Good day, ladies and gentlemen, and welcome to the Albemarle Corporation Second Quarter 2019 Earnings Conference Call. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Mr. Dave Ryan, Vice President of Corporate Strategy And Investor Relations. You may begin.
Thank you, and welcome to Albemarle's second quarter 2019 earnings conference call. Our earnings were released after the close of the market yesterday, and you'll find our at www.albemarle.com. Joining me on the call today are Luke Kassam, Chief Executive Officer Scott Tozier, Chief Financial Officer Rafael Crawford, President catalyst, Netha Johnson, President Bromine Specialties and Eric Norris, President lithium. As a reminder, some of the statements made during this conference call about our outlook, expected company performance planned joint ventures as well as lithium production capacity and demand may constitute forward looking statements within the meaning of federal securities laws. Please note the cautionary language about forward looking statements contained in our press release.
That same language applies to this call. Please also note that our comments today regarding our financial results exclude non operating, non recurring and other unusual items. GAAP financial measures and reconciliations from those to the adjusted numbers discussed today may be found in our press release and the appendix of our earnings presentation, both of which are posted on our website. Now I will turn the call over to Luke
Hey, thanks, Dave. Good morning, everybody, and thanks for joining us on the call today. In the second quarter, excluding currency impacts, Albemarle grew revenue and adjusted EBITDA by 6% and adjusted diluted EPS by 20% compared to the second quarter of 2018. Volume and pricing contributed to the year over year growth in lithium and bromine while pricing was up year over year in Catalyst. Scott will go into more detail on our quarterly performance and outlook for the rest of the year in a minute.
I want to focus my comments on why we are adjusting our lithium capital expansion plans to significantly reduce capital expenditures in the medium term. The potential impact of EV subsidy changes in China possible shifts in cathode chemistry excess inventory held in spots along the supply chain and the current oversupply of lithium carbonate in the market has caused some caution in the energy storage and we expect to see this pressure on carbonate pricing continue in the near term. But we also expect supply demand dynamics to tighten in 2020. We have always stated that we would add production capacity to meet demand. As you can see on page 8 of our earnings presentation Albemarle has decided to delay all work related to planning, engineering and construction of approximately 125,000 metric tons of previously announced additional conversion capacity.
We anticipate that these changes will reduce our capital expenditures by approximately and allow Albemarle become free cash flow positive in 2021. As part of this strategic pivot, we recently announced amendments to the transaction with MRL. The joint venture will now be owned 60% by Albemarle and 40% by MRL. Albemarle will pay $820,000,000 in cash and contribute a 40% interest in the 50,000 ton lithium hydroxide facility currently under construction by Albemarle in Kemerton, Western Australia. This facility is still on track to be commissioned in stages commencing in the first half of twenty twenty one.
We had previously announced that the 1st phase at Kemerton would be a 75,000 metric ton hydroxide facility, but we are scaling the total capacity back to 50,000 metric tons at this time. The Wodgina mine will still have the ability to support at least 100,000 Met tons of lithium hydrox side. However, any additional conversion capacity expansions in this joint venture will be based on market dynamics and we would expect a the mining expertise of MRL with the lithium expertise of Albemarle and the modification accelerates the joint venture's ability to bring lithium hydroxide to the market. Albemar will continue to have responsibility for marking all of the product produced by this joint venture. In China, our 20,000 met tons in U2 lithium hydroxide facility continues to ramp production and is on pace to reach the full capacity run rate by year end with several large customer qualifications complete We continue to anticipate meaningful sales growth supported by this facility during the second half of twenty nineteen.
In Chile, our 2 existing operating units in La Negra remain on track to produce close to 40,000 metric tons of lithium carbonate this year. The 40,000 tons of La Negra 34 remains on schedule for completion in the first quarter of 2021. Based on what we are seeing in the carbonate market and to better manage our cash flow, we have decided to delay all work on the Salar yield improvement project at this time. This will likely limit our ability and will delay our ability to build a safety stock of concentrated brine for a rain event or similar issue. However, we are confident we will still be able to meet our commitments to our carbonate contract customers While we are pulling back on previously announced conversion capacity expansions, I want to point out that Albemarle has access to the best lithium resources in the world.
The Salar de Atacama, Greenbushes in Australia, and upon closing the MRL transaction, Wagina. No other lithium company can match the quality, size or diversity of those resources. Albemar will be cash flow positive in 2021 and our balance sheet will get stronger and stronger as we grow EBITDA and operational cash flow over the next few years. This will give us that will use feedstock from the world's best lithium resources. In closing, as we promised we would do, we are adjusting our capital expansion plans to respond to market conditions.
