SQM Earnings: Lithium Demand Slowdown Will Prove Temporary, Keeping Market Undersupplied

We maintain our SQM SQM fair value estimate of $100 per share and narrow moat rating after incorporating the company’s first-quarter results. At current prices, we view SQM shares as undervalued with the stock trading in 4-star territory at a little more than 25% below our fair value estimate. The current stock price implies lower lithium prices for longer due to falling spot prices, which are down nearly 60% from the start of the year, as lithium generated around 80% of companywide gross profits in 2022. However, we point to a temporary slowdown in demand as the driver of falling prices and forecast strong demand will ultimately keep lithium undersupplied for the remainder of the decade.

Despite lower spot prices, we forecast SQM will realize roughly flat prices in 2023 versus 2022, in the low-$50,000 per metric ton range. While spot prices currently sit around $31,000 per metric ton, we point to rising China spot prices as an indicator that the temporary return to market balance between supply and demand has ended, with the market shifting back to undersupply conditions as demand growth remains strong. We forecast spot prices will rise through the rest of the year. As SQM generally sells its lithium at short-term contracts, realized prices will likely fall during the second quarter, down from the $51,000 per metric ton price realized in the first quarter, but rise sequentially in the third and fourth quarters.

The slowdown in demand also affected SQM’s first-quarter volumes, which were down 15% year on year versus the prior-year quarter. However, on the earnings call, management noted customers have begun buying lithium again, which should lead to sequential volume growth throughout the year and slightly higher volumes in 2023 versus 2022. As SQM finishes its planned capacity expansion in Chile and its project in Australia enters production later this decade, we forecast total volumes will grow to over 250,000 metric tons by 2030 from 157,000 in 2022.