Albemarle Corp. (ALB): Electric vehicle production to drive lithium demand in the long term

Albemarle Corporation’s (NYSE: ALB) shares gained 38% in the past three months but the stock has dipped over 3% over the past one month and is now trading 23% below its 52-week high of $99.40. The company expects to face headwinds in its business during the year, with results expected to decline across its three main segments. However, demand is expected to pick up in the long-term in its largest segment Lithium as the usage of electric vehicles increases.

Overview

Albemarle Corporation is a specialty chemicals manufacturer based in North Carolina. The company reports its operations under three main segments – Lithium, Bromine Specialties and Catalysts. It serves end markets such as energy storage, petroleum refining, consumer electronics, construction and automotive among others.

Lithium performance

Through its lithium business, Albemarle develops a broad range of lithium compounds that are used in manufacturing various products such as batteries used in consumer electronics and electric vehicles. One of the company’s competitors in the lithium market is Philadelphia-based Livent Corporation (NYSE: LTHM).

In fiscal year 2019, the Lithium segment saw an 11% increase in net sales helped by higher sales volume due to strong demand in battery-grade lithium hydroxide. At the time, Albemarle had predicted results in this segment to decline year-over-year in 2020 due to pricing pressure in certain markets.

In the first quarter of 2020, net sales in the segment dropped nearly 19% due to lower pricing and volume. The volume levels were impacted by customers taking excess volume in the fourth quarter of 2019.

The company had to reduce production at some of its plants in early 2020 due to the restrictions brought on by the coronavirus pandemic. These plants are currently operating at plan and the company has seen minimal order reductions to date.

Outlook

However, looking into the second quarter of 2020, Albemarle expects customer closures and order cancellations to affect its specialty and technical grade products. The company is seeing solid battery grade orders as battery-makers finish off their backlog orders placed before the outbreak. Albemarle expects the impact of the recent automotive OEM shutdowns to get pushed into the second half of 2020.

Albemarle does not have any new capacity coming online in 2020 to drive additional volume. Also, after the acquisition of 60% interest in the Wodgina spodumene mine, the company has decided to idle the production of spodumene until there is sufficient demand to bring the mine back to production.

Since the production of electric vehicles has slowed down, the company is currently monitoring the impact from this to its lithium business for the remainder of this year. However, over the long term, Albemarle expects the demand for lithium to pick up as new applications advance and the usage of hybrid EVs and full battery EVs increases.

This demand is expected to be supported by lower costs for lithium ion batteries, increasing battery performance and favorable public policies toward renewable energy usage. Albemarle has long-term supply agreements with customers that position it as a preferred global lithium partner and the company has the advantage of being able to access low-cost resources which work to its benefit.

According to a report by Allied Market Research, the global lithium-ion battery market was valued at $36.7 billion in 2019. This is projected to reach $129.3 billion by 2027 at a CAGR of 18% from 2020 to 2027.

Albemarle Corporation is scheduled to report its second quarter 2020 earnings results on Wednesday, August 5, 2020 after markets close.

Click here to read the full transcript of Albemarle Corp. Q1 2020 earnings conference call