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Good morning and welcome to the SQM Third Quarter 2018 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Gerardo Illanes. Please go ahead.
Thank you. Good morning, everyone, and welcome to SQM’s third quarter 2018 earnings conference call. For your information, this conference call will be recorded and is being webcast live. You may access the webcast later on at our website www.sqm.com. Joining me today our speaker is Patricio Solminihac, Chief Executive Officer.
Before we begin, let me remind you that statements in this conference concerning the Company’s business outlook, future economic performances, anticipated profitability, revenues, expenses or other financial items, anticipated cost synergies and product or service line growth together with other statements that are not historical facts are forward-looking statements that term is defined under federal securities law.
Any forward-looking statements are estimates reflecting the best judgment of SQM based on currently available information and involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those stated in such statements. Risks, uncertainties and factors that could affect the accuracy of such forward-looking statements are identified in the public filings made with the Securities and Exchange Commission, and any forward-looking statements should be considered in light of those factors.
I now leave you with our Chief Executive Officer, Patricio Solminihac, for brief comments before we move to Q&A.
Thank you, Gerardo. Good morning, everyone. We post our results for the third quarter. Our net income reached $83.5 million. This is a decrease compared to the same period last year and have anticipated was mainly due to lower degree sales volume from directional logistic issues in Chile.
As mentioned in the press release published last night, the first stage of our major lithium expansion is allowing us to increase lithium capacity in Chile by almost 50%. This project was planned with a quick timeframe and a very low CapEx. The ramp-up of the overall and expansion of the lithium carbonate plant has confronted difficulties. This has led to a production shortfall and impacted our sales volumes in the third quarter.
We continue to work diligently and are advancing toward a solution for these production issues. We will solve this problem, and we will reach the 30,000 metric ton per year place capacity in near term. We believe fourth quarter sales volume will be significantly higher than the third quarter but less than originally expected letting us to reach approximately 45,000 tons this year.
The market in which we participate remains strong. We reiterate that 2018 lithium market demand is exceeded the expectations. I believe this will surpass 35% growth this year. Along with the stronger demand, various lithium projects have seen delays in recent months. These two factors have contributed to flat drive in the third quarter when compared to the previous quarter of this year. In the iodine market, price increased to almost $25 per kilo, in the third quarter, exceeding our expectations. And we are attracted to report regular sales volumes for the year.
Finally, in the potassium nitrate, we believe market growth will surpass 6% this year. This was reflected in our strong sales volume reported for the first nine months of the year.
We thank you for joining our call today. And I will open now the lines for questions.
[Operator Instructions] And the first question is from the line of Joel Jackson with BMO Capital Markets. Please go ahead.
Hi. This is Robin on for Joel. Thanks for taking my questions. So in Q3 and now guided Q4 volumes, lower than originally expected, yet second half pricing seems to be stronger than previously indicated at the Investor Day in September. So my question is how much of the pricing strength is due to higher hydroxide mix from shipping us carbonate given the production issues? And I guess put another way, would pricing be at these levels if you have net original volume targets? Thanks.
Basically the prices that we have seen, as we indicated in our press release, is the result of a very strong demand -- demand of being stronger than we originally anticipated, and also there has been delays in some of the production promises. So that’s why we have seen price keeping in the level that we had at the beginning of the year. What will -- would have been happened is that we have been producing more, we don’t know. I mean there -- always the price will reflect the behavior between the demand and supply that’s happening at anytime. But -- regarding your question there also effect of hydroxide and carbonate, we have not seen different effect on that prices of hydroxide as well as of carbonate both remain in the similar levels.
And just a follow-up to that. Some of your more contract-focused lithium peers have guided to both flat pricing in 2019. What is your early expectation for lithium price in 2019? And related to that, are you reconsidering policy against lithium long-term contracts? Thanks.
