To The Moon

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Despite the fact that the lithium market is currently oversupplied and has led to a sharp drop in lithium prices, $Sociedad Quimica Y Minera De Chile SA(SQM)$, the world's second largest lithium producer, released its financial report last week and announced that it would continue to increase production, investing $1.4 billion to expand the production capacity of its lithium projects in Chile.

SQM's U.S.-listed shares rose 9% on Thursday after the plan was announced, their biggest one-day gain in nearly two years.

Let's take a look at the financial report. SQM's fourth quarter and 2023 financial report showed that the company's profit last year decreased by 48.5% to $2 billion, or $7.05 per ADS, because of the global lithium price slump, while fourth-quarter earnings also plunged 82.3% compared with the same period in 2022. However, the company's lithium sales in the fourth quarter set a record.

What surprised the market even more was that the company's capital expenditure for 2024-2025 was set at around $2.4 billion, of which the capital expenditure scale of Chile's lithium capacity expansion project is as high as $1.4 billion.

So why did SQM do this? From the perspective of industry trends, the miner bets that lithium demand will continue to grow and prices will rebound before 2030. The company's strategy is to prepare in advance for production capacity to ensure that it has enough products to sell to the market after this round of inventory digestion cycle ends.

Ricardo Ramos, CEO of the company, said that supported by the growth in global electric vehicle sales and the rise in demand for battery materials, the company expects the global lithium market demand to grow strongly again in 2024, with a growth rate of no less than 20%. However, Ramos also pointed out that the oversupply of lithium and battery materials in the past year is expected to continue this year, thus continuing to pressure the prices in the lithium market.

Carlos Diaz, the executive vice president of SQM's lithium business, said at the earnings conference that the company's strategy is to maintain full production capacity and be ready to supply more products when the market needs them. According to Gonzalo Aguirre, the head of SQM's lithium market intelligence, global lithium demand will increase fourfold from the 2023 level in the next 10 years.

By its very nature, SQM is a low-cost lithium producer with the ability to wait for the recovery of demand in a low-price environment. Lithium mining is a cyclical industry, and now it may be at the bottom of the industry, which can be proved by many signs.

Early this year, many lithium producers issued profit warnings and project terminations. Lithium mining companies in the United States and Australia announced that they would re-evaluate their existing development projects in order to preserve cash. At the same time, large lithium miners in China also warned of a sharp drop in profits and asset write-offs.

Kent Masters, chairman, president and CEO of Albemarle, pointed out in last month's earnings conference that the sharp drop in lithium prices in the past year has inhibited reinvestment in new supply. However, against the backdrop of the continuing advancement of the energy transformation, large lithium suppliers maintain their long-term prediction that lithium demand will increase significantly, and the current low-price environment is "unsustainable". Masters said that if lithium prices do not rise, lithium projects, especially those in the Western world, will not be economically viable.

Both corporate executives and analysts agree that although lithium prices are currently low and the finances of top miners are in trouble, the delay and insufficient investment in new supply development projects will breed the next lithium supply shortage by 2030.