FMC Corporation Deutsche Bank Lithium Supply Chain & Energy Storage Conference

Transcription

1 FMC Corporation Deutsche Bank Lithium Supply Chain & Energy Storage Conference November 16 th, 2017 As Prepared for Delivery Greeting & Safe Harbor Paul Graves Good morning and thank you for having FMC here today and allowing us to give a short presentation on FMC Lithium. Before we begin, let me remind you that today s discussion will include forward-looking statements that are subject to various risks and uncertainties concerning specific factors, including but not limited to those factors identified in our release and in our filings with the SEC. Information presented represents our best judgment based on today s information. Actual results may vary based upon these risks and uncertainties. Today s slide presentation is available on our website. 1

2 As you may all know, FMC has been in the Lithium business continuously since the 1940s, first in North Carolina at Bessemer City, but more importantly since 1991 when FMC discovered the brine resource in Argentina and commenced lithium extraction. We have decades of experience in the industry, in terms of serving the end markets and, perhaps just as importantly, of producing lithium carbonate from brine, and manufacturing both lithium hydroxide and butyllithium. Today, I will spend some time putting FMC Lithium into context, discuss FMC s views of how the industry will unfold in the coming decade, and discuss how we see FMC Lithium s participation in the industry in that period. With me is Tom Schneberger, Vice President of our Lithium business, and he will join me to help answer any questions you may have at the end of this short presentation. 2

3 As everyone in this room knows very well, the Lithium industry is going through a period of unprecedented growth, driven by the shift to electric vehicles. As the industry transitions towards this higher growth environment, when you look at FMC s strategy for the next decade it s important to understand where FMC stands today. We have spent the last four or five years focused on improving the profitability of the business, which was significantly lower in For us, that meant exploiting our clear competitive advantage in downstream lithium products by converting an increasing share of our carbonate and chloride production into butyllithium and, most importantly, lithium hydroxide. In other words, a focus on maximizing the value realized for each LCE produced. The benefits of that strategy can clearly be seen in our financial profile today; around 90% of our revenue is generated downstream, and our average price per LCE is 3

4 $4 to $5 higher per kilogram than the industry average. While the increase in prices over the last two years has contributed to a higher value per LCE, FMC has also benefitted from a strategic shift to a higher-value mix of products over the same time. You will note that the total number of LCEs, i.e. total volume, in our business has not grown as rapidly over this time, with price and mix far more important than volume growth to our earnings growth. However, we expect to drive future earnings growth from a significant investment in capacity increase of both carbonate and hydroxide. In order to understand FMC s strategy for the Lithium business, it is important to look at the two most important variables in our industry supply and demand and break them down beyond a simple carbonate capacity conversation. Let me start with the supply side, since that is the area that seems to be the subject of most debate amongst industry observers. 4

5 You can see on the chart on the left side slide 4 what our estimate of the Carbonate cost curve looks like as we head into Brine producers supply around half the market, and are at the low end of the cost curve. FMC today is clearly in a relatively advantaged cost position in terms of its Argentina brine operations. Spodumene production makes up the remainder of the cost curve. As you would expect, the price of carbonate in the market, noted by the dotted red horizontal line, largely equates to the cash production cost of the marginal producer of volume, shown by the vertical red dotted line. This is a pattern that we have seen consistently in the lithium carbonate market throughout our time in the business, and we see no evidence that it will change in the foreseeable future. To that end, on the right side we have rolled out what we expect the cost curve to look like in 2025, taking into account all the expansions that have been made public and taking FMC s view of total carbonate demand by I would point out a few key items on here. First, as 5

6 with today, the marginal producer of carbonate is highly likely to remain a high-cost spodumene source. There is simply not enough brine capacity capable of being added in this period to meet the increased demand expectations. Second, the brine producers located in Chile and Argentina will remain at the low end of the cost curve. And finally, and perhaps most importantly, you can reasonably expect that the price of lithium carbonate is unlikely to be meaningfully lower than it is today. Put another way, it is likely that a price north of $10,000 a ton will be REQUIRED if all of the planned carbonate capacity additions are brought on line. The cost curve for downstream lithium products, which include butyllithium, various lithium metals and, of course, lithium hydroxide, is a somewhat different situation than carbonate. First of all, most of our customers need very specific product performance characteristics from lithium hydroxide, which is not typically the case for lithium carbonate or lithium chloride applications. We work with our customers to define their product needs, provide 6

7 ongoing technical support and to ensure they are able to produce consistent quality products without increased processing costs. Most of our specialty products go through a stringent pre-qualification process, and customers are either unable or unwilling to adjust to a different source of supply which would result in their processes performing differently. This requires a deeper technical relationship with customers than in the upstream, or primary, markets. FMC s legacy position in the lithium market, our historical involvement in innovations such as the lithium-ion battery technology itself, and our very long and deep customer relationships, are what create our advantage over new entrants. And it is this close partnership with your customer that allows you to expand your output alongside your customers, rather than in anticipation of broader market needs, reducing the risk of the boom and bust cycles you often see in commodity metals or chemicals. Slide 5: Growth in Demand for Lithium 7

