Hello, welcome to Albemarle Corporation's Q1 2023 earnings call. All lines will remain muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I will now hand it over to Meredith Bandy, Vice President of Investor Relations and Sustainability. Ms. Bandy, please proceed.
All right. Thank you, Donna. Welcome everyone to Albemarle's first quarter 2023 earnings conference call. Our earnings were released after the close of market yesterday, and you'll find the press release and earnings presentation posted to our website under the investors section at albemarle.com. Joining me on the call today are Kent Masters, Chief Executive Officer, and Scott Tozier, Chief Financial Officer. We also have Eric Norris, President of Energy Storage, Netha Johnson, President of Specialties, and Raphael Crawford, President of Ketjen, available for Q&A. As a reminder, some of the statements made during the call, including our outlook, guidance, expected company performance, and timing of the expansion projects may constitute forward-looking statements. Please note the cautionary language about forward-looking statements contained in our press release and earnings presentation, which also applies to this call.
Please also note that some of our comments today refer to non-GAAP financial measures, a reconciliation of which can be found in our earnings materials. I'll now turn the call over to Kent.
Thank you, Meredith. Our first quarter was excellent, with net sales more than doubling versus first quarter last year and EBITDA up almost 4x to $1.6 billion. This reflects the high market pricing for our Energy Storage business at the end of 2022. Our Specialties business also had a strong quarter, up sequentially from last quarter on higher pricing. Looking forward to the rest of this year, we are adjusting our expectations based on the current lithium market pricing, Scott will go into that in more detail. We moved the business forward in a number of ways during the quarter, including selecting the site for our U.S. Mega-Flex lithium processing facility in Richburg, South Carolina, which is a strategic move that is even more important given the U.S. Inflation Reduction Act.
We also announced the restructure of our MARBL joint venture in Australia, and we announced a separate investment by Mineral Resources Limited into two of Albemarle's conversion assets in China. We expect those two deals to receive regulatory approval and close later this year. This week we announced the final investment decision to build Kemerton Trains three and four in Australia, which will be 100% Albemarle-owned. The fact that we are advancing the Kemerton Trains and the U.S. Mega-Flex facility points to our confidence in the long-term growth and opportunities of the lithium business and, in particular, our Energy Storage segment. Lithium demand and the EV market continue to grow at extraordinary rates. With that, I'll hand over to Scott.
Thanks, Kent, and hello, everyone. Let's review our first quarter performance on slide five. Net sales for the first quarter were $2.6 billion, up 129% compared to last year. This is a $1.5 billion increase and was driven by Energy Storage as a result of both higher market pricing flowing through our variable price contracts and higher volumes. Net income attributable to Albemarle was $1.2 billion, up almost 390% compared to the prior year. Diluted EPS was $10.51, also up almost 390%, which is another record quarter for Albemarle. Looking at slide six, first quarter adjusted EBITDA was almost $1.6 billion, an increase of approximately 270% year-over-year.
This $1.1 billion increase was almost entirely driven by higher net sales in Energy Storage. Our Specialties business unit was up due to increased pricing and some lower freight costs, which were partially offset by lower volumes. Ketjen declined slightly due to volumes associated with a winter freeze in Texas earlier in the quarter. Importantly, we saw year-over-year price increases more than offsetting inflation in the quarter. On slide seven, we are adjusting our 2023 guidance to reflect current lithium market pricing. On average, lithium indices are down about 50%-60% since the start of the year. Based on our established guidance methodology, we are taking lithium market price indices as of mid-April and holding them flat for the balance of the year. To be clear, we are not predicting lithium market pricing.
We're simply taking the current price, holding it flat, and running it through our contract structure. This is the same way we provided guidance last year. We now expect 2023 total company net sales to be in the range of $9.8 billion-$11.5 billion. This is up 45% over the prior year at the midpoint. We expect to see sales for the second quarter to be in line with Q1 and then see a sequential increase in sales in both the third and fourth quarters as ramping Energy Storage volumes more than offset sequential price declines. Adjusted EBITDA is expected to be between $3.3 billion and $4 billion, reflecting a year-over-year growth of 5% at the midpoint. This reflects a full year EBITDA margin in the range of 34%-35% for the total company.
Our full year 2023 adjusted diluted EPS guidance is now in the range of $20.75-$25.75, reflecting a year-over-year improvement of 8% at the midpoint. We expect our net cash from operations to be in the range of $1.7 billion-$2.3 billion, and our CapEx guidance remains at $1.7 billion-$1.9 billion. We still expect to maintain positive free cash flow for the year. Turning to the next slide for more detail on our outlook by segment. The 2023 Energy Storage volume outlook remains unchanged, up 30%-40% year-over-year. We now project average realized pricing to be up 20%-30% for the full year.
