Shares of the world's largest lithium producer, Albemarle (NYSE:ALB), plummeted 7.1% on Thursday following news out that rival Sociedad Quimica y Minera de Chile (NYSE:SQM), or SQM, had resolved its dispute with Chile's economic development agency. The deal clears the way for SQM to significantly increase its annual lithium production.  

SQM's stock price dropped at the opening on Thursday, as lithium pricing concerns weighed on the entire group. However, shares of the world's second largest lithium producer nearly fully recovered from their more than 4% decline by the closing bell, ending down just 0.9%.

As for the other big publicly traded lithium producer, FMC Corp. (NYSE:FMC), its shares lost 3.9%, while shares of junior miners Galaxy Resources, Lithium Americas, and Nemaska plunged 6.8%, 14.9%, and 6.9%, respectively. (Trading in Orocobre was suspended this week through Thursday due to anticipation of the release of material news. Indeed, the Australian miner announced on Tuesday that the trading unit of Toyota is taking a 15% stake in it.)

Here's what you should know.

A salt desert showing evaporation ponds with a mountain in the background.

A lithium salt desert. Lithium mineral-containing brine is pumped above ground into evaporation ponds. Image source: Getty Images.

SQM gets green light to significantly hike lithium production

The SQM news didn't come as much surprise to those closely following lithium miner news. Earlier this week, I reported that "SQM could soon receive permission from Chile's state-run economic development agency Corfo to boost its annual production of lithium considerably more than the market was anticipating," citing a Reuters report. Indeed, this is what happened when SQM and Corfo met on Wednesday with the aim of resolving their years-long, bitter dispute, centered on Corfo's claims that SQM was underpaying royalties per its lease agreement at the Salar de Atacama. (The Atacama salt desert is currently SQM's sole supply of lithium, though the company has other development projects in the works. Albemarle also "mines" lithium from brine at Atacama, via a lease agreement.) 

Greater-than-expected lithium supply on the horizon means that lithium prices should be lower than what analysts had been projecting based on their supply estimates. Albemarle, SQM, FMC Corp., and other lithium producers have been benefiting greatly over the past few years from booming demand, which has resulted in surging lithium prices. This dynamic is being driven by the electric-vehicle revolution, as lithium is a critical component in the lithium-ion batteries that power EVs. The lithium businesses of the big three diversified chemical companies have been driving their financial results and stock prices.

A Tesla Model S driving on a road along a body of water at dawn or dusk.

Lithium prices have boomed in recent years, driven by the demand for lithium-ion batteries to power electric vehicles. Image source: Tesla.

SQM looks on track to gain market share

Since SQM is the lowest-cost lithium producer, its increased production should give it greater power to take market share from other lithium producers. As to market share, estimates vary considerably by source. One solid set of numbers, though a couple years old, are from lithium expert Joe Lowry, who runs Global Lithium LLC: Albemarle, 22%; SQM, 21%; China's Jiangxi Ganfeng, 12%; FMC, 10%; China's Sichuan Tianqi, 10%; and other, 25%. These numbers have likely changed somewhat, but they should be good ballparks. The key point is that Albemarle and SQM are the dominant players, though the Chinese have been making strides in gaining share in recent years.


I'd say the market got it right by leaving SQM stock unscathed and punishing shares of the other lithium players. While SQM would also be hurt by lower-than-expected lithium prices caused by greater-than-anticipated supply, higher sales volumes would help lessen or potentially even neutralize the negative impact. Meanwhile, the other lithium companies would be negatively impacted by lower prices and could possibly lose market share to SQM.

While the Corfo news increases SQM's attractiveness relative to its peers, keep in mind that the company is based in a developing country and so has higher financial and political risks than U.S.-based Albemarle and FMC. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.