We will still be able to meet all of our commitments to our contracted customers but will reduce capital expenditures significantly in the medium term, allowing Albemarle to be free cash flow positive in 2021. We have access to capacity in the future if doing so creates value for our stakeholders. In short, we're well positioned for and excited about the future. With that, I'll turn the call over to Scott.
Thanks Luke and good morning everyone. For the second quarter, we reported unadjusted U. S. GAAP net income of $154,000,000 or $1.45 diluted earnings per share. We reported adjusted earnings per share of $1.55, an increase of about 0.19 dollars or 14% compared to second quarter 2018, or 20% excluding currency effects.
Growth in bromine, lithium and fine chemistry services resulted in an increase of about dollars, earnings per share also benefited $0.06 from our 2018 share repurchase programs, and 10¢ from a more favorable effective tax rate than was the case in 2018. These gains were partially offset by unfavorable currency change of about $0.08 and unfavorable results in the catalyst business compared to second quarter 2018, which was a particularly strong quarter for catalyst. Now I'll cover a few financial details. Based on current geographic sales and production mix year to date, and our expectations for the rest of 2019, we currently expect our full year effective tax rate to range between 20% 22%. Excluding special items, non operating pension and OPEB items.
Corporate costs in the 2nd quarter were $39,000,000, an increase over the same period in 2018, primarily driven by an increase in unfavorable currency losses of approximately $8,000,000. From $130,000,000 to $140,000,000. For the first half of the year, net cash from operations was $199,000,000, down $25,000,000 from last year impacted by higher cash taxes and increased working capital to support increased sales $16,000,000 and we now expect full year CapEx for 2019 to range between $900,000,000 $1,000,000,000. Expenditures for the Kemerton project remain on track. However, some expenditures that were planned for 2020 are now expected to and a requirement by vendors our net debt to adjusted EBITDA was 1.5 times.
After the MRL deal closes, we expect our gross debt to adjusted EBITDA ratio to be and expect it to improve going forward. We will secure new debt to finance the joint venture and for general corporate purposes. Initially, a delayed draw term loan will be put in place. This may ultimately be converted to long term debt. Turning to the details of our business performance now.
In the second quarter, lithium delivered sales of $325,000,000. Excluding unfavorable impact of currency, lithium sales were up 5% compared to the second quarter of 2018, driven by increased volume of 3 products such as butyllithium and battery grade materials. Adjusted EBITDA of $142,000,000 was flat compared to the second quarter of 2018. In bromine, 2nd quarter net sales and adjusted EBITDA grew year over year by 17% and 20%, respectively, excluding the impact of currency. Adjusted EBITDA margins were strong at 32%.
Although we have seen some weakness in our connectors business that serves the automotive and construction markets, We have been successful to date in shifting our bromine to other end markets where demand remains more robust. Volume growth in the second quarter was aided by our JBC expansion that is running well and was brought online in the third quarter of 2018. Catalysts reported 2nd quarter net sales of $266,000,000 and adjusted EBITDA of $67,000,000. The decline in results was caused by a volume shortfall in fluid catalytic cracking or FCC catalysts due to delays in the startup of new units and changes in customer mix. This was partially offset by PC.
Insurance payments related to weather received during 2018 were also an unfavorable factor in the adjusted EBITDA comparison. Let me transfer the rest of the year now. In lithium, we continue to expect year over year volume growth of 15,000 to 20,000 metric tons and an adjusted EBITDA growth rate in the mid to high teens. With multiple customer qualifications complete, hydroxide volume from Xinyu is expected to drive a stronger second half. We are seeing pricing pressure on some technical grade products and expect second half pricing to be flat to slightly down compared to 2018.
However, we still expect full year pricing to be 4th quarters. In Catalyst, the FCC customer startup delays are expected to impact full year volumes. We are working to mitigate the short term impact by placing volume at other accounts where the pricing meets our profitability targets. But it is unlikely we will fully replace the delayed volume. To be clear, we have secured this FCC business, So it is a matter of when, not if we ship FCC catalyst to these refineries.
For HPC, the full year remains on track, although timing of orders has shifted around a bit. Putting all of this together we now expect full year adjusted EBITDA Second half results are expected to be spread fairly evenly across the 3rd fourth quarter and flat to first half. The downside in catalyst is offset by an improved outlook in bromine and fine chemistry services. Our 2019 order backlog in bromine remains healthy, and we now expect full year adjusted EBITDA growth in the range of 10%. Global Economic Weakness is always a risk for this business, although signs are pointing toward a potential 2020 impact on bromine full year guidance of net sales We are increasing guidance for adjusted diluted earnings per share to $6.25 to 6.65 a pro form a growth rate of 15 percent to 22 percent over 2018.
Now I'll turn the call back over to Dave.