Note that our realized prices are expected to be up year-over-year in the first half, including in Q2, and then down in the second half. We see volume growth in all quarters. This leaves potential upsides and downsides as the market price shifts during the year. Adjusted EBITDA for Energy Storage is expected to be between $2.7 billion and $3.4 billion, essentially flat compared to 2022. Beginning in the second quarter, we expect to see pressure on EBITDA margins, largely related to the timing of higher-priced spodumene inventories and the increasing impact of the MARBL joint venture. I have more on that shortly. For Specialties, we're maintaining our guidance range for adjusted EBITDA to be up 5%-10% compared to the pre-previous year.
We expect to see pressure in the second quarter as customers work through their current inventories. We expect the second half of the year to be stronger with a recovery of end market demand, particularly consumer electronics. Ketjen's 2023 full year adjusted EBITDA is expected to be up 250%-400% over the prior year. This increase in outlook is due to higher volumes and better pricing. When we look at lithium market prices, we need to remember that most of our volumes are sold under long-term contracts with strategic customers. We've updated our expected 2023 sales mix to reflect the recent market pricing, and there haven't been any changes to our contract structures in Q1. We expect our Energy Storage sales to be about 10% on spot and 90% on index reference variable price contracts.
These contracts are typically 2 to 5 years in duration and are designed to ensure security of supply for our customers as well as to make our sales more predictable. These strategic customers include partnerships across the value chain, including major cathode, battery, and automotive OEM customers. We are more weighted towards the market than we have been in the past. However, we will still have less volatility than a true spot business because of the index reference structure of these contracts. They typically have a 3-month lag and some of them have caps and floors. As Kent said, our confidence in the long-term lithium market is reflected in our ongoing investments in resources and conversion capacity.
As we look at slide 10, you can see we continue to expect year-over-year volume growth in the range of 30%-40% in 2023 as we bring on new conversion assets, specifically Kemerton and Qinzhou, plus some additional tolling volume. We still anticipate a 20%-30% CAGR in Albemarle sales volumes between now and 2027, allowing us to maintain our leadership position and keep up with accelerated market demand. All told, we expect to nearly triple sales volumes to more than 300,000 tons by 2027. Long-term, we continue to expect normalized Energy Storage margins in the mid to high 40% range, in line with the outlook that we gave in January. We now expect Energy Storage margins to be about 40% in 2023, primarily based on revised lithium market pricing and the impact of spodumene inventory lags.
Most of the year-over-year decline in margins is related to that spodumene inventory lag. On average, it takes about 6 months for spodumene to go from our mines through conversion to our customers. Last year, we saw dramatic increases in pricing for lithium and spodumene, and due to that time lag on spodumene inventory, we realized higher lithium pricing faster than higher spodumene cost of goods sold. As a result, we had unusually strong margins in 2022. This year is the reverse. As prices decline, we're realizing lower lithium pricing faster than lower spodumene costs. The next item affecting margins is the accounting treatment of the MARBL joint venture. We expect to report 100% of net sales but only our share of EBITDA, resulting in a lower reported margin rate on that portion of the business.
Finally, our reported EBITDA margins are impacted by tax expense at our Talison Joint Venture. Talison net income is included in our EBITDA on an after-tax basis. If you had adjusted Talison results to exclude tax, margins would be about six points higher in 2023. Turning to slide 12, we will continue to invest with discipline, allocating our capital and free cash flows to support the highest return growth opportunities. Our primary use of capital remains organic growth projects to leverage our low-cost resources in Australia and the Americas. Kent will speak more about these projects in a moment. Beyond organic growth, we continue to evaluate a broad range of inorganic opportunities to expand capacity to meet our customers' future needs. Our primary targets are in three areas: lithium resources, extraction and processing technology, and battery recycling.
We intend to maintain our track record of a disciplined M&A approach that improves returns, preserves our financial flexibility with our investment-grade credit rating. In line with that strategy, as previously disclosed, Albemarle submitted an indicative proposal to acquire Liontown Resources, a development-stage spodumene resource in Australia. We believe this potential transaction would be consistent with our long-term growth strategy and disciplined approach to capital allocation. To date, the Liontown board has not meaningfully engaged in progressing the transaction. We will provide updates if and when we have more information. Our balance sheet flexibility is a competitive advantage that allows us the opportunity to grow both organically and through acquisition, as well as support our dividend. With that, I'll turn it back to Kent for a market update and closing remarks.
Thanks, Scott. On slide 13, the global outlook for full-year EV sales remains robust. After slowness early in the first quarter due to China's reopening from COVID, global EV sales were up 26% year-over-year through March. Based on seasonal trends, China EV sales are on track to achieve full-year growth of 30%, an increase of more than 2 million vehicles over 2022. Outside of China, North America had a strong start to the year with 53% year-over-year EV sales growth. Demand has been boosted by government support, the supply chain, and increased model availability. In Europe, EV sales through March are up 7% versus prior year, a slower start due to supply bottlenecks and the phasing out of German plug-in hybrid EV incentives.
