The global lithium market is currently facing oversupply, leading to a sharp decline in lithium prices. Despite this, Sociedad Quimica y Minera de Chile SA (NYSE: SQM), the world’s second-largest lithium producer, has announced plans to increase production. Unlike many other lithium mining companies that are reducing production and investment, this Chilean company is investing $14 billion to expand its lithium project in Chile, a move that has caused its stock price to surge by 9% last Thursday.
In its recent financial report, SQM revealed that its profits for last year dropped by 48.5% to $2 billion due to the significant decline in global lithium prices, resulting in earnings of $7.05 per American depositary share. However, the company achieved record lithium sales in the fourth quarter, despite a drastic 82.3% year-on-year drop in quarterly profits.
Looking ahead, SQM plans to spend approximately $24 billion in capital expenditures between 2024 and 2025, with a significant portion of this investment, around $14 billion, allocated to the expansion of its lithium production capacity in Chile.
The decision to increase production stems from the company’s strategic bet on continued growth in lithium demand and an anticipated price rebound before 2030. SQM aims to proactively prepare its production capacity to ensure sufficient product availability for the market once the current inventory digestion cycle ends.
Ricardo Ramos, the company’s CEO, expects robust global lithium market demand growth in 2024, with a projected increase of at least 20%, driven by the growth in global electric vehicle sales and rising demand for battery materials. Despite the current oversupply situation suppressing lithium prices, Ramos anticipates this condition to persist through the current year, continuing to exert pressure on lithium market prices.
Carlos Diaz, the Vice President of SQM’s lithium business, stated during the company’s performance meeting that their strategy is to maintain full production capacity and be ready to supply more products when needed in the market. According to Gonzalo Aguirre, the Director of Lithium Market Intelligence at SQM, global lithium demand is forecasted to quadruple from the 2023 level over the next decade.
SQM’s position as a low-cost lithium producer enables it to patiently await a demand recovery in a low-price environment. The lithium mining industry is cyclical, and many indicators suggest that it may currently be at the bottom of the cycle.
At the beginning of this year, numerous lithium producers issued profit warnings and project terminations. Companies in the United States, Australia, and China have all taken measures, such as reassessing existing development projects, to preserve cash in response to the challenging market conditions. Despite the current low-price environment, large lithium suppliers maintain their forecasts for substantial long-term growth in lithium demand driven by the ongoing energy transition. However, they emphasize that the current low-price environment is unsustainable, especially for lithium projects in Western countries.
Both industry executives and analysts agree that while lithium prices are currently low and major miners are facing financial difficulties, the postponement of new supply development projects and inadequate investment will likely lead to a lithium supply shortage before 2030.