Thanks, Scott. Before we get to Q And A, I want to call your attention to our press release of August 6, announcing that we will host an Investor Day in New York City, on the morning of December 12, 2019. Additional details will be forthcoming, but we look forward to the opportunity to provide a detailed update on Albemar and the strategy and priorities for the company in each of our global business units. But before doing so, I'd like to remind everyone to please limit questions to 2 per person to ensure that all participants have a chance to ask questions. Then feel free to get back into the queue for follow ups if time allows.
Our first question comes from Josh Spector with UBS.
Yes, we can hear you.
Okay, great. Sorry, it's a bad connection. Just a question on CapEx kind of over the 5 years. So I understand you took down the number. And I wonder if demand does materialize kind of over the next 2, 3 years, either at or ahead of your expectations.
Do you see some of that CapEx coming in back into your planning? So I guess I'm thinking if you're adding new capacity in the mid-twenty 20 timeframe, you probably need to start building or spending on that in early 2020. Kind of how do you balance that versus what you said on the release earlier?
Yes, great question. If you look, what's see is we are building out Kemerton which would add another 50,000 Met tons of lithium hydroxide. And then in the chart, we show that we are assuming we will build out another 50,000 metric tons with our partner MRL once that deal closes. So that will reduce the capital that sharing that capacity with our partner. So we believe that when we look at the demand that it would be out further past that 2021 timeframe where we would have to commit any more capital.
So we're very comfortable with the free cash flow numbers that we say and being free cash flow positive in 2021 And then as our capacity if the market demands it at a lower capital intensity than what we're seeing today.
Okay, great. Thanks. And just on the personal resources and the spodumene availability, how does the change in the JV impact any of the plans there to the extent you could provide any color of what's going to happen with the capacity which you aren't going to be allocating to Kemerton at the start?
Yes. Upon the closing of that transaction, we will work with MRL to determine the best approach on that spodumene but it certainly appears to us today that the market is adequately supplied with spodumene today.
Okay great. Thanks.
Our next question comes from David Begleiter with Deutsche Bank. Your line is now open.
Thank you, Luke. Just following up on that situation, the additional Talison spodumene will that be processed or how will that be allocated going forward?
Under the Talison agreements, We have the rights to 50% of the offtake and our partner Tianqi has the rights to 50% of that off take. So that won't change in any way going forward, David. I'm not quite sure I understand the question.
With reduced capacity in Kemerton, will you be processing any of the Talison spodumene in the 50,000 tons of initial Kemerton capacity?
No, that'll be used with Wodgina Rock. We would expect to do that, but we certainly have flexibility to allow us in the future to with these resources to do whatever makes the most sense from a financial perspective.
Very good. And just on second half lithium EBITDA guidance, Luke, it is a big ramp up. You do have Xinyu coming in, but Any other drivers for the big second half versus first half in terms of lithium EBITDA guidance range?
David, this is, Eric. So it is, as you depicted, it's 2 things. It's the Xinyu II ramp up now that we are, have 6 months of experience under our belt and are ramping towards full rates have 4 major customers qualified that can really drive that plant. There's another 6 plus that will probably qualify or in the process of qualifying, but we have sufficient now to fill that plant in the second half of this year. And then the other factor is the ramp up of similarly of La Negra II in Chile and the volumes we expect there.
And of course, the underlying factor is strong demand in the EV markets, which we our demand outlook continues to be as it was 3 months ago for a strong growth going forward.
Thank you very much.
Our next question comes from Arun Vis Juanathan with RBC Capital Markets. Your line is now open.
Great. Thanks. Good morning. Just trying to guess, understand your comments, put them in context, in the prepared remarks. So obviously, they're going through a little bit of a period of over supply and carbonate and spodumene, and you've halted CapEx, partly as a result.
So are we supposed to I guess interpret that, some of your decisions to not bring as much tonnage to market would help kind of stabilize the market And do you think we would see some similar responses from your peers in the industry?
Yes, I have no way in knowing what our peers in the industry will do first of all. What we're looking at is we have always told our stakeholder that we were going to invest capital to meet our contracted customers' demand where we could get an attractive return on invested capital. And our stakeholders have been clear. When I talk to shareholders, the number one thing I hear is when are you going to be free cash flow positive? It's critical that we adjust our capital to allow us to meet our stakeholders' demand while at the same time driving towards a positive free cash flow and we put a stake in the ground that we're going to be free cash flow positive in 2021 We believe that will create more value for our stakeholders and we will have the financial flexibility if the market conditions call for it to build or buy additional conversion capacity to meet any increased needs in the market.
Okay. Thanks for that. And as a follow-up, just curious on your customer's acceptance of the long contracts. Are you still seeing increased contracting?
You mentioned
10 years
previous on previous calls
Are you still
able to extend those agreements? And if so, what's kind of the magnitude
or the level of acceptance that you're seeing out there? Thanks.
