Albemarle: Gearing Up for a Lithium-Driven Future

Since its inception as a paper manufacturing company in the late 1800s, Albemarle (NYSE: ALB) has grown to become a multinational manufacturer of specialty chemicals and the world’s largest producer of lithium for electric vehicle (EV) batteries. Albemarle’s success as a lithium miner and producer is rooted in its global presence, stemming from its appetite for strategic acquisitions.
Currently, Albemarle extracts lithium in Australia, Chile, and the United States. A significant amount of Albemarle’s lithium is located in Chile’s Salar de Atacama (Salar), an arid salt flat that hosts one of the world’s largest lithium reserves. Albemarle also wholly owns a chemical production plant in Langelsheim, Germany. This site further processes previously extracted lithium into products that can be used in pharmaceuticals, refrigerating machines, and importantly, lithium-ion batteries.
Albemarle is well-situated to compete in the landscape of lithium production and manufacturing due to its established global presence and low-cost operations. However, the lithium market is changing. Demand is expected to increase due to growth in downstream markets, primarily electric vehicles. Capitalizing on this lithium demand will prove challenging as environmental regulators oppose current business activities. If done hastily, lithium extraction comes with a high environmental price: ecological devastation, toxic waste sites, community disturbances, and excessive water usage, all of which could lead social and political agents to oppose the expected supply increases. Moreover, the threat from foreign competition in China dominating the lithium supply chain means Albemarle must strategically develop regional supply chains closer to automobile manufacturers.

What do flamingos, EVs, and Chile have in common?
Consumer demand for EVs has skyrocketed in recent years, with the number of EVs on roads across the world climbing 40 percent from 2018 to 2019. Although the industry only represented 2.6 percent of global car sales in 2019, the International Energy Agency (IEA) foresees EVs commanding a substantial global presence by 2030 with a 7 percent market share in its base case. The proliferation of EVs has been largely driven by stronger consumer sentiment regarding climate change. For the foreseeable future, the main constituent in EV batteries is expected to be lithium and the IEA estimates the EV wave will lead to a ten-fold increase in demand for lithium materials by 2030.

After a period of slumped lithium prices, the strong outlook for lithium is a welcome change for producers. It is estimated that the projected three-fold increase in lithium supply by 2025 will undershoot demand, and even meeting this increase in supply is not guaranteed.
Albemarle’s lithium brine facility in the Salar is an example of unsustainable extraction. In 2017, the facility represented 36 percent of global demand, but it is facing regulatory headwinds as it aims to increase production. In this region, Albemarle extracts lithium through an evaporative process where 95 percent of the groundwater cannot be recycled back into the earth (see figure 1). Making matters worse, the Salar’s water reservoirs are considered a nonrenewable resource as recharging them takes centuries to millennia; thus, extraction by evaporation places a significant strain on the local ecosystem. For example, increasing levels of toxicity in lagoons have impacted the health and stability of the Andean flamingo population. These flamingos help control bacteria levels in the water and without them, the local communities face contamination and other health risks.

Such water-related issues pose a severe threat to Albemarle’s ability to increase production. In 2018, an expansion attempt was blocked by regulators due to ramifications for soil, water, and air quality. While Albemarle has the opportunity to become the world’s largest producer of lithium for energy storage, its use of evaporation ponds to extract lithium in the Atacama region is not suitable for growth in an increasingly environmentally conscious world.

Capturing the Li-ion’s Share of the Market
In recent years, China has taken a global lead in the lithium industry by developing capacity across the lithium battery supply chain. In 2019, Chinese chemical companies represented 74 percent of the world’s lithium-ion battery plants in the pipeline into 2029. Moving upstream, Ganfeng Lithium, the world’s largest lithium miner by market capitalization, is set to overtake Albemarle to become the world’s largest lithium hydroxide producer by the end of 2020 after an acquisition of three lithium processing plants.

Albemarle must defend against China’s increasing interest in end-to-end control over the lithium battery supply chain. Failure to do so may limit growth opportunities, cut pricing power, and ultimately hinder the company’s chances of survival over the long-term.

Treating Chile’s Water Crisis with DLE
Direct Lithium Extraction (DLE) is a radically different operation than the solar evaporation process Albemarle uses in Chile. DLE is defined as the process of adding chemicals to a pool of lithium brine, heating the solution, and separating the desirable lithium salts from the brine (see figure 2). DLE better preserves natural resources because less water is lost in the process. Instead of letting the water evaporate into the atmosphere, almost all of the brine extracted is injected into a nearby water reservoir and returned to the local ecosystem.