Lithium spot prices in China, particularly for carbonate, have fallen primarily due to destocking of inventory in the battery supply chain. Outside of China, index prices for lithium hydroxide have remained relatively strong amid continued demand and less inventory pressure. Global lithium hydroxide prices are $15-$20 per kilogram above Chinese carbonate spot prices, the largest spread on record. We have also started to see initial signs of tightening in the supply chains. Unlike Albemarle, non-integrated lithium converters purchase spodumene on the open market. Year to date, spodumene pricing is down 30%, while lithium carbonate pricing is down more than 60%. As a result, some of the non-integrated producers are cutting production after their margins turned negative during the quarter.
Following several months' worth of destocking, customers have recently started to return to the spot market. As a result, Chinese carbonate pricing appears to have stabilized, with spot prices up about 7% over the past week. We continue to expand our global lithium resource and conversion capacity based on our confidence in the long-term outlook for lithium. On slide 14, you can see our expanding presence in the U.S., as well as our plans for a lithium conversion and recycling facility in the European Union. We recently announced the site for our U.S. Mega-Flex processing facility in Richburg, South Carolina, strategically placed in the growing Southeast EV and battery ecosystem. We are also strengthening our resource production. In the U.S., our expansion at Silver Peak is ahead of schedule. Our studies for the Kings Mountain mine are moving forward as planned.
Our project in Chile to improve the yield at our Salar de Atacama site is on schedule for mechanical completion this quarter. Recently, Chilean President Boric proposed a new national lithium policy. The government has repeatedly made it clear it would honor current concessions. Chile has always honored the rule of law, and we do not see the new policy as a threat to our current concession, which runs through 2043. In the future, the proposal, if enacted, may offer opportunities to expand our operations using new technology. We are proud of our more than 40 years of successful operations in Chile and value the good working relationships we have with the government and other leaders in the region. Elsewhere in the world, we are expanding both resources and conversion capacity. In Australia, the various trains of our Kemerton conversion facility are moving forward.
For Kemerton 1, we are pleased to have reached the specified battery-grade product milestone and look forward to product qualification with our customers. Kemerton 2 is progressing through commissioning with first product expected the third quarter of 2023. We have prioritized train 1 activity, and this has had some impact on the schedule for train 2. Kemerton 3 and 4 now have final investment decisions, and we are planning the construction schedules. Note that we will have 100% ownership of trains 3 and 4. In China, Meishan construction is progressing on budget and on schedule with mechanical completion expected in 2024. Our resource expansion in this area of the world is progressing both at Wodgina and Greenbushes. At Greenbushes, the tailings retreatment project, completed last year, is improving recoveries to increase spodumene production capacity.
We have talked a lot over the past year about our durable competitive advantages, including our scale as one of the world's largest lithium producers, our geographic diversity, our world-class brine and spodumene resources, and our vertical integration from resource to battery-grade lithium. The current lithium market conditions have tested these advantages and proven how durable they are and the difference they make for Albemarle. We are a company that looks to the horizon. Our sustainability commitment is an integral part of our long-term strategy and our customer value proposition, we continuously measure our progress against sustainability goals.
Our 2022 sustainability report will be issued on June 5th. We will hold a webcast on June 20th to discuss the key highlights from the report, including our initial reporting and alignment with the Task Force on Climate-related Financial Disclosures, progress on environmental and DE&I targets, and introducing new goals around Scope 3 and air quality. In summary, we had an exceptionally strong first quarter. While lithium prices have pulled back, our team continues to focus on the things that are within our control. We're delivering volumetric growth and executing our projects. We are confident in our strategic delivery and the future of the EV market. Bringing all these factors together, we anticipate 2023 sales to be up 45% over last year.
We remain a global leader with world-class long-term assets and a diversified product portfolio that highlights broader opportunities in the mobility, energy, connectivity and health markets. Innovation remains core to our business as we deliver advanced solutions tailored to our customers' needs. Our strategy is clear and disciplined. It enables us to accelerate profitability and to advance sustainability. With that, I'd like to turn the call over to the operator to begin the Q&A portion.
Certainly. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, press star 1. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. Also, please bear in mind this Q&A session is limited to 1 question and 1 follow-up per person. Our first question comes from the line of Colin Rusch with Oppenheimer. Colin, your line is now open.
Colin, maybe you're on mute.
Warren, let's go to the next question. Hey, guys. Sorry for the delay there. We can come back to Colin. Oh, there he is. That's it. Oh, sorry about that, guys. You know, can you talk a little bit about what you're seeing in terms of order size, you know, in the spot market and, you know, how that inventory is clearing at this point? Are you seeing any real meaningful change here in the last, you know, call it three or four weeks?
Good morning, Colin. This is Eric. You're talking about, I didn't catch the first part. You said order size and stock clearing. Is that what you asked?
Yeah, yeah.
So, uh-
Yeah.
Okay.
An activity in the stock market. Go ahead.