Ki Bin, hello, this
is Eric Norris. We ended 2018 with, largely all of those major contracts extended out, in somewhere in the 3 to 5 year range, some 5 plus. And that is what is we're operating against today. And with those contracts are holding, they are all largely outside of China, those types of contracts. And we continue to move forward against them.
Thanks. I'll turn it over.
Our next question comes from Jerry Zekauskas with JP Morgan. Your line is now open.
You said that over a 5 year period, you would drop your CapEx by $1,500,000,000. So what was your 5 year CapEx expectation, and what is it now?
Scott, you had that number off the top of your head.
I don't have it off the top
of my head. We'll get back to you with that number. I don't have it off the top of my head. What we did was we went in and looked exactly what we were taking it down. I can tell you by we look at 'nineteen being right around 1,000,000,000 dollars, $20,000,000,000 being right around $1,000,000,000 and then 21 dropping to around $500,000,000 or so or something like that.
Am I right, Scott?
Yes, the new is around 5 $100,000,000, but there was up around $800,000,000.
Yes. So it's about $300,000,000 to $400,000,000 drop. So in that 1 year alone, so We'll get that number for you. I'm sorry I don't have it off the top of my head, Joe.
No,
it's okay. Okay. And then just for my follow-up, originally once you're waived to capacity was done. I think you would have had something like 350,000 or 340,000 tons of LCE And what you're now going to do is you're not going to build 125,000 tons of LCE. So basically what you've done is you've curtailed your longer term capacity to the mid decade by about 35%, 35% or 36%.
So that must correspond to a diminished expectation for either lithium growth rates overall or lithium profitability overall. Can you give us a sense of why your curtailments are so large and how you got there?
Yes, Jeff, certainly can. First of all, we will still have the capability out in the years to either buy or build additional capacity if that's met. I don't you should not view this anyway as seen that we don't believe demand still going to be where it is. We're still bullish on demand. We're at, I think, 1,000,000 metric tons in that range by 2025.
And we still see that based on all the data that we have come in. So it's not demand. From an actual dollar perspective, I think it's too soon to say whether it's going to be a reduction in EBITDA or not. When the supply and demand has got to have an impact one would think over time on price. What this will do at a 1,000,000 metric tons is it will reduce our market share unless we build more over time.
So while it is not on demand, I understand how you do the math on the EBITDA and earnings, but I'm not 100% I'm not ready to concede that point yet. If you'll, we just need to let's see how this plays out. But I want to be clear, we're going to meet the commitments that we have to our customers We're going to be free cash flow positive in 2021. As we go out through the years and our EBITDA and our volumes do grow, you'll continue to see us generate significant free cash flow and we'll have the balance sheet and the flexibility to invest either in buying or building additional conversion capacity if it means it makes sense to our stakeholders. And that's probably Once we say go, if we're building it, it's probably 24 to 36 months.
Thanks for the questions.
Our next question comes from PJ Juvekar with Citi. Your line is now open.
Yes, hi, good morning. Look, now that you've delayed a big chunk of your hydroxide capacity, you are going to be more exposed to spodumene concentrate from both Wajina and from Talison for longer period of time. Why is that a better economic decision when you know that there is going to be excess rock capacity in the market?
Well, you're assuming I'm selling it and I'm not saying today we're going to sell it. So we're not going to be more exposed to spodumene rock. We're not going to sell it if there's not a market for it.
Okay. So you're saying you won't operate the mine if there is no demand for it?
I'm saying that we will discuss after the deal closes, we will discuss with MRL what the best approach is to take on the spodumene rock from that
And then most of your cancer capacity is in Australia. Is Australia not competitive either because of higher labor or building costs or whatever? Or is it because demand is lower and you're just matching it to demand has nothing to do with Australia?
It doesn't have anything to do with Australia. Although I will say, and it's clear, if you're going to build an asset in China versus you're going to build an asset in Australia, you've got a much higher capital intensity in Australia. It'd be the same thing if you built something in the US. You've got a higher capital intensity than you do in China. But what we're delaying is simply what we had on the drawing board and we're taking that capacity out and you ought not read anything more than that into it.
Okay. Thank you.
Our next question comes from Robert Koort with Goldman Sachs. Your line is now open.
Thank you. Good morning. Maybe a question for Eric, I'm trying to reconcile, Almarle's unique supply capability. I think you guys have talked in the past about customers, maybe narrowing or tightening their specifications and your ability to supply there given legacy, supply arrangements qualifications and whatnot. And Luke, you're suggesting maybe you could seed some share.
So are the Tier 2 and Tier 3 converters beginning to be able to meet those specifications? Are they narrowing the distance to and performance capabilities that you have? And then secondly, are we seeing those goalposts narrowing by the customer base? Are the specs getting tighter, tougher, requiring more out of their suppliers, their lithium suppliers?
