short term, medium term, in the 180,000 metric tons capacity.
That's a lot of lithium carbonate and lithium hydroxide we have to sell. Of course, we are looking for different alternatives around the world. As soon as we have any news regarding that, of course, we will announce the market.
Thank you.
Our next question will come from Joel Jackson with BMO Capital Markets. Please go ahead.
Hi. Good afternoon, everybody. I have a few questions. I'm going to ask them one by one. If I listen to your commentary earlier about half of the second half year volume for lithium this year being still contracted from last year's prices, that seems to imply that your spot prices hold here, your second half lithium price should average about 30% higher than the first half of the year. Is that the right ballpark?
Hi, Joel. Well, we believe that a good estimation of our price in the fourth quarter is to approach the $10,000 per ton average.
Okay. That's actually quite helpful. Thank you. I'll keep going. I think you said earlier on this call that you expect to be able to produce about 140,000 tons LCE next year as you look through your expansion. You've obviously had a really big volume growth this year, 30,000 tons. You've been able to increase your sales guidance throughout the year. Do you think right now, early stage, you can place 45,000 tons next year? Obviously, you've been lucky that you've had a lot of production increases this year. Others haven't. Next year has more supply coming on. There's also big growth. Do you expect to be building inventory next year? Whether you could sell the full 45,000, any early thoughts would be helpful.
Yeah. Regarding this question, I think that our idea or target is to grow at least same as the general or the overall market. Okay. Our best estimation for that today, with the information we have today, is that the market will grow around 20% next year. This should be our minimum growth in sales as well.
Okay. If that's what you think is going to happen, if the market grows 20%, then you're planning to produce 40,000 or 45,000 tons more next year, half for incremental sales and half for inventory build. Is that correct?
Yeah. The extra capacity that we will have will allow us to have flexibility, Joel. The business and our sales will move depending on our strategic actions and priorities. Yeah, the most important thing is that we will have enough capacity to sustain a growth in sales, but also to give us flexibility to move in the market.
This is helpful. If I look at in the Iodine business now, you've done great to recover volume. You've been holding price. Your Iodine costs have also gone up a fair bit. As we look into the next year, will these Iodine costs stay roughly the same and your goal is try to balance price with growing back volume to where you were a couple of years ago? Are you able to offset the higher cost with price?
Ricardo Ramos speaking. I think that the cost is, we expect next year, depending, of course, is the energy and exchange rate in Chile are very important. We need to keep an eye on it. Anyway, we have different initiatives to maintain our cost. We are trying to reduce our cost next year in the Iodine business, the price is the market condition pricing. Today, Iodine, as you know, is a very good trend, means the increase in demand is very strong. The clients are recovering; our customers are recovering their inventories that they decreased in the past during the second quarter this year. We think we are going to have a strong second half this year. Means that if continue that way, of course, pricing is going to be positive, it's too early to give a price guidance of the Iodine for next year.
Of course, in the cost area, we are working forward to move in the right direction to reduce some of the costs.
Just my last question, if I can be greedy? You've done very well to raise your guidance for merchant Potash sales volume this year. Looking at what your brine extraction plans have been, and what you've announced about in the past couple of years, should we expect a decent drop-off, like a large drop-off in your merchant Potash sales well below 800,000 tons next year? Can you hold roughly this level next year?
As I mentioned before, Joel, it's too early for us to have a guidance about volumes of Potash in next year. We're working in our business plan for next year and our operational plan in the Salar. As you know, Lithium is a very important priority for us. It's a very good long-term business for us. Second, most of the use of the Potash for us is a raw material for potassium nitrate. That's why we don't have today a guidance of Potash next year, but it is reasonable to expect that the volumes we're going to sell this next year is going to be slightly lower or lower than this year. I don't have the numbers so far.
Of course, considering what is the market condition during second half this year, I'm trying to increase as much as we can the volumes, because we think that the price is very interesting pricing environment in the potash industry so far. It's very difficult now to have a guidance. I think I have to wait until September.
Thank you very much.
Our next question will come from Ben Isaacson with Scotiabank. Please go ahead.
Thank you, congrats on the great quarter. First question, Ricardo. You talked about looking at different alternatives both within and outside of Chile for lithium. Is the Mount Holland project an alternative for you, the 50% that you don't own? How is that structured? Is that possible for you to buy that 50%, or do you foresee yourself being 50/50 JV partners indefinitely?
Hi, Ben. We're very happy with our partner in Australia. Wesfarmers is by far the best partner you can have in Australia nowadays. It's a great company. It's probably the number one company as a global company in Western Australia, and doing business with them in Western Australia is a dream come true for us. I'm very happy being partnered with Wesfarmers, and we will continue to do business together in Australia. I have no single doubt about it.
