Albemarle Corporation (ALB) Earnings Call Transcript & Summary

Hi, everyone. My name is Colin Rusch. I am the Managing Director and Head of Oppenheimer Sustainable Growth and Resource Optimization practice. We are very pleased to have the full team at Albemarle's Lithium business here with us. We've got Jeff Norris (sic) [ Eric Norris ], the President of Lithium business; Glen Merfeld, the CTO; Jim LaBauve, who is the CFO; and David Burke, Director of Investor Relations. Just from a format perspective, we're going to start off with some slides for about 15 minutes or so. We will then take questions. You can e-mail those to me at [email protected], [email protected]. Happy to take them there, and I'll facilitate those. And so without further ado, I'll turn it over to Jeff (sic) [ Eric ] and the team to -- I'm sorry, Eric and the team to take it forward.

Thank you, Colin. This is Eric Norris. Hopefully, you all can see us okay. We are in a room. I'm here joined by Lithium's CFO, Jim LaBauve. And on the line dialing in, like many of you, is Glen Merfeld, our Chief Technology Officer. Really happy to be here today. We're going to have a few remarks to share, some slides that will hopefully warm up a discussion that we look forward to getting into talking about our expansion and the role of technology. First off, forward-looking statements. You're familiar with this cautionary language, and it's described here as it is on our website as well as the reconciliations we do to non-GAAP measures, that we'll talk about some of our financials around also available here and on the website. Why don't we go to the first slide and getting into it a little bit, let me just summarize what we're going to do, and then I'll get into this slide. First off, we're going to talk a little bit about strategy. Just to remind you of strategy. We had our earnings call last week. Perhaps many of you were able to join. We hit on some updates there. I'm going to talk about specifically what we're doing around what we call our Wave 3 expansion, which is very Asia-centric, given how we see the market evolving in the very near term, being very Asia oriented and with the resources we have in that part of the world. Talk then more broadly about the expansion beyond that and then really pivot into technology. We can talk about -- throughout this dialogue, we talk about the technology we employ in our operations and in our plants. But importantly, we want to talk about battery technology and that's why Glen is joining us to talk about the evolution of technology, the role lithium plays and some of the things we're doing to play there. So this is just sort of an opening slide that just sizes the business for you. Our revenue at over $3 billion, our EBITDA of $863 million, 6,000 employees, 3 core businesses, lithium being the largest today in sales and poised from a growth standpoint, to be the largest. We have, in each of these 3 businesses of market-leading franchises, strong vertical integration, great cash flow, a great growth story around vehicle electrification and lithium and a strong digitization story in our bromine business, which has some interesting attractive growth legs to it. Overall, our strategy is to accelerate growth within lithium, and I'm going to hit on in the near term, what that means from an expansion of our conversion capacity, leveraging world-class resources. It's about maximizing our productivity. We have driven on something we call the Albemarle wave of excellence. It's an operating model to really sharpen and continuously improve or the way we run our plants, the way we execute our capital, the way we serve our customers. Around that, a big part is how we invest with discipline and focusing on profitable growth, driving continuous improvement in our capital deployment and generating the financial flexibility through the portfolio we need to continue to grow and support our dividend. And then finally, advancing sustainability. It is important across all of our businesses. But in the case of lithium, it is a must have, and in some cases, increasingly a differentiator with our customer base, the automotive market. So first, let's talk about capacity expansion in the near term. That's the next slide. We -- in early September, many of you may have had the opportunity to participate or review Albemarle's Investor Day. There, we talked about something called Wave 3 expansion. And since that date, until -- as we sit here today, we've made a lot of progress in a short period of time. We've agreed to acquire Guangxi Tianyuan New Energy Materials. The name of that site is Qinzhou. So you'll heretofore will always refer to that as the Qinzhou site. It's a 25,000 ton per annum plant that has the ability to be doubled in its capacity. It's in its commissioning stages now when we expect to be selling from that -- producing and selling from that in the first half of next year and expect to close on it early next year. We are also in the process of -- we made some investment agreements we've announced with at the Zhangjiagang and Meishan areas. These are 250,000-ton greenfield facilities also, could be expanded beyond that, but initially targeting 50,000 tons. And all 3 of these, the acquired assets and the greenfield sites, now the greenfield sites will take some time. It won't be until '24, '25 that they come online. Al 3 of them be served by our world-class resources. And as a consequence, given the strength of the market and this oncoming addition of supply accompanied by what we're doing already in the case of Kemerton I and II. We are bringing on Wodgina, the first train to begin producing spodumene concentrate in the third quarter of 2022. All of this aligns with our strategy of driving conversion growth, expanding the potential and providing us optionality and operating in low-cost jurisdictions where we are able to drive strong investment returns, reduce our capital intensity over time. It's also -- frankly, it's where the market is. We've spent some time last week in the conference call explaining that the amount of cathode material produced to electrified vehicles around the world will in the near term increase from China and the Asia region before it then starts to balance out as more of that capacity moves West. So let's talk about what we see in the long term. So looking to our next slide here, we talk a little bit about the pipeline here, and this includes all of the growth projects across all the milestone includes the Jordan Tetrabrom expansion as well as some activities at our Magnolia site for bromine. But it's heavily focused on lithium. We are, as you may have heard, introducing a new technology to improve the yields. It drives a great sustainability story. Without increasing our pumping, we'll be able to produce more volume out of Chile as a result of this technology, the Salar Yield Improvement technology. It's an enabler of our carbonate growth. We are -- have installed capacity at Kings or at Kemerton I and II, those were in progress. Kemerton I will be mechanically completed at the end of this year, Kemerton II later next year. But that isn't the end of it. This site will continue to become leveraged. We'll be able to drive down costs and scale. As we look -- as we move into Wave 3, which was the aforementioned slide, we see ourselves reducing our capital intensity by 40% as we continue to build out in these projects, we see a further reduction by 20%. So this -- sites like this will we continue to expand upon them outside of China and Australia, that's a key enabler of that capital reduction. And then in the U.S., this is very important to us as we think about what's happening with the vehicle electrification, We're very pleased with some of the outcomes we expect from the Infrastructure Bill just approved last week. And we see these resources as instrumental in driving that, namely the doubling of Silver Peak, which is already underway. And the exploration we're undertaking of Kings Mountain, which is the best spodumene resource in all of North America, that can drive potential for localization of supply here. And we, frankly, see the ability to do that as well as Magnolia as with our sister business in bromine. And then finally, what I've already talked about being the expansion activity in China, which is already underway and driving that optionality for us. So this is the expansion activity. This is what's making things possible from a growth standpoint in the coming years. What is not clearly stated here, and we're happy to get into in the Q&A, is all that we're doing from a process technology standpoint. We don't drive down the capital intensity or improve our sustainability or quality without continuous improvement in how we process lithium. And we won't be able to tap all these resources the same old way that we have in the past. We're bringing new technologies to do that as well. So we'll be happy to give some examples of that when we get into Q&A. But before that, what I'd like to do is turn it over to Glen Merfeld, Glen will talk a bit about what we're doing from a -- how we see the battery landscape and how Albemarle will play in that and the significant role lithium has there. So Glen, I'll turn it over to you now.