Hi, it's Eric. So I would say that, this is all about EV growth, right, for our strategy. First of all, that may be obvious, but an important point because where we see that going is largely a high nickel base, increasingly. And where we see that needing therefore is hydroxide, lithium hydroxide. When you talk about the types of quality specifications, they are tightening and you talk about the ability to supply pace to meet them.
It's a handful or less of companies that can do that. So I would say that that is today that is not the non integrated producers. It is the integrated major producers in the marketplace. And so our strategy is one simply around creating flexibility that you're hearing on this conference call for growth while continuing to meet needs not any statement around what we see competitively in this high growth market or the continued need for more specialized or high quality products? Yes, Bob, this is Luke.
As a
leader in the lithium business, we feel like we need to put a stake in the ground. And that's what we're doing. We're pivoting our strategy to address the major concern we hear from our shareholders, which is when are you going to be free cash flow positive? We're going to be free cash flow positive in 2021 and we're still going to be able to meet the commitments we have to our customers. And we will also have the flexibility in the future using So don't hear me please don't hear me say that I'm willing to seed share.
I'm happy with a lower EBITDA or I'm not looking for earnings growth. I don't hear any of that. What you ought to hear is we're going to be very responsible in how we are managing our cash to drive shareholder value and meet our customers demand.
And if I could follow-up, Luke, that seems to be an ongoing anxiety in the market about spot prices and relevance to your portfolio. I think you guys have obviously demonstrated consistently your pricing is not in any way correlated to that spot market. But I am curious, as you think about renewing contracts, I assume some roll in, some roll off and you're writing a new contract today, does that still have a price uplift from where it may have been written the expiring contracts or how do you how do you sort of characterize the contract pricing dynamic as you look forward from here?
Yes, I'm going to let Eric talk about that, but I think you've got to separate it between what you're seeing today in carbonate and what you're seeing today in hydroxide. From a battery grade standpoint, okay. So, Eric? Yes. So, it is different by the 2, yes.
I mean, first of all, in our mix of business, as I said in the previous question, we are not seeing a lot of we don't have a lot of contracts expiring within the next this year or next year. We have a large number, a large volume committed on the hydroxide side of that. That is where we see, the growth certainly for EVs, but it's also where we see considerable tightness from a supply standpoint, both today and into the future And so while there might be excess in carbonate, carbonate is also a product that is not the preferred product line going forward for EVs And as a result, you will see pricing pressure there, and any contract that renewals will see more there in carbonate as you would on hydroxide. And so that's really the dynamic we're facing right now.
I mean, Bob, that's the question is, as these contracts enter, we've got to look to see is a steady price, a set price on that minimum volume the way it makes sense or do we go to a band of pricing? How are we going to do this in this evolving market? And that's something that there is a significant amount of focus on not only internally with Albemarle, but on a discussion with our major customers, the major battery suppliers, and some automotive OEMs because what we're seeing today is that buying decision is moving further to the right of that supply chain. And we are engaging those discussions at the right levels and we're going to hopefully reach an arrangement that makes sense for us and for our stakeholders and allows our customers to also meet their demands that they have to the OEM. That's our
goal. Great. Thanks for the help.
Our next question comes from Aleksey Yefremov with Nomura. Your line now open.
Good morning. This is Matt Skowronski on for Alexei. Given the price volatility that seen so far this year, are your lithium contracts being executed as expected or were there any change in terms mid year?
Hi, Matt. Eric Norris here again. So, we see a mix of things, right. The vast majority of our businesses is battery grade. The vast majority of that is located outside of China.
And that's where our contract sweet spot has been for years and we're continues to be where we renewed a lot of our contracts last year for the duration of a number of years going forward. So those all those contracts are performing as expected. We have some technical grade products that are sold under more shorter term nontraditional or not traditional to these battery grade contracts. They are seeing pressure and Scott referenced that we'll see some of that in the second half of this year. The volume that we have in China, which is strategic to maintain a position within that supply chain.
It is also not a traditional sort of contract. It's been shorter term. Some expired this year. In some cases, we were able to reach a price agreement with some and others, we weren't willing to go where they felt they, they felt they wanted them to go. And so we walked away from some contracts, but we've kept a foothold in China.
So it really would be China, which is less than 10% of our volume and tech rate, which is another depending on 10% to 20% of our volume. That's where there might be some pressure, but in the vast majority of our business and certainly our battery grade parish portion of the market that's growing. Those contracts are performing.
Thank you. That's helpful. And then what are your early kind of views on demand for lithium in China in July August so far. Has there been any change or deterioration from June levels?
Again, it's Eric here. It's a question that I asked my team and I think it's really way too early to know you ask it in the spirit of I think the fact that the new subsidies went into effect as of July 1, very often there's a run up for any subsidy change of buying behavior. And so we don't know what it's going to mean going to July or August. I could speculate one way or the other. The market for EVs remains robust.