Well, look, I mean, I think what really transpired, and what as Kent referred to in his prepared remarks, we saw a significant destocking happen in China, which affected the spot market. You know, our contract customers around the world continue to buy at their contracted volumes. As Kent pointed out, we've seen a close to 30% growth in EV sales in the first quarter across the industry and over 50% in the U.S., a little weaker in Europe. Overall, the market's, you know, performing largely as we thought it would. Having a strong year with what we think will be a tight supply as well. Specifically in the first quarter, with that destocking, we saw the spot market be practically nonexistent at times during the quarter.
There was very little activity going on as these stocks were drawn down. Stocks were drawn down to levels at the cathode level and battery level. In China, lithium stocks to, in some cases below a week. you know, clearly not, in the long run, a level that's sustainable for sustained operation. To your question, what we've seen in the past couple of weeks, we've seen spot buyers return. We've seen. We believe that's partially what's affecting the price that has popped, has leveled, and then started to rise within China. We see no change in what, our projected sales for the year in EVs of about 30% growth anticipated in China, closer to 40% for the overall market.
I think these spot orders, it'd be premature for me to say how large they are, but they are beginning, as these cathode producers now start to restock and prepare for a more stable operation for the balance of the year.
That's super helpful. Then in terms of the competitive landscape around just from the refining side, you know, as we've seen some new entrants into this space, are you seeing any real meaningful evolution in terms of, you know, the technology piece of this and how folks get to the quality spec across, you know, the landscape? You know, asking that question in context of looking at some of the evolving chemistries that we're seeing that are preparing to go into production.
Yeah. I don't think we have visibility of that. I mean, we've not seen. I mean, the specs have not changed to whether people are getting qualified, taking longer to get qualified with some of the newer facilities. Maybe that's some of the delays that we see, but we don't have visibility whether it's about qualification issues or just about production issues. I don't think we have visibility of that.
No, in terms of the competitive landscape. I would tell you in terms of the expectations of customer of us, that it is a moving ball. The expectations go up on quality, particularly in the higher energy density chemistries.
Mm-hmm
which tend to be the nickel chemistries. We've recently completed even upgrades in some of our workhorse plants like Xinyu to drive even higher quality standards to remain a leader in that regard. It is something that is a barrier for any new entrant to be able to achieve and to get to, for sure.
Thanks so much, guys.
Thank you for your question. Our next question comes from the line of David Begleiter with Deutsche Bank. David, your line is now open.
Hi, this is David. Calling you with Dave. Just going back to the spodumene cost, can you talk about where the lower cost spodumene is coming from in Q1, and probably, how much was the benefit to margins in Q1? Also, is that higher cost of spodumene from the restart Wodgina or is it from Greenbushes?
Yeah. The lower cost spodumene is really from the both Kemerton as well as Wodgina.
Greenbushes.
Sorry, Greenbushes. Just as a reminder, the reason that's lower cost is because of the timing lag, and the rapid increase and then now decrease in spodumene prices. It's really not the operating cost of the mines itself that's causing this issue. In Q1, the benefit was probably in the kind of 15 to 20 percentage point type of range that we were seeing in Q1. Again, we'll see that reverse as we go through the rest of the year, and it'll be a margin rate pressure on the business.
Okay. What was the final cost for Kemerton 1 and 2, and, I guess what will Kemerton 3 and 4 cost?
We haven't, we haven't disclosed the total amount, so it's probably in the $1.5 billion-$1.7 billion range for Kemerton 1 and 2. Kemerton 3 and 4 will be in a similar type of range, partly because we've got it an employment village that we're putting in place to help with the labor issues ultimately.
Okay. Thank you.
Thank you for your question. Our next question comes from the line of David Deckelbaum with Cowen. David, your line is now open.
Morning, Kent, Eric, and Scott. Thanks for taking my questions today. I wanted to just ask about long-term planning, particularly for you, Scott, how you think about the move to be spending, I guess, about $4.2 billion in 2027 versus $1.8 billion this year. You point out obviously that your guidance always just illustrates pricing if you held conditions sort of flat today. You talked about this year spending within cash flow. I guess if these conditions obviously persist, that you would be outspending cash flow if you followed that CapEx plan. How do we think about that planning cycle, while you maintain sort of a long-term structurally bullish view on the market? You're expanding your conversion quite a bit to get to those CapEx numbers.
I guess, how do we think about that CapEx trajectory every year, and should we expect it to be governed by sort of the beginning of the year outlook for organic cash flows?
I think as we'd said when we laid out our investment plans, look, we look at the market and we'll adjust as we go through this. What we put forward in January, those are our plans. If the market, and our view of the market changes dramatically or significantly, we'll adjust to that. Short-term cycles, if our view is right, we'll maintain and invest through those. If it, if our view of pricing changed longer term, then we would adjust our investment profile.
Yeah. I would just add, Kent, that, you know, given our volumetric growth at these kind of pricing levels, we'll continue to be generating significant cash flow to be able to fund that kind of CapEx growth. You know, the Albemarle story is not really about the price, it's about the volumetric growth.
You know, the cash generation that's coming from this is significant.