Terrific. Thank you, Eric. In this first chart then, we'd like to lay out one of a broad-based view of where we see battery technology advancing. And the great news here is that really strong pipeline of performance and it's enabled by advanced materials. So it's instructive to think about this as we're showing it here. There's a legacy, there's advanced materials and really the next generation just for consideration purposes. When you look at what's really driven technology advantage to get us to where we are today. These are legacy technologies that are continuing to be kind of the workhorse of the consumer electronics space, tried and true technologies that we will continue to sell a lot of lithium carbonate into to make cathode materials, we'll continue to sell lithium-derived electrolytes to help conduct the ions. But what you see in the center of this panel here are advancements in both cathode and anode chemistries that are looking to drive further improvements above the legacy chemistries to get to 20% to 40% improvements both in energy density and cost. And this includes advancements in cathodes around higher nickel compositions. It also includes on the anode side increasing insertion of things like silicon modified anodes to get higher energy densities. From Albemarle, what we're doing is we're providing lithium carbonate and lithium hydroxide materials to make those more energy dense cathode materials. At the same time, we're innovating new forms of lithium to help enable unmet needs today of pre-lithiation. I'm glad to talk about that more in a follow-up conversation. What gets particularly exciting is if you go all the way to the right and you think about what's in the pipeline for next generation. This has the potential to be very disruptive because we're talking about doubling energy densities while at the same time opening up the opportunity to take cost out by as much as half compared to legacy. And so what this means is we're going to continue to sell lithium carbonate and lithium hydroxide into the cathode site that increasingly, it opens up other opportunities in the anode side, not only to do pre-lithiation for silicon-based anodes, but also to start inserting things like lithium metal. And there's some very disruptive technologies that we're working on there as well as new forms of lithium that can be used in solid separators. So across the board here, what we're talking about our innovations in lithium that are going to open up opportunities to make lithium-ion battery safer to make them more energy dense to really increase the charge acceptance rates. And I think all combined, that's really what's enabling the faster adoption of EVs. So in the next chart, we'd like to highlight just a bit of some of the things that we're doing within Albemarle to accelerate this development. In July of this year, we formally announced -- publicly announced the opening of our Battery Materials Innovation Center in Kings Mountain, North Carolina. That's about 30 minutes west of Charlotte here in our headquarters. And the driving force behind this is really highlighted there in the left-hand margin. This is about how do we more closely work with our customers to accelerate material development and really focus on the value that we're creating because many of these new advanced materials, it's not about selling dollars per kilogram, it's about creating dollars per kilowatt hour. And that's a new way to think about material advancements. And you'll see there's multi phases to this approach, but it's about accelerating screening of new materials. But it's really enabling for us to take our materials and get them very quickly into test sets that are relevant to our customers. So we're able now to make multilayer cell phone science batteries that are perfect test beds to validate our performance. Additionally, we already have been able to demonstrate the ability to make 20-micron thick lithium metal anodes. That's 1/5 the thickness of a human hair. So all combined, this is the type of capability that's world-class, and it is helping us accelerate the development and adoption of our advanced lithium materials. So with that, I'll hand it back to Eric for closing comments.