But subsidies do distort behavior. And so it's possible that the July or August could be weak weaker than they otherwise would be without the subsidy. On balance though, we see a strong year for China going forward from a demand standpoint.
Our next question comes from Steven Byrne with Bank of America. Your line is now open.
Hi, good morning. This is actually Luke Washer on for Steve. So given your decision to reduce hydroxide capacity, could you provide some more detail on what you're seeing on the demand side that's changing your tone? Are you seeing a slowdown in optimism perhaps for the timing in the shift to 811 and the NCA Technologies?
Hi, Luke, Eric, again. So as Luke said, first of all, there's nothing that's changing the next 2 to 3 years, right? The capacity that we have opted to not pursue, is in that 3 to 5 year timeframe that same 3 to 5 year timeframe, we'll have certainly the resources and the cash should the market warranted to go after that, that opportunity. So it's putting the stake in the ground as Luke referred to. In terms of now your question of demand, demand is unchanged from what we thought 3 months ago from what we thought 6 months ago, it remains strong and probably stronger than for hydroxide than we would have expected maybe 6 months ago.
So there continues to be that edging towards hydroxide that is supported by NCA chemistries and 811 chemistries. But I'll reiterate what I said 3 months ago, we never expected 811 to be a big player in EVs in the next couple of years. There are technology and processing challenges yet for that technology to be safely used in a large scale format in a battery for an EV. It is being used experimentally in some in China and some consumer goods products. It is being blended with 622 to sort of, if you will, supplement the energy within that battery at a small level.
But it is not there are today really no we don't see any 811 full EV batteries for some time yet. NCA continues to grow. It's driven by a few automotive producers in particular. And, and so that that continues on. But again, going back to the original point, nothing has really changed in our demand view in the next couple of years or for that matter 5 years out.
Thanks. That's helpful. And then on the La Negra 34, you expected to add 40,000 metric tons carbonate to the market and now you're delaying that project a bit. What do you believe the effective capacity of those increases will be now?
Yes, I think we always intended to bring that capacity on. You know, as 2021 is when we would have mechanical completion in the first quarter, we would have to have 4 to 6 months worth of qualification. So I wouldn't expect much in 2021. We always talk about bringing these units home 3rd, a third, a third. So we're confident we can still bring that on.
And we could probably have the Salar yield online and have the brine ready for it by 2023 when we need that last third of that project there. So I would look at it as 15, 15, 10, something like that, something in that range.
Great. Thank you.
Our next question comes from Joel Jackson with BMO Capital Markets. Your line is now open.
Hi. Hi. You've clearly said that being free cash flow positive in 2021 is a key thing for you when considering the changes in the JV with MinRez. And I understand the optionality, I guess, spodumene for you here. Maybe you could talk a little bit about the rationale about deciding to give over $1,000,000,000 of consideration for spodumene resource where maybe in the future you could go and get that resource later when you need it?
Yes, that's a great question. They will run-in an auction. And it was going to get sold. If you go back to the very beginning of it, MRL was running a process. We were engaged in the process it was a top tier asset.
If you take Talison out of the equation, you take out green bushes, that is the best right resource in the world. The when you look at Wagina, the size of that resource, the purity of that resource and the skill that MRL brings to the table from a mining standpoint. And I believe from a capital execution standpoint that can help us, it just made for a perfect fit. Ultimately you're going to need that volume and we thought it was best that we had it. We saw it as a good asset.
And now when we've restructured it, we have 60% of that joint venture. So that gives us some rice that we didn't have in the past. So all in all quality asset, we're going to use that rock for Kemerton. We will also partner with MRL on our next installment of capital, which will further reduce our capital outlay and still allow us to meet our customer demand. So quality resource, quality people, ability to reduce our capital outlay still have 100,000 met tons worth of lithium hydroxide coming on board.
It all makes sense to us from a return standpoint.
Thank you for that. A little more on the yield improvement program deferral. Is that just matching some of the strategies you've talked about earlier today, is there anything else going on with the government on getting proper quota, increases or maybe or No, this is yes,
no, this is nothing involved with the government. I quota system is fine. There have been no changes in any of the regulatory issues, no changes within any of our contracts. This is purely a decision where we saw an opportunity to delay the implementation of capital to allow us to get free cash flow positive more quickly than we were. So we decided that we're going to take the step to do that because when we calculate it, we believe we can still meet all the commitments we've made to the carbonate customers that we have under contract.
So it's all about free cash flow has nothing to do in any way. Our relations with the government in Chile are fine.
Our next question comes from Colin Rusch with Oppenheimer. Your line is now open.