8 Obviously, all of these conclusions are predicated on demand growth assumptions. On slide 5 we have set out FMC s high level estimates of demand for each of the major lithium categories. While there are a number of forecasts from consultants and other market observers, it s probably fair to say that most follow a similar pattern to this. What is apparent here is that two factors will significantly shape our industry in the coming decade. First, the absolute level of demand growth for lithium will accelerate compared to the last 15 years or so, and may in fact continue to accelerate for years to come. Second, that growth will not be shared equally across all lithium products, with lithium hydroxide by far the fastest growing form of lithium. Slide 6 attempts to show why we believe this rapid growth in hydroxide is likely to happen. First, we believe, as do almost all observers, that the growth in penetration of EVs will be rapid, driven by higher and higher penetration rates of full electric vehicles. Market expectations of 7-10% penetration of new car sales by the pure EV segment by 8

9 2025 seem to be as close to a consensus as we can see in our market. This is driven by a number of factors, not least of which is regulatory developments around the world. But a further factor that we believe is important to understand is how the Auto OEMs are looking at battery technology during the next decade. By looking at the technology roadmaps of major auto OEMs we have sketched out how we see cathode technology developing. First, I would point out that there does not appear to be any expectation of a substitute for lithium-based batteries at any point soon. Given the multi-year nature of OEM planning cycles, we can be reasonably confident in this statement through at least Second, the most obvious trend we see, highlighted by a shift of color from blue to red on this chart, is the broad and rapid shift towards high-nickel content cathodes. This development, which I am sure will be a topic of conversation from others today, will favor a move towards 9

10 lithium hydroxide as the preferred form of lithium, given its processing characteristics in the high-nickel cathode manufacturing process. We are already seeing our customers start up new high-nickel content cathode manufacturing lines, and as a result, they are increasingly focused on certainty of supply of the required quality of hydroxide as they engage with us to discuss future supply arrangements. Which brings me onto our view of how the next 10 years will play out for the lithium supply industry. I have set out 6 key elements that underpin FMC s strategy on slide 7. Battery technologies will continue to be lithium based and, as I just discussed, cathode technologies will move towards those that favor hydroxide. Manufacturing processes will require this hydroxide to meet very strict quality and performance targets. As a result, customers will increasingly focus on seeking partners, rather than suppliers, as they set increasingly ambitious growth targets to meet the demands of their ultimate customer, the Auto OEMs. A significant proportion of cathode 10

11 production will be located in China, notwithstanding the growth of gigafactories in the U.S., Korea and Japan. On the supply side, growth in supply of lithium will mainly take the form of new carbonate resources, with South American brine and Australian spodumene dominating the new supply additions. New entrants will continue to face technical and financing challenges as they seek to exploit new resources, often in remote areas with limited infrastructure, and requiring various technical challenges to be overcome. This will give an advantage in the near to medium term to incumbent producers looking to expand. These technical and financial challenges for new entrants will, in our view, reduce the likelihood that they focus on hydroxide capability in the first instance. While we fully expect many of the new entrants to ultimately be successful, we do not believe that the path will be as smooth or predictable as some others might suggest. And so, what does this mean for FMC? Our approach can be summarized as follows; retain our leadership in 11

12 specialty lithium products and maintain our market share in the rapidly growing hydroxide market. Both of these objectives will require us to forge ever-closer relationships with our customers and continue to invest in technology to support our customers needs. And, critically, our approach will ensure that we remain fully back-integrated by increasing production to match the growth in demand from our customers. To achieve this, we will invest more in carbonate both in Argentina, where we have announced our intention to more than double capacity in the coming years, as well as seeking out additional resource locations. Let s be very clear on this point we have announced our intention to take our total lithium carbonate from 18,000 tons a year in 2017 to 40,000 tons by 2022, through a series of debottlenecks and capacity expansions. In addition to this, we are considering a second phase of expansion to take our total capacity in Argentina to potentially as high as 60,000 tons a year, by We expect to be able to bring more 12

13 clarity to our plans for this second phase by the time of our February earnings call. We will continue our progress in adding hydroxide capacity at the same rate as market growth. The modular approach to adding capacity, an approach that is unique to FMC, allows us to move quickly and in small or large increments across multiple geographic locations, while continuing to produce consistent quality and specifications from all our units, wherever located. Our BuLi business will maintain its global footprint, able to serve our customers in the local markets they operate in. This will remain an important, high-value part of our lithium portfolio and we will continue to ensure we have the capacity required in each market to support growth opportunities there. We will invest in technology capabilities that allow us to add value to our customers manufacturing processes. And we will continue to invest in areas such as metals and 13

14 alloys such that we retain the ability to supply whatever form of lithium the market demands. With that I will stop and open the floor for questions. 14