Yes. Before I get to closing comments, Glen, I think it's important to all realize, just to connect the pieces together here. When I started talking and shared with you the investment strategy, that was about carbonate and hydroxide. And fundamentally, that's where we see the market in a 5- to 10-year basis. There's a lot of volume required to meet that demand. what Glen is talking about here that goes beyond that, R&D is just the tip of the spear. There will be -- you'll continue to hear as we grow in this space and achieve milestones more and more investment, more and more growth opportunities in different products than what you've heard us talking about in the past. So that treat this or think about this is as, again, that tip of the spear of what is to come. And you can hopefully know by looking at the space, there are quite a few companies out there that are very interested in this R&D work that are partnering with us, names you've heard of, some of even the automotive OEMs and certainly established battery producers who are looking at these alternate chemistries. It's really exciting stuff. So with that, let's just wrap up quickly and then we can go to Q&A. We're well positioned. We've talked about our resources, the vertical integration and that capacity expansion capability. We've also talked about playing in these new technologies and developing the IP and know-how to support and collaborate with our customers and that will bring us growth beyond that. And we're playing in an environment, which I think many of you understand is just incredibly favorable from a public policy standpoint, a social standpoint, social acceptance standpoint, and therefore, fundamental end market demand for electric vehicles. And as we sit here today, we're a $1.3 billion business, but the growth targets we put out have us more than tripling that by the middle of the decade. So a fairly exciting growth story for the business going forward on a very profitable low-cost structure, very profitable base. So with that, I'll turn it over to you, Colin, for the Q&A session.

Thanks so much, Eric. And my apologies, I have a person named Jeff Norris in my life who works in the Battery Materials space. So that's a brain fart. So sorry for that, guys. So let's get started. Can we set a baseline on the amount of lithium that's used on a per kilowatt-hour basis. This is a question that comes up. There's some studies out there talking about 750 grams per kilowatt hour. As you guys look at the market, where are those estimates? Because I feel like there's still some confusion around that number out there. But where would you guys pick that right now?

I'm going to have Glen answer the question, but I'll put that -- the 3 factors that are involved. One is the theoretical uses versus what's practical in industrial scale, then there's a difference between the 2, with the theoretical being closer to the figure you just referenced. The other is the advancement of technology and the introduction of those new components of lithium in the battery cell increase the lithium content per kilowatt hour. Glen, maybe you could answer the question where you see the market today? And vis-a-vis that chart of those 3 categories where you see it potentially going?

Yes, absolutely. And today, I think at the if you take the industry and how much lithium is sold, which is how many kilowatt hours are produced, you'll come up with a number that's on the order of 0.85 kilograms per kilowatt hour. So I think that's a more holistic number and it accounts for supply chain inefficiencies. If you go back and you calculate the fundamental number, the stoichiometric number in chemistry, it's a bit lower than that, as you would expect. But as you evolve into some of this progression of technology that we talked about, we see opportunities to introduce additional lithium and probably more important, more advanced forms of lithium, things that are highly tailored prelithiation agents, for example. So there's benefits for us as a company being able to insert more types of lithium into the cells. And so simultaneously, that we're creating more kilowatt hours for every kilogram. So that's the balance that we have to watch. When you go all the way to that next frontier and we make that jump all the way to lithium metal anodes, that's where we do see the opportunity to insert lithium, not only in the cathodes as we do it today, but additionally, in the form of lithium metal in the anodes. And so it could increase the lithium intensity by 20% or greater, depending on the final configurations.

That's super helpful. And just a reminder for everybody, we're going to take questions, either e-mail me with questions at [email protected] or drop them into -- there's a Q&A section in the chat, and I'm happy to get after what folks want to talk about. And so that's helpful just from a baseline perspective because I think that extra 12% has been confusing for some folks in terms of what actually gets flow through supply-demand models. So as you look at some of these newer chemistries, notably with silicon anodes and we're seeing various levels and the requirement for prelithiation on that. Can you just put some numbers around the volume of that. And it's obviously very different from process to process and from architecture to architecture. But how are you guys thinking about that prelithiation opportunity for Albemarle?

Glen, you want to take shot at that?

Yes, certainly. And it's probably worth just pointing out that in cells, the first time you charge them up, some lithium is irreversibly consumed to form this SEI layer. And it's desirable. It actually makes the batteries will last a long time. And as you evolve towards silicon modified anodes, that irreversible reaction actually consumes more and more of the lithium. And so the lost opportunity is if you don't compensate for that somehow, you have all this active material in the nickel and the cobalt that gets underutilized. So the opportunity is for prelithiation to be able to address that irreversible consumption of lithium during the first cycle. So silicon itself consumes as much as 10x more lithium during that prelithiation reaction. But the evolution that we see happening is the battery manufacturers today are inserting 5%, 10% silicon. So it's not 10x more lithium. It's a little bit more on lithium, but in a very special format that you can drop into your existing processes. Sometimes it needs to be water compatible which you can imagine if you know lithium, being able to make a water compatible lithium is pretty novel. And so these are the type of opportunities that we see to introduce more specialized forms of lithium. Now when you do that, you've also increased the numerator of that equation, it's dollars per kilowatt hour. But now we're doing a better job of making more kilowatt hours for the same kilogram of materials. So that's the equation that we're trying to drive more premium products that enable higher energy densities.