Thanks so much. Can you tell us what you're looking for from your customers or from the demand environment to think about reanimating these projects? And then, can you just update us in terms of your targeted return on capital? Are you looking at evolving that or looking for higher returns as see this market evolve and see the strategic moves play out a little bit more in advance
No, we for return on invested capital, we still shoot for 2 times our weighted average cost of capital for return. That's what that's and that's always been the case and we continue to see that as our case. As of what we're looking for for our customers at if people are going to sell carbonate at the cash cost of that marginal producer, It doesn't make sense for us to add new capacity and we won't. We can because of our position in Chile because of our cost position in Chile, we can still make very good margins at that level, but we don't see the need to put new capacity in the ground. It all comes down to what's the pricing going to be, how is that pricing going to be, how are the contracts coming with the customers, what or how are those going to evolve over time?
And those are all decisions that need to be made in the context of a company that needs to make a commitment to our stakeholder on free cash flow, which we're doing.
Okay, great. And then just with the kind of changing changing trajectory here, the operating expenses, are you, is the organization rightsized at this point? Do you need to make any adjustments there?
Yes, I think as we look at as we look out into 2020 and you start looking across our portfolio, We've been operating. Bromine's grown almost double digits for 3 or 4 years in a row. That's not happened before. And we can see some weakness in automotive. We can see some weakness in construction.
As we talked about, we've been able to reallocate that bromine molecule to date it very successfully. So, there's continued to grow, but I don't know how much longer that's practical expect that business to grow at that we are undertaking in the second half of the year a view of our overall cost in a way to try to reduce our overall cost and gain efficiencies going forward. And we'll share more of that with you at our December Investor Day presentation.
Thanks so much guys.
Our next question comes from Mike Harrison with Seaport Global Securities. Your line is now open.
Hi, good morning. Hey. Luke, as you've commented several times about this build versus by decision that you could have, looking out a few years when it comes to conversion capacity, does this reflect a view that you think there's going to be excess conversion capacity available when you might need it?
Yes, I think there's excess conversion capacity available today. And there's more coming online. So I think that it's going to provide perhaps an opportunity for people that are interested in conversion assets. So as an integrated player with the best resources in the world, we believe that that could be an opportunity for us and we are always mindful of making sure we're getting the best return on the dollars we invest in that regard.
And then, I wanted to actually ask a question about Catalysts. Can you just maybe give a little bit of color on the changes in customer mix that you mentioned and the startup delays, maybe what's causing them and how those play out in the second half?
Hey, Mike, this is Rafael. So in the 2nd quarter, the mix in the 2nd quarter was different namely we had a very strong 2nd quarter in hydroprocessing catalysts in 2018 that is a refill, rebid, rebid business. So sometimes those projects or those refills shift from 1 quarter to the next. And it just so happened that last year, we were very strong in hydroprocessing. With regard to FCC, as Scott had mentioned in his commentary, There are some delays in some projects that we have won.
It is not a matter of if, but when, So we have in 2019, coming into 2019, we shed some low price low margin business to make room for those orders. Some of those have now been delayed. So that gives us a little bit of a gap 2019, but we fully expect that we will have that business in 2020 and beyond. So fundamentally FCC catalyst and catalyst overall in the refining space is very strong for Albemarle.
All right. Thanks very much.
Our next question comes from Chris Kapsch with Loop Capital Markets.
Yeah, good morning. Thanks. Question. Probably for Eric, maybe, Luke, in your formal comments, you'd pointed to, expectation that you'd see tighter supply demand in the industry in 2020. Just wondering if that's just based on sort of top down math or are you seeing anything specifically from a bottoms up standpoint, either customer order patterns, inventory levels, anything that, any acceleration demand that is pointing to that?
Just characterize that, that'd be appreciated.
Hey, Chris, it's Eric here. So a couple of factors. 1, demand is, as we've said on prior questions, is continues to be strong and we see it based on electric vehicle launches, commitments from EV producers to battery producers. We see that the demand will continue step up again in 2020 to a greater degree. We'll give more specific guidance, but it's consistent with our demand model that we articulated of 50,000 to 60,000 tons this year and 1,000,000 by 2025.
So it's a natural step up there. So that's on the demand side. On the supply side, we are seeing a couple of projects on the resource side be delayed take longer to come to market and or under current economics. We believe may be challenged to operate And then finally, inventory, which has been a big factor in the marketplace. This year, we believe hard to quantify.
A lot of it is in China. Within China, that's largely been depleted, we think, from the supply chain on the carbonate hydroxide side and what's being in hand. It's not outside of China. There continues to be some excess rock and inventory outside of China and in Australia and there continues to be some excess salt in some of the battery producers' hands outside of China. So maybe the balance of this year that would be drawn down.
And when you put that formula together, we see a pretty tight 2020.