Second question, when you look at the impact that COVID-19 had on Iodine volumes, it seems that there was quite a bit of a lag. You did 3,000 tons in Q4 2019 before COVID-19, and then you went to 2,800, 2,600, 2,200, and then by Q4 2020, you were at just over 2,000. Now that we're heading into the fourth wave with the Delta variant, you guys just did really well in Q2 with respect to your Iodine volume. Is there a risk now that we start to see declines to your sales volume over the next several quarters as it relates to the Delta variant?
Yes. Hello, Ben. Well, 2020 was indeed a negative year for Iodine because the pandemic was hitting strongly certain applications. This year, 2021, we have seen recoveries. As a matter of fact, we believe that the total demand will even surpass 2019 total demand, which is good news. We are expecting that looking ahead in the coming months, this growth or this recovery will be maintained. Okay? During the second quarter, we had very good sales volume, part of it explained by the demand, but also customers feeling more confident about the future. They started to recover or rebuild stocks. Okay? We will have to see how this goes in the coming quarters, but at least, we are positive.
My last question is, when you look at the supply-demand balance for Lithium right now, it's quite tight. You talked about Lithium demand maybe growing a little bit better than you expected through 2025. I think a lot of consultants are looking at 800,000 tons, 900,000 tons, and now people are starting to talk about more than one million tons in 2025. How do you see the next 18-24 months playing out versus the tightness right now? Do you think things are going to get tighter, or are there going to be pockets of softness when new supply comes on? Do you think it'll basically stay where it is right now? Sorry, I don't mean pricing. I really mean the supply-demand imbalance.
Yes. Well, regarding the demand forecast, as I mentioned in a question before, we believe that for next year, it should be at least 20%. Being retroactively, we were also thinking that the growth this year would be around 20%, and we were all surprised about the very good growth. We have to monitor that development, and we hope that our estimation is on the low side, and that we can see a much solid market in the next one or two years.
Thank you.
Our next question will come from Corinne Blanchard with Deutsche Bank. Please go ahead.
Hey, good morning. Good afternoon, guys. Again, congrats on the nice quarter. Most of my question have already been answered. Just probably two more. The first one would be on the Solar Salt contract. How much of the contract have been pushed to 2022, and is there any part that has been pushed even further to 2023? I believe last quarter you guided sales for 120 kiloton for Solar Salt for this year. Now you decrease it by 100 kiloton. Just trying to get an idea there.
Hello, Corinne. Ricardo Ramos speaking. Yes, you're right in means that we have some delay in the volume sale for this year to first half next year. It's mainly due to our client. He had some issues at the beginning of the COVID-19 with the workforce. They solved the issue of the workforce. Now they are moving ahead as fast as they can. That's why we moved some of the schedule of the shipping from second half this year to first half next year. There's a delay, if I'm not wrong, close to 100,000 metric tons from this year to next year, plus of course, the sales that were originally estimated for 2022. The real delay from this year to next year is close to 80,000 to 100,000 metric tons.
Total volumes this year is going to be close to 100,000 metric tons instead of being the 180, something like that was the original schedule. The total volume will be just a reschedule of the shipments to the first half. There's no reduction. Probably it's going to be an increase in volume in these sales , but no reductions, just a delay in the shipments.
Okay. That's good to know. Just for the segment by safe industrial chemical, what's your guidance again for the entire year in term of volume?
Sorry, we have a problem with the communication. Can you repeat the question? We have very bad noise here.
Sure. I was just asking you what the total volume guidance for this year for the entire segment, for the Industrial Chemical Division.
Okay. Industrial chemical, we have two main business in the industrial chemical. The first one is the Solar salts business that, as I mentioned you before, is like 100,000 metric tons expected for this year. The second one is the traditional use of industrial chemical, and this is close to 65,000 metric tons per year. We expect to have this year between 65,000-70,000 metric tons of what we call the traditional industrial chemical.
Great. Thank you. Just one last question, if I may. This is a bit broader topic. Could you just give us an update on the license renewal process, the timeline? Where do you stand now, and what can we expect maybe over the next 12 to 24 months?
Okay. As we mentioned before in not only today, but in the last, I don't know, several quarters report, we are very focused in increasing capacity, increasing our productivity, increasing yields, and doing a great job in sustainability in the solar. We are going to reach the 180,000 metric tons. That is more than four times what we used to have three years ago. We're increasing lithium hydroxide in our facilities, and the quality is incredibly good today. We're really proud of our process. As we're working as fast and as good as we can, and we don't foresee any issue regarding our license or our working activity in the solar. Of course, as is publicly known, we have a full agreement, I already explained that, until the year 2030. We're working very hard in order to do the best job we can.
Great. Thank you. Thank you so much.
This concludes our question and answer session. I would like to turn the conference back over to Kelly O'Brien for any closing remarks.
Thank you for joining our call. We look forward to you joining our next quarterly conference call in a few months.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.