Yes. So just to digress on that. Just so the reason it's called by the industry prelithiation, just to emphasize what Glen said is because you take the traditional cell geometry today that you have. And on the first charge and discharge that lithium is lost, with silicon, you lose even more with even a small amount of silicon in that and that graphite anode, you lose a little bit more. So the idea is to put lithium into the cell before that happens. So that's additional lithium in a product form that need to be put into the anode or the cathode hence prelithiation. And it's illustrative of the fact that, yes, you're putting more lithium in the cell, yes, that costs more money in the cell, but the bang for the buck is greater, right? That's there because you're getting more kilowatt hours, right? So it's -- I think it's really important, Colin, and we deal with this when we talk about LFP and the trend towards LFP versus higher energy density cells is that you can get cost to a certain degree by just cheaper raw materials, but that only takes you so far. To really get far with regard to driving range and energy density and smaller battery sizes that pack a more powerful punch, you're putting in more lithium to get there. You're dealing with more expensive materials, but they engender a greater performance from an energy standpoint. It's just a principle. It's important to understand and when we look at what's going to happen with technology in the coming years.

So I think that's an important point here that I think we want to unpack a little bit, right? And so it's -- part of this is about the overall opportunity for Albemarle and the differentiation and defensibility of the platform. And so I think what we're hearing from investors are a couple of things. One, what is that headroom in terms of the overall content net-net with some of these elements? And I think you addressed it a little bit, Glen, with the prelithiation kind of mid-single digits of incremental content. But as we go into some of these other cathode materials and getting into some higher quality elements, can you give us a sense of kind of the price delta and the defensibility on the margin perspective? So I think if we're kind of starting from the stoichiometry, that's 750 grams per kilowatt hour, the practical application being about a 12% increase, another 5% to 6% for prelithiation. From that baseline, what's the full headroom? And then how do you guys think about the real value capture as you get into some of these more advanced materials?

Yes, Colin, it's a great question. And I might start with your -- the last part of your question first, because you asked a great question. And it's the same question that we're working with our customers on, it's about value creation. So when we're able to increase, for example, with prelithiation agents, the energy density, by 10% and maybe 20%, it will scale with the amount of silicon that's introduced in the anode. Effectively, if you're saving 10% on a $100 per kilowatt hour type battery, you're creating that immediate value, okay? And so that's the way we're thinking about the value creation is in terms of, hey, it's an incremental $10 per kilogram per kilowatt hour, I'm sorry, a value that we're creating. So it creates a lot of headroom to think about, well, how do you price that in terms of the lithium products that you enable. And that's a different mindset rather than sell on a per kilogram basis, you got to maybe thinking about how do you sell on a per kilowatt hour of improvement? And that's really -- that's the driving force. So on the other side, I think, of the equation that I know, Eric will want to emphasize too is, is the more economical that we're enabling batteries to get down the learning curve of dollars per kilowatt hour, what it's enabling is the market adoption and then accelerating that market adoption. So it's that feedback loop that we want to enable with these technologies. So I know you're asking the question about how much more lithium are we going to sell for every battery. But really, the way I'm thinking about it from a technology type standpoint, is for every precious atom of lithium that we have, how do we make it in a format that allows better utilization of the volume that you have in a car for example.

So why don't we unpack that a little bit as well, right? So if we're talking about getting down to numbers that are in the $60 to $80 a kilowatt hour range, what do you think the overall content is for modern materials in that value chain? How do you guys think about that? And how should we be thinking about that sort of value capture for you guys there?

Well, I think that's invariably going to be getting to those levels or lower is invariably going to be introducing beyond silicon anode introducing a fully metal lithium anode. So now you're talking about -- Glen mentioned a moment ago, we've demonstrated the ability to roll metals down to 20 microns or so. And those ultra-thin films and being able to put them into a very -- given their small geometry, a very small space allows you to really increase energy density for the cell, allowing you to get down to those levels. Now look, there's 2 steps in that. There's companies who are looking at still using liquid electrolyte and then there's ultimately getting to a more solid state chemistry versus solid form electrolyte. Glen, you can comment. I think the liquid electrolyte may come sooner, but has hazard issues to overcome. Solid electrolyte a little bit longer term. When it comes down to lithium content, if I'm not mistaken, Glen, we're going well over a kilogram close to 1.1, 1.2 kilograms of lithium per kilowatt hour but you're driving that cost down to those sort of double-digit levels that you just referenced, Colin. Do you want to add, Glen?