We are, at this very moment, working with our customers for the closer of contract for next year. And -- so we don’t know yet what the situation of prices will be next year. We are in the new of that process now. And regarding contract, longer-term contracts we have been working with some of our customer to have volume contract and we are finding ways of how to handle the ability of prices for the future. But we are now working with some of our customers to have longer-term contracts, but not at this price.
Next question comes from the line of Ben Isaacson, Scotiabank. Please go ahead.
Hi, it's Oliver on for Ben. So how should we think about lithium volumes next year? Will those be closer to the 70,000 metric ton run rate that you exit 2018? Or how much additional production from the extension 220,000 metric ton where you see? And will that ramp-up process result in lower volumes similar to what we're seeing with the current ramp-up?
Thank you. Basically we expect that all the issues that we face in the ramp-up will be solved and we will not have any issues to stop in '19, that's our expectation. We planned to try to recover our inventories. Now how much we will be sell -- we will be selling next year, of course, we are expecting to sell more than where we are selling this year. But we don't have yet specific target number. We are in the middle of discussion with our customers today.
Right, that makes sense. So on the potash business, we've seen pretty significant declines in volumes as you're ramping up lithium and MOP as well. So how does this trend develop when you to double and then triple your lithium capacity over the next several years? How low cloud those potash volumes actually and that's going long term?
We have to divide that leasing in shorter-term or medium-term and longer-term. Longer term, we are working in a couple of projects to be able to recover more products in our businesses. So we expect to recover some of the volume is the longer term period. Shorter term, we expect to continue the maintenance a little bit more. And also we will be using more of our potassium chloride in order to support decreasing volume in our potassium nitrate production. So finally, when you look at what we sell in the markets of potassium chloride, there are two effects: on that we are lateral ability because we use more for potassium nitrate, given the growth in potassium nitrate because of growth in the specialty plant nutrients as well as growth in solar salts. And at the same time, lower availability. So thoroughly we will be lowering 200,000 or 300,000 tons more of our sales with sales of potassium chloride in the short term.
And last one from me. So the results in iodine have been very strong, especially compared to where they were even last year where gross margins are now, I think up 10% year-over-year. And assuming that we're close to run rate that could actually be sort of double where they were three years ago. So my question is how sustainable is current pricing in iodine? At what point do we trigger a new capacity? And I think there've been some closures in iodine or at least in curtailment by the producers. So is that capacity able to restart and sort of what prices does that come back on?
We are -- as we indicated in the press release, we are in the levels of $25. We believe that there is still space to grow some of the prices next year. And then still with those additional growth, we will not see restart of high cost production at least.
Next question is from the line of Lucas Ferreira with JPMorgan. Please go ahead.
My first question is a follow-up on the 2019 sales volumes. If you can -- I know, you assume not giving guidance on the number, but I remember you spoke on previous calls and mentioning that you were expecting to sell about 80,000 tons of carbonate equivalents. Would this change? And if you also can quickly comment on the Phase 2 progress, when that should start if you still expect to sell that 80,000 tons? Few on the carbonate side. I wanted to ask -- you mentioned and you've been seen that the hydroxide demand has been outpacing the overall market in your expansion volumes and your projects are pretty much focused on the carbonate. So my question is if at some point the company may reassess all the plan in expansion in carbonate and maybe start investing a little more in hydroxide that could either in Chile or outside Chile, if that something that you guys considered any story? My final question is regarding the production costs. Of course, I was expecting the production cost for lithium to increase because of the -- let's say, full quarter impact of the higher lease fees, but the cost that came above expectation. And I suppose it's regarding the, let's say, lower fixed cost dilution or maybe some extra cost and some impacts from these shortfall in volumes you had during the quarter. So if you can comment on any sort of one-off impacts on the costs during the quarter would be great. Thank you.