Thanks for that color. And then my follow-up is really to the expansion curtailments. And really the question is that, strategic pivot, juxtapose against a couple of your slides you've used in prior investor presentations regarding your your, lithium hydroxide and lithium carbonate that you have under contract over the 2021 2025 period. The question is like it looks like this decision doesn't influence those metrics on 2020 intended production, but this is really all about not having visibility on longer term commitments from customers out to 2025. So could you just is that one way to think about you just maybe characterize the decisions against those slides?
Thank you.
Yes. So we made commitments to people out through 2025 in some instances. And in all these scenarios, we're able to meet those commitments with the capacity that we've announced and that we have under construction today. And we know what the price is on those and we're able to calculate the return based on what that capital is going to be. But we'll be able to meet everything that is under contract today.
What we're doing now again is driving to a free cash flow positive in 2021 with the ability to flex up if necessary to build or buy additional capacity if the market demands it and if we have customers that are prepared to enter into contracts with us for those volumes that we will be producing. But we don't think it makes a whole lot of sense for us to build a lot of capacity if we're not going to have contracts that we can place against those or and it doesn't have to be the exact same contracts we have today. We just need to know within the range what that return is going to be and we can make a intelligent economic decision about what that'll be. So if you see our long term agreement changed a little bit. All these agreements are a little bit different.
What we're looking for is a not a guarantee but a surety of a return based upon the capital we put in the ground. But we're going to meet our commitments to our customers. We have enough what this is a pivot to make sure that we're also focusing
Got it. Thank you.
Our next question comes from Dimitry Silverstein with Buckingham Research. Your line is now open.
Good. We can hear you now, buddy.
Okay, great. Thanks. Thanks for taking my call. Quickly on the you mentioned higher upfront payments that your vendors are requiring for the expanded capacity that you are undertaking. And that was one of the reasons that your CapEx is staying where it is.
I'm just trying to understand sort of why. I mean, are they less I mean, are they concerned about rapid lithium expansion across the world by many players and just want to make sure that you guys, sort of serious about these longer term borders?
No, Dmitry. This is Luke. It's just a matter. The Australian market is heating up for structure. And so you're seeing a lot of activity in mind.
You're seeing a lot of activity in Australia and they got a book of business that they that there is now they're kind of they got a good market. I mean, they got a good seller's market and what they're doing is if you wanted to get in line for the time that we want to get in line in the shops, we had to pay more upfront to get that preferred space in line so we could get it to the market. When we said we would, in that timeframe. So that's all it is. And the cost didn't the overall cost didn't change a matter of having to pay a little bit more upfront sooner than we originally thought we would.
That's all it is. It's just a market heat up. It's got nothing to do with Albemarle. It's not got nothing to do with lithium in particular is the construction market in Australia.
Got you. Okay. That's helpful. Look. And then just as my follow-up question on volume growth that you saw in the 2nd quarter in lithium, I think you talked about 3% volume growth.
I mean, it doesn't sort of jive well with the market that's growing 60% or whatever, the EV megawatt market, battery market is growing at. So was this constraint in your capacity that prevented you from delivering a better volume number? Or is there something else going on and that's going to go away in the second half and you're going to get to the growth that is more reflective of what the EV market is growing at?
Hey, Demetri, this is Eric. So, we're selling everything we can make, right? We are ramping up Xinyu II that has natural limitations on the ramp experience curve and it has limitations on customer qualification. But I can tell you that both for that plan and for Chile, we was impacted in the first quarter by a rain event, everything we can make we can sell. Where we were limited in the first half of the year on sales growth was opportunistic sales, that would be enabled by tolling of spodumene capacity we have.
Those opportunistic sales are off contract. By nature given that they're opportunistic. A lot of them, given that half the marks in China is in China. All of them are in carbonate. And with the excess carbonate market, with prices where they are in that $8 to $9 marginal cash cost range, we we just it doesn't make sense economically for you to do that.
So we pulled back on that. We've maximized the growth we can get from our internal assets. And what happens in the second half of the year is we get the full benefit of full qualification at June 2 running to full ramp rates on June 2, which is nameplate on that facility 20,000 tons and the same on La Negra, both the benefit of both units running at full tilt as well as seasonally better brine. We have an opportunity to really recover from the headwinds we had from rains in the first quarter. And those are the factors that drive the comparison first to second half.
Got you. So there was a little bit of a capacity constraint that's going to resolve itself in the second half of the year. That's what I wanted to make sure. Okay, thank you.
At this time, I'm showing no further questions. I'd like to turn the call back over to Mr. Dave Ryan for any closing remarks.
We just wanted to thank everyone for your questions and participation in today's conference. As always, we appreciate your interest. And this concludes Albemarle's 2nd quarter earnings
the program and you may now disconnect. Everyone, have a great day.