Yes. And I would think the way I would add to that is -- for the figure of merit, as you've said, Colin, it's dollars per kilowatt hour. And there's been so much, I think, benefit that's been derived from economies of scale in the battery industry on the numerator. So you just -- you produce more and you get better productivity year-over-year-over-year. Increasingly, though, I think the battery companies and OEMs are now realizing the numerator is powerful, but the denominator you can't ignore. So when you start looking at lithium as a way to get more kilowatt hours for every kilogram that you have, it expands the equation. So if you take a step back and you look at what's our revenue share or what's our cost share of a battery today, I think there's estimates that are out there that are on the order of maybe 10% of the cost share. But our goal is, quite honestly, is to take more of that as we enable the battery manufacturers and our customers to get more kilowatt hours for every kilogram that they put in that same cell our shares should open up and it should become greater. And so that's where the metrics change a bit. We stopped thinking about dollars per kilogram, and we start thinking about how many dollars per kilowatt hour is our share.

Yes. But that being said, while that's the metric we want to think in, I mean, just as an order of magnitude, you go from tens of dollars a kilogram for a lithium salt to hundreds of dollars on a lithium metal basis, right? And that enables that reduction that Glen was describing that you were targeting, Colin, when you referenced $50 to $60 kilowatt hour.

Yes. And the other element of this is really just changing the operating range on these batteries, right, in terms of what the cycle life looks like, depth of discharge and the scale of operating range within those batteries as we go forward. So just to kind of put a pin in this, and then we can move on is we're talking about moving from about 0.85 kilograms per kilowatt hour up to 1.1 to 1.2 potentially kilograms per kilowatt hour from a content perspective. And then the pricing delta can be really the metric here as you get into some of these more advanced materials moving into the electrolyte materials, the prelithiation to a certain extent, but then also ultimately the lithium anode materials that folks are looking at for some of the advanced batteries in the back half of this decade. So I think with that, I do want to delve into this battery, the advanced technology center that you guys are working on because it's so important, I think, to building trust with your OEM partners, not only at the vehicle level, and user level, but also with the battery manufacturers. If you could talk a little bit about how you're engaged with those folks with these advanced research because it gives you -- it seems a couple of things. One, a very active dialogue with your customers; but two, a very active look at what's going on across the field in terms of innovation. And as we kind of see LMR move from being a chemicals company that's positioned a little bit, it's a specialty chemicals company into an advanced materials company. And obviously, there's a valuation delta that happens with multiples there. Can you talk a little bit about like how engaged you are, how integrated those processes are with those customers and how we should think about that effort kind of rolling through from a timing perspective into some differentiated products?

Well, I'll start, Glen, can give some examples. I mean it really is -- it's a simple principle. It's -- we have to have the capabilities in our battery technology area to understand how materials work in a battery cell. Well, I would say the table stakes for greatness in this regard are at least as well but really for differentiation, is better than the customers do. So that's the capability of thoughts. What you have to do is be able to be expert at how battery operates and then start to have some understanding material science, so you can manipulate levers to see how that impacts a battery performance. That then becomes the entry point at which -- whoever you're talking with in your customer base, whether it's the automotive OEM, a stand-alone company that's recently raised money through a SPAC to go to market with a solid state chemistry or a traditional battery company that is out there of the brand names you know, that's the basis for a rich dialogue. And Glen, maybe you can give some examples without naming names, of course, is how that might work?

Yes, absolutely. And thanks, Eric, that's a perfect baseline because Colin, what you said -- you asked about credibility. And it really is about credibility. How can we go to our customers and speak their language. And the best way to do that is to actually develop the same sort of test beds that they use to valuate materials. And maybe just to expand that a little bit more is we have the ability to do side-by-side material assessment with our customers. And that's what we're doing. So let me give you the example of these prelithiation agents. The need for prelithiation has been for 20 years that we started developing some novel ways to this. And our customers almost wouldn't believe it until we could show them data in standard test vehicles that they find credible. And so not only we're able to open the discussion more broadly than we ever have in the past. Now we're actually sampling materials, simultaneously formulating cells in our laboratories as our customers share and we formulate side-by-side, we run the test in parallel, we share results. And what this is doing is not only building credibility, but it's also accelerating the development cycle. Whereas in an old world as a material company, you throw them a material and you say, "Hey, do you like it or not." In this world, it's really that co-development. We're iterating in real time. Our customers are testing in real time. We've got confidence in our test bed such that our customers are now pulling for more accelerated scale-up. They're asking how can we get to validation and qualification sooner. So that's the power behind this sort of almost ecosystem that we've developed it with some key customers around prelithiation. And the same story is expanding into the lithium metal space. So it's about building credibility and accelerating the development process.

So that's -- I think, Glen, circling into a couple of things. So one, our understanding has always been that the quality issue for these advanced materials is really about what the contaminants are. It's not necessarily being at the 99.9% lithium. It's about what's in that 0.1% that can turn into a dendrite or excursion within a battery. And so in the qualification process and the consistency process of getting those materials right as you -- especially as you move into these more advanced elements, and there's more at stake on these materials. You could talk about that qualification process, how important that is and how that's informing your ramp-up of carbonate and hydroxide? Because that's ultimately a basic question for a lot of investors is which material is the right one to ramp? And how can you get the economics to work from those precursor materials to the right and material with the right amount of contaminants that your customers need?

