According to Morningstar, industrial chemicals, fertilizers, iodine and lithium producer Sociedad Quimica Y Minera De Chile ( SQM) bears believe the company faces possible oncoming pricing pressures in its lithium segment owing to the possibility that Australian miner Orocobre could add as much as 40,000 metric tons of lithium production over the next several years; over the last few years, Chinese producers have already accelerated production. Morningstar also notes that SQM has in the past resorted to more expensive energy sources during natural gas shortages in Chiles. "This situation is expected to continue, eating away at the company's profits."
Potential SQM bull scenarios highlighted by Morningstar include a surge in lithium prices owing to strong demand for lithium batteries in the electric vehicle space, and the usage of lithium-aluminum alloy in next generation airplane models. Morningstar says bullish developments at its other units including any SQM ramp up of potassium chloride production in an already "oligopolistic market" and increased biofuel production partly through government mandates. The latter should drive up corn, sugar and palm oil prices, Morningstar points out, giving farmers more incentive to use fertilizer to increase crop yields. "We predict SQM will maintain its market share leads," Morningstar analyst Jeffrey Stafford says in note. "However, this is not a foregone conclusion, given that the company will always be susceptible to irrational pricing in all of its markets.