The most ambitious climate bill in U.S. history cleared a key hurdle on Saturday, but one lithium executive said the single biggest catalyst for the critical materials industry would be an overhaul of the country’s permitting practices. The bill, which the Senate voted to advance on Saturday evening, includes $369 billion for climate initiatives. For critical materials it includes domestic production incentives, and ties the electric vehicle credits to domestic manufacturing. It also allocates additional funding for the Defense Production Act. “The incentives for the EV supply chain is a positive from a market standpoint, but the market is pretty strong,” Albemarle CEO Kent Masters told CNBC. “The permitting part of regulation is probably the most helpful thing for us.” The company operates the Silver Peak mine in Nevada, which is currently the only operating lithium mine in the U.S. It’s relatively small scale, and the company has plans to open a new mine and processing facility at Kings Mountain in North Carolina. “It’s of very good quality and of significant scale, and it’s enough for us to build a material supply chain in North America,” Masters said. The capital intensive nature of mining and the many permits required means the industry is slow moving. Albemarle hopes that since Kings Mountain is a brownfield mine – meaning it previously operated – it will avoid some of the bottlenecks that face new projects. The company hopes to have the facility set up by 2027, although Masters was quick to note that it all depends on permitting. The industry is resource-intensive and can be disruptive to local ecosystems. Another player, Lithium Americas, has been working for years to get its Thacker Pass mine in Nevada up and running. The project has faced delays in part because of concerns brought by the surrounding community. Some environmentalist groups also argue that the focus should be on maximizing output from existing mines and beefing up recycling rather than building new facilities. The International Energy Agency forecasts lithium demand growing by over 40 times by 2040 under its Sustainable Development Scenario. Building local supply chains In March President Joe Biden invoked the Defense Production Act to encourage domestic production of key materials required for an electric future. Biden has called securing domestic supply chains for these resources a matter of national security. China is a key player, refining 56.5% of global lithium, according to Benchmark Mineral Intelligence. The U.S., by comparison, refines just 2.1%. Lithium has gained widespread attention this year due to a massive jump in prices. The upward momentum has cooled slightly in recent months amid recession fears and a slowdown in demand when China locked down to curb Covid cases. But prices are still up more than 300% over the last year, according to Benchmark. Lithium’s surge boosts miners’ performance The rapid price rise has boosted lithium companies’ financial performance. Albemarle raised its guidance for the third time this year when it reported second-quarter results on Wednesday. The company’s net sales jumped 91.2% year over year to $1.48 billion. Adjusted earnings per share came in at $3.45 for the latest quarter, up 287% compared to the same quarter in 2021. Amid the surge in lithium prices, net sales from the company’s lithium division jumped a whopping 178% from the first quarter of 2022, to $891.5 million. For the full year, the company now expects net sales to be between $7.1 billion and $7.5 billion. That’s up from the $5.8 billion to $6.2 billion range the company projected as recently as the end of May, when it raised guidance. The company also raised its full-year outlook when reporting first-quarter earnings earlier in May. Albemarle has restructured its contracts in a bid to capture the upside in lithium prices. Traditionally its contracts were long-term in nature, but now they can more closely track the moves in lithium prices. The metal’s price previously shot up during 2017 and 2018 before collapsing as the market became oversupplied. That led to a lack of investment in new production, which is partially why prices have been trending higher in the last few years. And with the world focused on rapidly moving away from fossil fuel energy, lithium will be instrumental. Looking forward, Masters said he believes the market will remain tight. And while prices could moderate some, he doesn’t envision them falling back to 2019 levels. “It was a big negative for the industry, not just lithium, but for EVs in general,” he said. “So now we’re chasing that curve whereas if they’d stayed up, maybe there would have been a bit more investment.” The surge in lithium prices has created challenges for auto companies, which have in turn raised prices for consumers. Legacy auto companies and new upstarts alike have announced ambitious EV targets, which also begs the question of whether there will be enough supply. Lithium is by no means a scarce resource, but mining and refining it takes time and significant upfront investment. Tesla’s Elon Musk has been a frequent commenter on growing demand for crucial raw materials. “The processing of lithium is insane,” he said on Tesla’s second-quarter earnings call in July. He called on companies to enter the refining business, saying “you can’t lose. It’s a license to print money.” Tesla is one of Albemarle’s customers. “The market really wants a local supply chain,” he said. “The government wants a local supply chain, but our customers want that as well.
© heardonwallstreet.com