Let me start at a high level from a customer perspective -- commercial perspective, and then Glen can give you the technical sort of background on this. I'd say, as we've said many times before, that process is at least 6 months. And there are certain companies for qualification of hydroxide and carbonate where it can in be longer than that. There are certain that are shorter than that, and they tend not to be as sort of say, as a higher quality end or necessarily EVN. But where we see EV technology going for major global automotive producers are going to put a 10-year warranty on a battery, it's at least 6 months. And you're right, Colin. It is about what is in -- what is present with the lithium in one respect, not all ionic, not the presence of any other ion other than lithium is -- it is an elimination of everything. It's not a sterile lithium per se that's important, if you will, to use it a lay term. it's about what that impurity is and what it would do to battery performance. So Glen can talk about how we're replicating that to understand that in a moment. But what's also important is understanding what we can do from the morphology and particle size of the product that influences how its manufacturability. You can swing the productivity of the cathode manufacturer by double digits up or down in terms of their yields in their process by what you do simply on that critical measure of particle size and shape of the particle size, the way the product flows. It's a material science or material flow issue that's very important. So those 2 factors and the ability to replicate that. So that from batch to batch, from plant to plant, that that's consistently the same. Those are key differentiators when you're sitting there as an automotive producer and you're saying, I'm going to invest billions of dollars around the world and I have to buy from multiple sites. And I want to make sure it's the same every time so my plant doesn't shut down. Those are big issues for our customer base. Glen, maybe you can give some anecdotes and examples that would help illustrate.

Absolutely. Well said. And it's I guess the thesis could almost be as you more precisely engineer your batteries to put more energy in the same volume or for the same way, the supposition is automatically going to have to more precisely tune and tailor the materials going into that. But what specifically is the requirement for a specific battery manufacturer for a specifically tuned and tailored chemistry, that's what we're trying to help accelerate that understanding. And Eric explained it really well that you asked about impurities. No doubt, impurities are really important, but some impurities may be more tolerable in certain chemistries. So that's part of the feedback loop that we're really trying to understand is how do we tune and tailor our manufacturing operations to a specific resource. This goes back to the resource, it gets into our manufacturing process and really kind of tie it back to how we do material development in our new battery material innovation center we start at the formulation step. We emulate how our customers take lithium carbonate, how they take lithium hydroxide, how they go through all the formulation and calcining steps. And so this is how we're developing that close collaboration with our customers to figure out how do we tune and tailor that you're right. We got to do that with an eye to the duration of the process to get those materials qualified.

And how does that impact the CapEx investments that you guys are making on the raw material side. So obviously, if we're starting with high-quality, high concentration lithium coming out of the ground, and then you're going through a clean process at the mine before you start shipping into the refining process. Having that vertical integration is one level of insight. But then also, making investments in capital and where you're acquiring assets and growing capacity, looking at the end market, how should we think about that in terms of the growth of the carbonate versus growth of hydroxide and how this is evolving over time for you guys?

Well, I think you referenced one, the insight of being backward integrated and what that allows you -- what the control mechanisms that gives the consistency that allows you to plan against is very important, right? You can contrast that versus someone who might not be integrated to the resource has to go buy from different resources and is constantly seeing a different feedstock or a slightly different variation on that feedstock. That brings a lot of complexity and quality challenges to that operator. We don't have that per se because we have -- we can tune to a resource. That's one aspect that's important. The other aspect is important is as we scale and drive down capital intensity, the enemy of efficiency is changed, right? So there's a balance between constantly using the same design and optimizing on it to drive down your capital cost. So we can drive up our returns for our investors versus changing and improving that to meet the evolving customer needs. And the way we do that within our organization is we have split organizations to come together and collaborate. We've got a process technology team that works for our operations group. A gentleman by the name of Mark Mummert is my Chief Operating Officer. This group reports to him. They're constantly looking at existing assets and improvement opportunities for our, we'll call our incremental or year-to-year or sustaining capital that we put into that. And some of those improvements, then if they have a significant enough impact either on cost, quality or performance then become institutionalized in next-generation designs that we are very careful about implementing, and we make choices. The choice can be in order for capital efficiency, either we implement it into the new design or we build with the existing design and implement it after and do a retrofit afterwards. And that choice is purely based on risk and cost, right, to get the product to market at the right time. So those are some of the considerations that we use here. The other thing we're doing is a lot on extraction technology and geology on the mining side to improve our efficiency and quality of the resource coming in. Glen could comment on that. Glen, I don't know if you have some other comments generally on process technology and a role it plays in improving quality.

Yes. I think you highlighted it well. Maybe just another dimension then is as we expand resources, technology itself is an enabler. So one of the things my team has been doing for years now is really surveying emerging extraction and purification technologies and not just understanding what they can do chemically but also what they do from a sustainability fact standpoint. So the equation that we're optimizing is certainly cost but it's also about what's the energy intensity of an approach? What's the freshwater intensity, what is the footprint that we make when we make these capital expansion. So this is the way we're getting smarter and integrating plans for expanding our resources to match the technology that we want to put into our conversion plans.