I appreciate that. Kent, in your prepared remarks, you talked about the minimal impact for now of the Chilean governmental moves, particularly given your contracts expiring in 2043. You also, I guess, highlighted looking at things like extraction technologies, processing technologies. I guess, did the moves change any of your long-term strategy in the country? Might it accelerate some of the investments or, I guess, exploration around Direct Lithium Extraction and applications in Chile?
I guess we were surprised by the announcement that came out of Chile. We knew they were moving in that direction. A couple things we learned in that. Our plans around DLA and our discussions with the government about using that in the Salar are consistent now and before. We're working to progress that as quickly as we can, and we'll do it in a number of places. There's an opportunity to utilize that in the Salar as well. I guess our view is, I mean, our concession goes through 2043, where government has gone out of their way to assure us that that's valid. Expansions and getting additional concessions will probably require us to use new technology and probably partner with the government as well around that.
We see that as an opportunity, beyond our current concession.
Appreciate the answers, guys.
Thank you for your question. Our next question comes from the line of Joshua Spector with UBS. Josh, your line is now open.
Hi. Thanks for taking my question. I was wondering if you could talk about your thoughts around the EBITDA margin cadence in Energy Storage through the year. I assume 2Q is probably gonna see the biggest compression, but can you get back to that mid to upper 40% range in 4Q, or can you even get there with where spodumene prices are today once that does roll through? Thanks.
Josh, with where spodumene prices are and the projection that we've made using the mid-April prices, we'll be below that kinda mid 40% range in the second quarter all the way through the fourth quarter. It's really, again, the pressure's coming from that price being lower as well as that spodumene price drop or cost drop that is putting the pressure on the margins. If you were to stabilize that, I think you'd end up being more at the long-term expectations of that mid-40s to low 50% range. Really just a reminder and repeat it again, this margin pressure is really just driven by the velocity and the change in the spodumene price flowing through our P&L.
Okay. Just to make sure I'm clear, is this in your pricing assumption... I mean, are you assuming that your contracts step down with the lag in the next couple of quarters, along with that? Or are you assuming your current contract mix extends?
What we do is we're taking our current contract mix as of today, or let's just say mid-April. We're applying the market indices that are referenced in those contracts, flowing that through, and that generates what we think, what the revenue will be. As you look at that on a sequential basis, we'll see price reductions each quarter. As you look at it on a year-over-year basis, our first half of the year, we actually see price increases. In the second half of the year, we're seeing price decreases on a year-over-year basis. Again, that's just really just reflecting how those contracts are structured and the lags that are built into them. A couple of the contracts have caps and floors that those will have to take into account.
Okay. Thanks for that.
Thank you for your question. Our next question comes from the line of Michael Sison with Wells Fargo. Mike, your line is now open.
Hey, good morning, guys. Nice start to the year. In terms of inventory destocking, I understand, you know, there's been some in the industry, but your volumes were up in the first quarter. Are you not seeing destocking from customers, and is that a risk as you get into the second, third, and fourth quarter?
Good morning, Mike. This is Eric. The way I would qualify that is again, that the destocking has happened specifically in one country. It's China. Happens to be the largest country in the market where almost all the spot volume activity is, but that's 10% of our mix as we've described on an annualized basis. All of our contracts are everywhere else around the world, including even some long-term contracts that are sourced into China, are all operating according to the projected plan prior to the beginning of the year, prior to any destocking that happened in China. Meaning the EV growth story is intact everywhere. All that's happening in China is the destocking what's specifically there. Everywhere else, volume continues to flow.
We're not seeing destocking as a widespread phenomenon, just something in China and specific to the spot market.
Got it. When you think about the volume growth as you head into the second half of the year, it doesn't sound like there's a lot of risk to that on your end, right? Customers want that product, and it's within your contract. What is the risk for volume in your second half, if any?
Everything that's happened and that we've talked about on destocking has to do with a temporal effect in China. It has nothing to do with fundamentally the demand that we've seen. It is true, the year started out a little weak in China on demand, recovered rapidly by the end of March. We saw a weak start in Europe, that's a hangover effect we believe, from what has been expiring incentives largely in Germany. The U.S. has started off with a bang for the year. All of that is consistent with our look, our view at the beginning of the year, our view now, that we're looking at a 40% year-on-year growth in demand.
Our customers need the supply, and frankly, we see the market as still being tight for the balance of the year. This is a market that's healthy in that regard. Independent of what's going on with price now, the supply demand fundamentals are very favorable.
Yeah, Mike, I would just add to the.
Got it.
... as you look at our projection, I mean, it's really an operational risk, you know, because we're ramping new plants, right? It's really just our ability to ramp those plants and, you know, we think we have it dialed in, things can go wrong. I think that's really the risk and also potential opportunity, because if things go better, then we'll have more volume.
Great. Thank you.
Thank you for your question. Our next question comes from the line of Arun Viswanathan with RBC Capital Markets. Arun, your line is now open.