Thank you, Lucas. I will try to remember the questions. Well, first we have lithium hydroxide. The good news is that the expansion of our lithium hydroxide plant at stronger 6,000 to 13,500, is working well. We started up that plant and then we have not had any issues like the ones that we had in the carbonate plant. So lithium hydroxide plant is going well. We do have a plant, and we have indicated that we have already some approval of additional expansion in Chile with the traditional technology. And at the same time, I also reported that we are working in trying to find development for a new technology that will allow us to reduce or would allow us to reduce lithium hydroxide directly from grind and not through the route of lithium carbonate. And the third point on this is that we defined that our choice in Australia will be 100% lithium hydroxide. So we already have been taking caring our opinion of the needs of demand for lithium hydroxide and lithium carbonate. That is regarding that.
And regarding our -- what I indicated that we probably will be able to produce 80,000 tons, I always has been indicated that one thing, in 2019, one thing is to have the capacity then to produce and then to sell. Each of the systems is differently depending on the conditions. We decided that we want to have the capacity for sure because our lot low CapEx and what we see on the growth. So we already think and we are in the final ramp-up of starting of our lithium carbonate going to 70,000. And we continue working in order to have the second phase we will be to get to handle that 10,000. And we will continue to do that. Then, we given that we have in a very, very low inventory rate, probably we will try to produce as much as we can originally at the beginning of next year in order to recover the inventory. Now, how much we will sell? As I indicated before, we plan to sell much more than what we sell this year, but exact number will depend on how we see the market and how we see as we optimize the value for the company in the long-term.
Regarding the production costs, yes, you are right. The main issue here is our rent that we pay to CORFO. That it is, as you know, tied to the price. So, at the actual level of price of lithium product, we end up paying close to 23% of the sale meaning that today its $4,000. Besides that, we have some fix payment to CORFO, which go to the community and money that we give for certain development in Chile. Those two have affected because -- this quarter also -- because the lower volume. So that unit costs should go down in the future. And regarding the cost itself --production costs, in the quarter, we have a special additional cost of close to $300.
Next question is from the line of Laurence Alexander with Jefferies. Please go ahead.
I guess, can you give us a little bit more detail on the ramp delays that your production delays that you have this year. And specifically, what I’m interested in is have you learned any things from this that would make future delays on the next expansion of avoidable at perhaps the higher CapEx cost. So were there any learnings from these delays or were these just a normal kind of delays that you would expect?
Sorry. Your question was not clear. If you can try to repeat your question, so we can understand.
Sorry. So, I guess, what I might be asking about is with the delays that the production delays that you’ve indicated, can you fly to what expense you have learned things from that might affect how you approach delays or how you approach capacity expansions in the future? If any and perhaps it might change project design and might change CapEx. But have you learned any things from this that makes that avoidable? Or should we just assume that these -- this is within the normal lumpiness that will repeat on future projects?
Clearly, you're starting that we have a steady loss. And, of course, we’ll continue to analyze in detail to learn from these. Of course, we did not expect this and we didn’t like it. Basically, we have to remember that this project was designed to be very rapid -- very quickly implementation that was there because the market needed the volume very quickly, and at a very low CapEx. And to gear it, this was, I mean, translation of our actual plan operating at full capacity. So it was very difficult and very conflict. And we knew that that will be difficult and complex to have a quick implementation of the project at the low CapEx and intervening a plant that was operating at full capacity. We have some issues in some of the connections between the new equipment and the old equipment. We have some issues that we didn't expect that on some of the old equipment that will be out of the new plant. And then also some of the new equipment took a little bit more time to fine-tune their operations. We have been [indiscernible], but some of products have been out of state that we need to reprocess. So this is something that, of course, we are learning and we are using most all these learning experience for our future expansion. Also remember that this is not new product. We have been producing lithium carbonate for more than 20 years. We do have experience that's why we feel comfortable that we will be solving this in the right way.
This was our last question for today. This concludes our question-and-answer session. I would like to turn the conference back to our host for any closing remarks.
Thank you all very much for joining us today. And we hope to have you with us in the next conference call. Good bye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.