So let's get into this capital efficiency perspective because this is ultimately where you get a lot of really high-quality returns as an equity investor. So can we just baseline -- we've got one question from the audience, just clarifying Wave 3 CapEx at about $1.5 billion. I just want to understand that. And certainly, with what we're seeing on a global supply chain basis and availability perspective, I want to get a sense of like how that might shift around, given labor shortages, material shortages and efficiencies. And then want to extend the conversation into like where you can find some efficiencies in terms of production and output on these things. So we just baseline that number and then kind of the range of possibilities around that baseline number.

Yes. So the $1.5 billion is linked to -- how many David, is it 170,000?

150,000, 175,000 kilotons.

Yes, 150,000, 175,000 kilotons of capacity all of it hydroxide based on -- largely hard rock based on spodumene. And that's the investments that I summarized to begin with, the 3 -- the acquisition and then the 2 greenfields in China, as well as Kemerton III and IV. So what we are -- the reason that there are a couple of benefits of doing this multiple times over and doing it in Asia and part of that is access to consistent set of vendors who are expert in their specific equipment wares, if you will, some of whom are based in China. It's access to a couple of global EPC firms and specific China design institutes who are experts in building some of these plants or have some specific process know-how we can leverage. And it's then incorporating those learnings repeatedly into the plant designs. And as we build that expertise, that's expertise to have that we can evolve further. It becomes proprietary out model expertise, it becomes something we can leverage, particularly as we move to the west. The plant that we could build here in North Carolina to support a burgeoning U.S. industry in Kings Mountain, that asset will be very -- will be -- will benefit from all the improvements we make of what we're doing in Asia. Now we'll have to evaluate the supply chain, maybe some of the same equipment isn't as available or it's easy to move from Asia to here. Maybe we have to set up new vendors. But nonetheless, the know-how that we learn will be directly applicable to the resource here. So that's what's giving us the confidence that we can build successive plants at lower costs, and I gave you some reduction targets that are implied in the numbers. Specifically, we're focusing on areas like energy efficiency because that's -- these plants do consume energy and CO2 reduction as a part of the lithium value proposition to our customers. So looking at renewable sources of energy, more efficient energy use in the thermal process of these plants is key. We're looking at different types of downstream processing. We talked about some of the key factors around quality, particle size, taking units, making them continuous versus batch, implementing specific improvement mechanisms to improve the quality of the product or the consistency from batch to batch. These are some of the investments we're making that not only have a quality benefit but it can also drive down some costs over time. So those are some examples of some of the things we are doing with that current wave that will benefit future waves of capital.

So I guess there's a couple of just clarification questions in refining here in this area. I mean so we're getting some questions around. What you can do with these CapEx investments to shorten commission times, looking at, I guess, what sort of grades come online quicker and like bringing up to industrial grade versus battery grade and how can accelerate velocity of capital. And this consistency of process and equipment certainly aids that. But I guess in terms of the time lines that you've laid out, how much wiggle room do you have in terms of being able to accelerate these things? And is that even something that's on the table at this point, given what we're seeing from a supply perspective?

Yes. I don't have a target that we can give you that says what's been a 3-year process to go from where we are at these greenfield process to commercialization in China, which is the numbers we've given you. How much we can reduce that buying. But I think that is one -- other than capital reduction, time reduction is one of the things we'd be greatly focused on. So I mean, my hope would be that we, at some point in the future, could give you targets of things we could do faster. Yes, certainly, external factors will limit that. I mean, global supply chains being what they are, it's a challenging time to do that. But for us, more importantly, it's about how -- if we have built and honed standard designs and have standard vendors doing them. And we are building a 50,000 ton plant a year, which is basically where we need to be on average going into the middle of the decade to sustain our leadership. And you are buying long lead time items in groups from the same vendors. And then you are, at the same time, looking at how you get better, you build -- you strengthen your playbook on the back side of how you commission find out common errors that happen, work around those errors so that you shorten those commissioning times. And then you become more reliable in what you bring to your customer on successive plant start-ups such that they're learning that there's a consistency in your product that maybe allows them to take -- I mean, qualification time lines are about risk taking and how much risk the customers want to take for a newly started product. So if there's an ability to provide assurance that they don't have to do a full replication of a battery cycle over its life, which is basically what they do over that 6-month period then maybe there's an ability to shortcut things. These are all things for us that are areas of focus to not only improve cost but to reduce time and it's -- we'll have to see what that means in terms of how much time we can reduce. That's just -- that's a future target that we'd like to aspire to.

Okay. So we'll stick with your time lines for now, knowing that you guys are trying to make it faster. And so I guess, we're getting a little bit short time here, and maybe we could go on for ages, I'm sure. But I want to understand, one dynamic with the customers around the environmental issues that you guys have really focused on and highlighted. Like how important is that in the sales process when you're getting down to the OEM level and OEM being the auto OEM level in terms of environmental footprint, trying to meet some of the environmental mandates and emissions reduction and environmental footprint reductions that a lot of these companies are out there. How more is that in the sales process at this point, if at all? And then I have a couple of follow-ups on that.