Great. Thanks for taking my question. Appreciating that it's a very volatile market that's constantly evolving, could you just kind of, you know, review some of the drivers that you think are influential on price, lithium spot prices and, you know, maybe just give some perspective on the market. The declines that we saw were very swift and would indicate, you know, destocking and very high inventory levels, especially in China. I know that there's been some other factors like discounting on ICE vehicles over there, but maybe you can just provide your own perspective on what you're seeing. Thanks.
It's difficult to say what's really happening in the spot market. Kind of the fundamentals we rely on are the supply and demand balance. We spend a lot of time working on that, making sure that we understand that. We think we understand that, and it kind of works where it's a tight market for a pretty long period of time. You know, the previous question, we're probably more concerned in this year about volume and being able to produce the volume as opposed to the demand that's there for the product.
In the spot market, I mean, in China and the movement that we've seen, a lot of that is about destocking and that volume running down and shifting to different areas in the supply chain between the battery makers, the cathode makers, and then the raw lithium salt providers, like ourselves, and converters that sit in the market as well. It's moved around within that space. Then there's been a lot of destocking in that that's really driven the pricing. It's in the spot market. As we've said before, it's about 10% of our portfolio. Has a big impact on the broader portfolio because we index, our prices index to those with a lag.
It does have a bigger impact on our portfolio than just the 10% that we represent. Eric, you have additional color?
No. I mean, I think the market is changing as well at the, at the automotive level. I mean, there's now more models, more vehicle producers, aggressive competition for share. That's a dynamic that's going on within our customer base. That's, that's the industry rising up to meet the demand that's there for these vehicles. It doesn't change the need for us to execute well in order to meet our customers' expectations. As Ken said, the, the market for spot material is isolated largely to China. What you're seeing now is some dynamics playing out in China, which when you think about an inventory drawdown, it's temporal in nature with strong demand.
We are gonna pretty soon go to a point where much of the supply chain needs to start restocking in addition to just meeting its growth that's before it.
Great. Thanks for that. Just as a quick follow-up then, you also noted that there potentially are some observations of a supply response in that, you know, some of the newer capacity that's potentially at higher cost levels may not come on or is being delayed. Could you just elaborate on that? What are you seeing there? Is that meant to also imply that maybe the mid-30s is the marginal cost of some of that new capacity? How should we think about that? Thanks.
I'm not sure. We weren't talking about new capacity coming on that's been delayed. We were talking about converters in China that were shutting down because their math didn't work any longer between lithium prices and spodumene prices. I'm not sure. I'm not aware of anyone who's delayed a new project as a result of the current market pricing, although that could be the case. I'm not aware of that.
I don't know that we have any intelligence that says a new project is delayed. There's still a fair amount of interest in bringing supply in order to meet the demand, which we believe will be necessary given the shortness in supply. We know because we both compete, of course, in the China market against some of these converters who buy spodumene on the open market.
Also toll with some of these individuals. From the behavior that we have in that market, we've seen that market, we know very clearly that more tolling capacity is available because they cannot make money on existing spodumene conversion when they buy the spodumene themselves. That's part of the evidence package we have that some capacity has been leaving the market at current prices.
Okay, thanks.
Thank you for your question. Our next question comes from the line of Vincent Andrews with Morgan Stanley. Vincent, your line is now open.
Thank you and good morning. Scott, I'm wondering if you can just help us on the inventory on your balance sheet. Just looking at the end of the year, it was a little south of $2.1 billion, and then at the end of the quarter it's almost $3.2 billion. What were the mechanics of that increase? I'm sure some of it's price, but how much of it is volume? I think you made an accounting change at 3Q in terms of how you deal with the unrealized profits from your JVs, and I think those now reduce inventory. If you could just help us bridge the increase from 12/31 to 3/31, that'd be great.
Yeah, Vincent, I think so the a significant amount of that increase is due to price. As the price has moved up, obviously there's an impact on our on the value. Also, we've got increase in volume, you know, as we're ramping both the expansion at Greenbushes as well as Wodgina. You're gonna see increases coming from that. To your point, we did have an accounting change where we've changed how we're recognizing the profit in inventory, that now is reflected in our inventory line as opposed to our investment line, that reduces the effect. Those are kind of the moving pieces.
Okay. The other follow-up I had was just on your spodumene costs. It's very easy to understand what and how you're assuming lithium prices, based on what you've said, but the spodumene costs that you're running through your guidance. Are those the mid-April costs, or do you have a sort of more of a projection on those that's baked into the guidance?
Nope. Same. It's the same methodology. It's based on that mid-April, that mid-April cost. We don't, we're not taking a position on what that's gonna do.
Okay. Thank you very much.
Thanks.
Thank you for your question. Our next question comes from the line of Christopher Parkinson with Mizuho. Christopher, your line is now open.
Hi, this is Harris Fein on for Chris. Thanks for taking my question. There's been an effort over the past few years to increase the variable portion of your lithium tons. All of your expansion plans are still going forward, it seems, and tracking, you know, in line with expectations, and you're still generating a lot of cash. I guess in light of what's going on in the market, just can you speak to how comfortable you are with having this level of volatility in your results? Thanks.
