. Some out-takes from the Livent earnings call:There have been a...

. Some out-takes from the Livent earnings call:

There have been a few factors that have come together in 2019 to drive Livent's costs higher as compared to last year. Some factors have been out of our control, such as weather-related disruptions and foreign exchange rate fluctuations. However, demand from our customers continues to outpace our ability to produce sufficient product -- in particular, the lithium carbonate needed to feed our hydroxide units. This has required us to purchase third-party carbonate, and we expect to continue to do so until our first phase of carbonate expansion comes online.

for the third quarter, we expect revenue to be in the range of $105-115 million, essentially flat at the midpoint compared with last year, as the trend of higher volumes and lower average prices seen in the first half of the year continues

I want to conclude on slide 9 by giving a high-level update as to what the key lithium markets are looking like today from Livent's perspective. There are a lot of positive indicators in the market, with demand fundamentals better than we had expected six months ago. There is, though, a supply overhang that is likely to prevent prices from increasing before 2020. However, demand is growing faster than we had previously forecast, and supply additions are slowing, giving us confidence that today's pricing environment does not reflect the longer-term outlook

The market for electric vehicles continues to be very strong. Passenger EV sales globally were up roughly 45% through the first half of the year compared to the same period last year, and sales in China were up over 60% in this period. More importantly, when we combine EV sales with average battery size, we can see that the total reported megawatt-hours of battery capacity sold in passenger EVs was roughly 150% higher in China for the same period, and ultimately, it is this metric that drives lithium consumption.

For the most recent quarter, reported sales of higher-nickel chemistries, such as NMC 622, NMC 811, and NCA, were up 40% in China compared to Q1 2019. Not surprisingly, given this trend, hydroxide sales are significantly ahead of last year, with global sales approaching 50,000 metric product tons through the first six months, roughly double the same period in 2018. Independent data suggests that sales of hydroxide was over 10,000 metric product tons in June alone. Based on this data, we are increasing our 2019 hydroxide market demand forecast to 100,000-110,000 metric product tons, an implied 55-71% year-over-year increase compared to last year. We will revisit our 2020 demand forecast numbers once we have Q3 market data and have had more discussions with our own customers about their needs for 2020 and beyond.

We believe that one of the key drivers of this faster growth is the increased involvement and direction from global auto OEMs, which is providing greater clarity throughout the entire electric vehicle supply chain. As OEMs prepare for new vehicle launches in 2020 and beyond, they're taking a number of important steps to prepare. Many are now announcing firmer commitments with multiple battery suppliers, typically on a vehicle platform basis, and are being more precise with specifications as to battery type, cathode technology, and battery pack size.

Just as important, they are more directly engaging in the qualification processes, not just of the batteries themselves, but also of the battery raw materials. The greater involvement of OEMs has, in turn, helped the battery producers more clearly plan their own production roadmaps, and as a result, we're seeing more qualification activity taking place by battery and cathode producers, as they look to establish hydroxide purchasing agreements for 2020 onwards.

As the OEMs get more directly engaged, we are seeing this translate into more stringent specifications for lithium, and slower qualification processes as a result. A greater variety of specifications are also being requested, whether it relates to impurity levels, particle size, moisture levels, or even whether the hydroxide is produced directly from spodumene or brine-based carbonate. This is resulting in a rapid proliferation of the forms of hydroxide that are needed, making it more challenging to meet customer requirements. Equally important, because of the cost and time required to qualify producers, battery companies are looking to limit the number of lithium suppliers they qualify on each platform or vehicle.

I'd like to comment on the inventory and supply situation in the market, which is having a negative impact on the pricing environment for 2019, but which also points to the likelihood that when pricing for hydroxide does recover, it is likely to do so quickly. There is continued oversupply and excess inventory of spodumene in Australia and China, as Australian miners have brought on more capacity in the first half of this year. Much of this inventory is in China, but there are also meaningful inventory levels in Australia. Consumers of lithium products are expecting lower prices until this inventory has been consumed.

Hydroxide inventory at Chinese producers has been built ahead of demand, reflecting the economic incentive to run plants continuously to keep costs per ton down. However, hydroxide has a shorter shelf life, and therefore is being pushed into the market, creating further pressure on prices.

Carbonate inventory is elevated at some customers, particularly outside of China. This is due to a number of factors, most notably the temporary suspension of production of ESS batteries in Korea and the more rapid than expected move away from carbonate-based chemistries toward hydroxide-based chemistries for the EV market. However, we believe the destocking of hydroxide inventory at cathode producers is largely complete, with customers now operating with much lower inventory levels. This is not a surprise, given broadly held views as to pricing trends in the coming months, but it is an important factor in our view that when prices do start to increase, they will do so very quickly.

My last point is connected to my final observation about the supply situation in the hydroxide market. At current prices in China, third-party reports indicate that many spodumene converters are operating at the marginal cost of production, even allowing for lower spodumene input costs, which clearly isn't economically sustainable for them in the long run. Perhaps more important, supply additions outside China are increasingly being delayed, reduced in scale, or put on hold altogether. Spodumene expansions in Australia are being delayed, as we believe that current spodumene pricing is insufficient to cover both operating costs and reinvestment costs for many producers. And crucially, previously announced projects to build at-mine hydroxide plants are also being reassessed, as both capital costs of construction and the forecasted operating costs are simply too high for them to be viable with prices where they are today.

Not surprisingly, given the environment we are in, traditional financing for new projects is largely unavailable, while nontraditional financing sources are prohibitively expensive, but this will not impact 2019 or 2020 supply. Much of the enhanced additions due to commence production in 2021 are unlikely to start up until later, if at all.

So, to conclude, while we remain cautious on the 2019 pricing environment, we are increasingly positive on the long-run pricing environment. We remain committed to adding the capacity and the capabilities needed to meet the requirements of our customers, not just today, but over the next decade and beyond.

There's no doubt that the supply situation is far more bearish than the demand situation. We've seen -- our best estimate is, as I said, about 110,000 tons of hydroxide is going to be purchased in 2019, but we think about 140,000 tons may be produced. And so, not only do you have a situation where there's a lot more volume available into the market relative to demand than we'd expected, I think the single biggest driver of pricing today is a customer who, first and foremost, has destocked. Why would you hold hydroxide inventories when A). It has a finite shelf life, and B). You see the price going down in the future?

So, I think we've seen destocking at the capital material producer of hydroxide, but we've seen -- based upon expectations as to spodumene prices, there's been a decline in marginal cost of production at that spodumene-based hydroxide producer, so put yourself in the minds of a rational consumer of lithium hydroxide. You're going to destock the inventory you have today. You're going to defer purchases to the future because the price will be lower in the future than it is today. If you look at the spodumene story and see a continued increase in spodumene output, you don't see pricing of spodumene recovering anytime soon, so you don't have a huge incentive to do anything more than buy what you need in any given month.

Frankly, I think that's what we've seen going on. Meanwhile, supply comes in in larger lumps. There's always an incentive, particularly on a spodumene-based unit, to just run them -- run them flat out and produce the product. Unlike carbonate, though, you're going to start asking questions. How long can I hold that hydroxide as a producer of hydroxide? The longer it sits -- particularly if it's not in a temperature-controlled or humidity-controlled warehouse -- the more it wants to turn itself back into lithium carbonate. As you start to head down that path of moisture and clumping in the material, it starts to fail specifications of customers, so you have a supply that is coming on that is rather immediately being pushed into the market, and any rational consumer of lithium hydroxide today is looking at that and saying, "I'm just going to buy what I need as I need until the situation changes."