Despite the existence of the DLE process, major industry players have opted to pursue evaporation ponds as an easier alternative. Historically low lithium demand and weak societal pressures did not incentivize producers to improve this practice. With growing demand pushing lithium prices higher and building environmental pressures, competitors like Orocobre and E3 Metals are beginning to recognize DLE as an economical, smarter alternative. While SQM and Albemarle, the two dominant players in the Salar, still employ the solar evaporation techniques that were popular in the mid-90s, newer lithium companies are entering South America’s lithium-rich areas with cost-effective DLE technologies. Orocobre recently partnered with EnergyX to implement proprietary Lithium-Ion Transport and Separation (LiTAS) DLE technology in its Argentina operations. Such an extraction method will enable Orocobre to obtain lithium more cleanly, more quickly and more efficiently.

Evaporating Evaporation Ponds with Direct Lithium Extraction
The replacing of water-intensive evaporation ponds in the Salar with a DLE process has profound effects on Albemarle’s value chain in terms of both sustainability and efficiency. DLE could remedy Albemarle’s water consumption by reinjecting similar amounts of water into nearby basins. This would help Albemarle to prevent legislative backlash or further production limitations imposed by the Chilean government.

DLE also reduces extraction time from the 12 to 18 months needed with evaporation methods down to a few days. This shortens the delay in the asset’s cash flows, thereby lowering risk. Additionally, lithium extraction rates using DLE are almost twice as high as traditional evaporation ponds. The combination of more efficient processes and healthier relations with the regulator will prove useful when expanding lithium output. This will allow Albemarle to grow market share in preparation for heightened uptake in EVs, garner long term investor support and customer loyalty, and strengthen its defensibility against China’s growing dominance in the lithium battery market.

DLE is a complex process that hinges on intense research and development. In order to reduce the risk in changing extraction methods, it is in Albemarle’s best interest to invest in financial and human capital towards the technical development of DLE within the Salar.

A Vulcan-ic Opportunity
Vulcan Energy Resources (ASX: VUL) is an exploration-stage natural resource company aiming to become the first zero-carbon lithium producer. Vulcan holds rights to Europe’s largest lithium resource in Germany’s Upper Rhine Valley that is JORC-Compliant—indicating it meets required environmental standards of the Australasian Joint Ore Reserves Committee. The deposit would be extracted using DLE technology and harbours significant geothermal potential as it would provide a regional lithium supply chain geared towards German automakers. However, the commercial viability of the lithium resource remains speculative as commercial operation isn’t expected to begin until 2023 at the earliest.

Salar Synergies
While lithium prices are depressed and Vulcan’s commercial operations remain uncertain, Albemarle should use this opportunity to acquire Vulcan with its sizable cash balance. Albemarle would immediately benefit from informational synergies for its suggested implementation of a DLE process within the Salar. While the type of deposit in Germany is structurally different from Atacama, Vulcan’s technical expertise and investor relationships will be a critical component in successfully implementing the DLE process in the Salar.

Vulcan’s management team is equipped with seasoned experts in geothermal technology, direct lithium extraction, and lithium chemistry. This mitigates management’s lack of experience with DLE and allows for the two teams to work together to fund sustainable growth in the region. Even in the event that Vulcan’s riskier geothermal deposit in Germany cannot be developed, with a cash balance roughly four times Vulcan’s market capitalization, Albemarle is in a strong financial position to sustain the financial impact, while it can still retain the team’s intangible assets and vision for sustainability and apply it within the Salar.
German Upside

Assuming commercial viability, extracting lithium in the region aligns operationally with Albemarle’s existing lithium processing infrastructure in Langelsheim, Germany, located approximately five hours away from Vulcan’s deposit. Controlling a full supply chain near progressive automakers could minimize transportation costs, reduce sourcing risk, and appeal to automakers.

Germany is an ideal place to capture the growing EV segment for a few reasons. Firstly, Albemarle has pre-existing relationships with some car manufacturers already pushing for “sustainable” lithium practices. Further, the German government and automotive industry players are keen on incentivizing EV growth. Establishing lithium sourcing that is both local and sustainably produced would align well with the strategic vision of Albemarle’s German automotive manufacturers.

Charging into the future
The lithium industry is changing, and Albemarle needs to prepare itself for a new market dynamic. Explosive downstream demand due to the pivotal role EVs are playing in the fight against climate change is generating a renewed need for lithium. This is compounded by dominant Chinese companies threatening Albemarle’s position as an industry leader due to their growing end-to-end control over the lithium supply chain.

To prepare for the inevitable spike in lithium demand, Albemarle needs to move in the direction of sustainability so it can increase its output capacities and entice automakers. An adoption of DLE processing in its Atacama operations will achieve these sustainability goals. Furthermore, an acquisition of Vulcan Energy Resources, a zero-carbon lithium project in Germany, will create informational synergies for the Atacama’s DLE operations as well as aid in establishing regional supply chains, thus combating the threat from Chinese lithium companies controlling the supply chain. If Albemarle intends to power the future, it will first need to embrace the sustainable practices needed to survive the present.