Yeah. I there was quite an effort from us to move toward index-based pricing as pricing was moving. Whereas historically we'd had more fixed price or at least agreed prices for a period of time. It does create a little volatility in our results as the price moves, but I... It's a volatile market and just the space, and it's probably gonna move around like that for a period of time. Could we at some point wanna change that structure? Yeah, you never say never. It could be the case at some point. Given where the market is now, I think the being indexed to the market, we like that. We think it's right for us and our customers.
No one is really out of the market either one. That's kinda how we're gonna operate now. It creates volatility in our results, and we just have to live with that in the near term.
I also think that it's, you know, it's reflecting. You can see in our performance that our low cost resources and our low cost operations benefits us. We can handle this volatility better than many of our competitors, just given our cost position, as well as our scale.
My second question is, you know, I would think that spodumene is the more commoditized product versus the downstream lithium salts. I guess why do you think that spodumene prices are holding in better, or, you know, more stable on a relative basis versus the downstream chemicals?
Look, that's speculation, but there's just a longer lag in the way that works its way through our P&L and through the, and through the industry. We kind of rely on what happens in the market that where spodumene prices get set. It's not that material for us because we're integrated all the way from spodumene into the lithium salt. The real impact, it's timing and the tax impact from the joint venture that hits us. That's kinda why you see that volatility. But I think it lags just because of the timing of how long it takes to adjust those prices and how long it takes to move that material through the supply chain.
Can I also add that, I mean, fundamentally, this is an inventory drawdown in a period of time that won't last, we believe, long, and we're seeing, we think as that fact transpired and is behind us, and we see strong demand. I think the spodumene market's reacting to the strong demand, and the need for the supply. There is a time lag, but there's also just the
The supply-demand fundamentals are, again, very strong for growth going forward. I think, yeah, we can speculate, but there's some of that's at play as well, I think.
I think we're ready for our next question.
Are there no more questions?
Oh, everyone, sorry. It seems that the operator dropped, and we're getting our operator back. Everyone, if you just hold a moment. The next question is gonna be from Joel Jackson at BMO. Joel, I don't know. It looks to me like your line is open, but we may have to wait for the operator.
Hey, Meredith, can you hear me?
Yeah, we can hear you. Go ahead, Joel. Thanks.
All right. We will go on. We think we need the operator, right? Okay, a couple questions. Maybe this is simple. I wanna make sure that I understand. When you talk about mid-April market pricing is what you're using for the rest of the year, are you talking about, you know, spot industry prices in the market? Are you talking about so we're mid-April. Are you talking about the realized price that was going through your book in mid-April with your lags? What is that price level in mid-April that you are referring to?
Yeah. Joel, we're using the indices that are referenced in our contracts. It's not just taking, like, the China spot or just one index. We're actually taking the actual indices that are referenced in our contracts as of mid-April, holding that flat and then calculating through the contract structures and the lags and caps and floors and all that kind of stuff to generate what that forecast is. If you look at that as of mid-April to today, it's basically the same. It hasn't really moved much in that time difference.
Right. That is the unlagged mid-April market industry price.
That's correct. Yep, that's correct.
We-
Which of course will be.
Okay.
inside China versus outside China as well. That's the point, yeah. it's-
Understood.
you know, they're.
It's a blend.
Index.
It's a blend.
Yep.
That's understood. Okay. My other question would be conversion margins have been negative for some months, like, your actual business where you are buying spodumene, say from Greenbushes, excuse me, from Talison, at, you know, the market price, that business of converting it is a negative margin business. Now, I understand when you put the whole thing together, you're actually making money. How do you think about that? That business that is negative, how does that change how you do things? Going forward, how do you think the mix of earnings, the mix of profitability should steady state out between conversion margins and spodumene production margins?
We don't look at it that way. We're in the lithium business, and we're fundamental from the resource through to the salts that we sell to the customers. We think of that as one business. If the margin moves from one part of the business to the other, they're both ours. It's not that relevant to us.
Thank you.
Thank you, Mr. Jackson. The next question is coming from John Roberts with Credit Suisse. You may proceed.
Thank you. On your contracts that have caps and floors, do you expect to hit the floor on any contracts in 2023?
We've not disclosed that, right? We're not, we've not talked about specific contracts. I don't think we want to.
Okay. Second question. I know it's small, but can you remind us of the main limitations of sodium-ion batteries and why the range won't improve over time for them?
Hey, John, it's Eric. It's sodium-ion batteries are just less energy-dense and heavier in weight for this comparable energy density. While it may fulfill a, maybe a city low-range vehicle, and that could help ease some of this, you know, the ability of the industry to meet electric vehicle demand, given the shortness of lithium we see in our forecast, it cannot replace it in whole, in any significant way. However, it could be a viable technology in grid storage. you know, it just, you know, it has inherent limitations given the energy density and weight-to-energy benefits.
Okay, thank you.
Thank you, Mr. Roberts. The next question is from Chris Kapsch with Loop Capital. You may proceed.