It's -- when an OEM is involved and that OEM is certainly out of Europe although also in the United States now increasingly, it's everything. I mean it is a -- one of the -- other than the surety of knowing that they can get supply from you and that there might be -- that there's a basis for an economic agreement. It is right at the top of the list. And that is why we have done things on the mining side, like joined the initiative for responsible mining, IRMA. That is why we have set the targets we have on ourselves to reduce -- improve water or reduced water use, introduce more renewable energy into our mix, improve our energy efficiency. These are all things that are very important from a value proposition. The fact of the matter is, Colin, that you put a kilogram -- you make a kilogram of lithium. There's a certain environmental footprint with that associated with that of CO2, but it pays back more than 50x once it's in use. So it's much -- there's still that efficiency value. But the automotive OEM says, that's my value proposition, not yours. Yours has to be to make it more -- with lower and lower and lower intensity still over time. So it's becoming table stakes, those who do it well, it's becoming a differentiator. And I would not -- I would -- as any differentiator, I would not dismiss that those who do it well are able to capture better value than those who don't do it as well.

Okay. That's super helpful. And as you see this ramp, we're obviously at low inventory levels on lithium right now, and we're seeing a variety of things kind of get rebalanced in terms of the global auto supply chain. How long do you see, I guess, shortage of supply at this point? From our perspective as we look at the electrification of not just the transportation market, but increasingly all other areas of the economy as we move towards net-zero. There's a lot for lithium ion and more efficient battery chemistries to enable from a functionality perspective. So I guess, how long does this last? There's been this kind of feeling that maybe by 2025, things settle out, but my suspicion is that we're going to be all the way to the end of the decade on tight supply. So I guess, do you guys have a view on that yet and where the variables are, what variables are you tracking right now?

Yes. I mean we -- Glen could talk a little bit. We do a lot of modeling on this. And that modeling includes not only extensive modeling of demand but extensive modeling of supply. We look at -- we evaluate what's out there. As we're in the resource business and looking to acquire resources over time to grow beyond 2025, we're constantly valuing resources. We understand the competitive landscape. We understand the process technologies, where we look at different extraction technologies on the mining side. So we have a very large technology effort that all reports and Glen that he could share with you. The punchline, though, is that it's just -- it's -- the industry is not -- is growing. It's becoming more mature. We're getting better ourselves. But the whole industry needs to get better over time in its ability to deliver projects on time to meet demand. I don't see tightness being alleviated anytime soon just because we're going as fast as we can and we're improving, but we're just keeping up basically with our customer base. So I think it's going to be tight for some time. Glen, do you want to add any data behind that from the data team that reports into you and the work you do on analytics?

Yes. Yes. Thanks, Eric. And it's probably worth maybe just throwing out there, part of the lithium ecosystem that we model, it goes all the way from the minerals to the market. And so your question, Colin, is on both sides, what do we think is going to happen on demand? Is that going to be monotonically increasing the way we see it or even maybe more acceleration. There's a particular part of supply chain inefficiency as mature as lithium ion batteries are kind of in the first ones were introduced 20-plus years ago, we're still at the infancy of what the lithium ion battery industry is becoming. And that's sort of a realization we're starting to see is there's some supply chain efficiencies. And the other thing that we need to think about is lithium that's being purchased today is being purchased to satisfy demand 6 to 9 months in the future, okay? And so it's a constantly reaching forward and trying to pull in the future, and that future is also accelerating. And so I think that's the phenomenon that we're really building some analytics around to understand what can we do to help in the areas that we can control that it's a phenomenal test bed and looking for productivity opportunities. So this is something like Eric said is we're closely building out scenario models to help us make sure we're well positioned.

Well, guys, we're running out of time here. So I think we may need to leave that here. But I think just to reiterate, there's a couple of dynamics here. One, capacity is being built out kind of as quickly as it can be at this point to meet demand. Demand is growing at a very accelerated rate. You guys are looking at always from a vertical integration perspective and a process technology perspective to optimize the supply chain, coupled with analytics and really starting from your innovation center at the end product and how you can work all the way through to the basic materials and that this is going to be an iterative kind of reflexive process as we move forward here. And so I think it's a little bit cheap to say, "Hey, watch this space, but that's kind of what's going on here." It's from a conclusion perspective. And as you guys continue to optimize these investments and operationally, there is a very significant element of environmental consideration that's going into the customers' consideration. And frankly, it's going to be reflected in circular economy type approaches, not just at the recycling a battery perspective but also at the basic consumption of elements within the process perspective. So guys, thank you so much for making the time today. Certainly for the investors that dialed in, thank you for making the time. We're happy to extend this conversation because it does feel like we had a lot that we did not quite get to here. But thank you all for being here, and we look forward to continuing the conversation as we go forward. Enjoy the afternoon. Talk to you soon.

Thank you, Colin. Appreciate it.

Thank you.