Albemarle Corp. Outlook Revised To Negative On Declining Credit Measures Due To Weak Lithium Pricing, Ratings Affirmed
- Due to a sharp decline in lithium pricing in the second half of 2023 that has continued into the first quarter of this year, S&P Global Ratings expects U.S.-based specialty chemical company Albemarle Corp.'s EBITDA and credit measures will deteriorate significantly in 2024.
- In addition, the company's high capital spending requirements, combined with the depressed lithium pricing environment, have pressured its cash flows and liquidity, which management is addressing by issuing mandatory convertible preferred stock (treated as 100% equity). This led us to revise our assessment of its liquidity to adequate from strong.
- Therefore, we revised our outlook on Albemarle to negative from stable and affirmed all of our ratings, including the 'BBB' issuer credit rating.
- The negative outlook reflects the at least one-in-three chance we will lower our ratings on the company over the next two years if lithium pricing does not improve along with a continued recovery in its demand.
NEW YORK (S&P Global Ratings) March 6, 2024—S&P Global Ratings today took the rating actions listed above.
The negative outlook reflects our expectation for a sharp deterioration in Albemarle's credit metrics for 2024 before its performance gradually improves in 2025 amid a recovery in its demand and lithium pricing.
Following its strong operating performance in 2022 and the first half of 2023, the company's earnings and credit metrics have been negatively impacted by weak lithium pricing and reduced demand. Lithium pricing has been very volatile over the past 12-18 months, with prices for lithium carbonate equivalent (LCE) ranging from $70 per kilogram(/kg)-$80/kg in the latter half of 2022 to only $10/kg-$15/kg as of the first quarter of 2024. High lithium prices led downstream companies to build their inventories in 2022, which was followed by a period of de-stocking in the latter half of 2023. In addition to this de-stocking, the demand for lithium has been negatively affected by the economic uncertainty in China, North America, and Europe, as well as higher interest rates, which have disrupted the end market's dynamics.
These unfavorable supply/demand dynamics add to the uncertainty around the timing of a recovery in lithium pricing and demand, which has depressed Albemarle's 2024 credit metrics. We expect lithium prices will gradually improve in the second half of 2024 but remain only slightly above their current trough-like levels. If LCE pricing begin to trend upward, in line with our expectations, we believe that the company's metrics would remain appropriate for the current rating on a weighted-average basis.
Based on these factors, we now believe Albemarle's funds from operations (FFO) to debt will fall to around 20% in 2024 before modestly improving in 2025 but remaining in the 20%-30% range (on an S&P Global Ratings-adjusted weighted average basis). In early 2024, the company moved to preserve its cash, including by implementing cost reductions and cutting back on its previously announced growth capital spending. We believe that Albemarle could further reduce its growth spending if lithium pricing remains lower for longer.
The company will continue to focus on its cash flows and liquidity amid the depressed lithium pricing environment.
Assuming the current lithium pricing environment remains unchanged throughout 2024, we expect Albemarle's liquidity would be stressed. As such, the company recently announced a plan to raise approximately $2.0 billion through the issuance of depositary shares (series A mandatory convertible preferred shares), which it will use the proceeds from for general corporate purposes, growth capital spending, and to repay its outstanding commercial paper. We believe Albemarle will remain focused on preserving its liquidity and, if needed, pursue asset sales or further reduce its growth capital spending. That said, the company's future expansion remains dependent on its high capital spending.
Albemarle maintains strong positions in several end markets.
The company maintains leading market positions in its key segments and has historically generated S&P Global Ratings-adjusted EBITDA margins in the mid- to high-20% range, which rose to 50% in 2022 amid elevated lithium prices before falling in 2023 to mid-20% range as prices declined. We expect Albemarle's S&P Global Ratings-adjusted EBITDA margins will be below 20% in 2024 before improving above 20% in the following years as lithium prices slowly recover. The company benefits from good geographic diversity, given that it derived over 85% of its net sales from outside of the U.S. in 2022. Albemarle manufactures lithium derivatives for various applications, including lithium batteries used in the automotive, grid storage, and consumer electronics end markets. In addition, the company benefits from its leading position in lithium, representing about one-third of the industry's production capacity.
The negative outlook reflects the uncertainty around lithium pricing and demand. The sharp decline in lithium pricing starting in the second quarter of 2023 has materially weakened Albemarle's credit metrics. In our base case, we expect the company's weighted-average FFO to debt will remain between 20% and 30%. If lithium prices remain depressed into the back half of 2024, we could consider taking a negative rating action on Albemarle over the next 12-24 months.
We could take a negative rating action on Albemarle over the next two years if:
- We expect the weak operating conditions will persist over the near to mid term, causing its weighted-average FFO to debt to drop below 20% with no prospects for improvement. Such a scenario could occur if lithium prices remain subdued throughout 2024 because of industry oversupply, the slower-than-expected penetration of electric vehicles (Evs), and continued global macroeconomic uncertainty;
- The company pursues transformational debt-financed growth initiatives such that its FFO to debt falls below 20% for an extended period;
- Its sources of liquidity weaken below 1.2x its uses for the next 12 months. This could occur if lithium pricing remains subdued for an extended period and management doesn't cutback on its growth capital spending; or
- The company is negatively affected by geopolitical factors such as--but not limited to--the potential nationalization of lithium in Chile, China's domination of lithium demand, pricing, and EV production, and a failure to cost effectively produce lithium compliant with the U.S. Inflation Reduction Act (IRA).
We could stabilize the outlook on Albemarle over the next two years if:
- We expect its weighted-average FFO to debt will remain comfortably between 20% and 30% while it maintains prudent financial policies that account for pricing volatility. Such a scenario could occur if lithium demand recovers and outpaces the substantial supply additions in the industry. We would also expect the company to generate a higher-than-expected level of EBITDA in its Specialties and Ketjen segments. Under such a scenario, Albemarle's EBITDA margins would need to expand by more than 400 basis points (bps) beyond our expectations and significantly improve its credit measures; or
- We believe the company's financial policies could support its maintenance of stronger credit measures after incorporating its potential growth initiatives (both organic and inorganic) and shareholder rewards.
Related Criteria
- Criteria | Corporates | General: Methodology: Management And Governance Credit Factors For Corporate Entities, Jan. 7, 2024
- Criteria | Corporates | General: Corporate Methodology, Jan. 7, 2024
- General Criteria: Hybrid Capital: Methodology And Assumptions, March 2, 2022
- General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
- General Criteria: Group Rating Methodology, July 1, 2019
- Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
- Criteria | Corporates | General: Reflecting Subordination Risk In Corporate Issue Ratings, March 28, 2018
- General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
- Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
- General Criteria: Methodology: Industry Risk, Nov. 19, 2013
- General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.spglobal.com/ratings for further information. Complete ratings information is available to RatingsDirect subscribers at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.spglobal.com/ratings.
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| Primary Credit Analyst: | Edward J Hudson, New York + 1 (212) 438 2764; edward.hudson@spglobal.com |
| Secondary Contact: | Daniel S Krauss, CFA, New York + 1 (212) 438 2641; danny.krauss@spglobal.com |
| Research Assistant: | Rohan S Thakur, Toronto |
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