Yeah, good morning. A couple follow-ups. One is on the pricing discussion. Just trying to get a little bit more granular because it sounds like you have good visibility on volumes and then the variability is gonna come from the pricing assumptions. You alluded to the, sort of the bifurcation in hydroxide and carbonate prices. Can you get more explicit in sharing with us, like, where the assumption baked into your guidance is on each of those chemistries is just that $15-$20 delta that you're currently baking in your revised guidance?
Yes. I mean, what we're looking at the market as it is today, or middle of April, right. We're using those spot markets to guide us for the balance of the year by the different chemistries. Carbonate would inform the carbonate business, and hydroxide would inform the hydroxide business. We're holding them flat as they were at middle of April from an indices standpoint. Again, the index that are relevant for our different contracts.
Got it. just to be clear, you have...
That gap that we talked about remains.
Yeah. Okay. Just to be clear, you have different indexes for both carbonate and hydroxide inside China and outside China?
That's right.
Okay.
Yeah, we've got indices for the different products. You also have different countries, you know, different regions, and some customers actually blend some of the indices. It's a.
It's a mix.
Like, it's a, it's a mix, right.
Makes sense. Got it. A follow-up just on the market intelligence about the non-integrated converters shuttering in China. Just curious. We had heard that that's definitely the case with lepidolite. Just wondering if your commentary where you're talking about sort of more conventional SC6 feedstock users or lepidolite or just across the board in terms of non-integrated converters being uneconomic at where recent spot carbonate prices have been?
Generally speaking, Chris, what we view lepidolite producers as tending to be more integrated producers from, you know, mineral resource of a lepidolite all the way through conversion. Our comments of what we're seeing and who we'd be tolling with are obviously those who consume spodumene, and who have to buy spodumene on the market to run their business. That's where our comments were focused on.
Got it. Thank you.
Thank you, Mr. Kapsch. Our last question is from Ben Kallo with Baird. You may proceed.
Hey, thank you very much for fitting me in. If you could give us some help on marginal costs of the industry and, you know, to you guys' point about being integrated, not how you look at, you know, margin in mining versus conversion, but how do we think about the marginal costs of the overall industry? In any way you can frame that for us, because I think that's the biggest question when everyone's looking at price is like, how low can it go? If you're the, you know, the cost leader, then you set that price, theoretically. I have a follow-up.
Eric can probably add detail to this. I would say, I mean, we look at it and we think you should look at it. I mean, there are integrated producers. There are producers that are not integrated, and they probably set the marginal cost, right, the ones that aren't integrated. You, spodumene price you can see for the most part, it's pretty transparent around that. Conversion on top of that to make a margin, those are the marginal producers when, I guess it moves around depending on where spodumene sits. You can see that and probably can determine that.
Yeah. I'd just add, Ben, that as when the spodumene, when the battery-grade carbonate price, spot price in China on the various indices crossed from the $30s into the $20s, you started to see that pain. We started to hear more producers who are having trouble operating. You started to see even more activity within China to try to find ways to thwart that from falling further. You could tell, we could tell from the market sentiment that that was a point of pain for many of these producers. It substantiates what we've said for some time, that prices need to be at least in the $20s for this industry to operate, if not higher.
Yeah. Then you see as new resources come on, right, and new technology comes to play, those could very well move out that cost curve, as well as lower quality resources come to market with different technologies. That cost curve, kinda it grows.
Thank you. Then just on, I think we see this already to some extent, but a bifurcation, if that's the right word, of pricing that comes out of China versus elsewhere. Then if you wanted to go elsewhere to specifically in the U.S., I know there's not a lot of volume that comes out of the U.S., but in your discussions, how much of a difference is that, is that pricing across different regions? Where, you know, whether it's spodumene or carbonate or what have you know, the difference in pricing based on region?
Yeah. China's a big part of the market. Historically it's kinda set that, all of those price, that pricing, historically. I think as the other regions grow and we start shipping volume into other regions, that's gonna change, and it will start bifurcating and being different around the world. I would say now it's kind of one market. It's kind of looks like it's wanting to separate a little bit, but it's, I would call it one still.
It's particularly true, Ben, for carbonate. 70-80% of the world's carbonate is consumed in China. If China's de-stocking, that's gonna have a disproportionate impact on carbonate in China.
Yep.
The IRA and, you know, the intent of the IRA, to, you know, move supply chain out of China, has it started impacting market pricing yet?
Yeah, there's no real consumption around that at the moment.
Right.
The speculation around it has started. There's not a lot of volume shift that's changed since that law came into effect.
Thank you, Mr. Kallo. That is all the time we have for questions. I will now pass it back to Kent Masters for closing remarks.
Okay. Thank you, and thank you all for joining us today. It's clear we're a growth company that continues to provide added value to our markets. As a global leader in minerals that are critical to a mobile, connected, healthy, and sustainable future, we remain the partner of choice with customers and key stakeholders. Thank you.
This concludes today's conference call. Thank you for your participation. You may now disconnect.