Image Source: Chilean presidency/Ximena Navarro/Handout via Reuters.
As Mexico and Argentina face disputes over their exploitation of their countries’ valuable lithium deposits, last week Chile saw over 50 companies express interest in nearly 90 new lithium projects as the country aims to become a leader in the global lithium trade. President Boric’s new national lithium strategy was set in motion on May 31, 2024 with a significant agreement signed between the state copper producer Corporación del Cobre de Chile (Codelco) and private lithium producer Sociedad Química y Minera de Chile (SQM). This public-private partnership, aiming to share ownership of lithium resources across Chile’s salt flats, aligns with Boric’s vision to enhance state participation in the extraction and production of lithium. This strategy, introduced on April 20, 2023, aims to ensure that the benefits of lithium production are more equitably distributed among all Chileans. The strategy aims to gain the benefits of public and private collaboration via the newly established partnership: private input is expected to help Chilean lithium exploitation continue to adapt and become more efficient, while state participation will ensure a wide-reaching divide of the economic benefits.
Boric ultimately aims to create a national lithium company that will eventually take over most lithium production in Chile. Some laws still need to be passed for his government to achieve this. Congress is anticipated to attempt to dilute the reform as the president cannot count on all the required support, keeping investors in a wait-and-see mode. Given that it takes about eight years to make a new lithium project operational, this delay could hinder global efforts to boost lithium production rapidly. However, if the bill’s statist elements are diluted, the reform could offer investors greater regulatory clarity and opportunities, potentially boosting confidence in the medium to long term. If not, criticism of this policy will persist.
Chile has always had a strong state control over lithium resources. In fact, in 1979, lithium was declared a strategic resource, and today only two companies, SQM (a Chilean company with a quarter owned by Tianqui, a Chinese investor) and Albemarle (a U.S. company), have contracts with the state that allow them to extract and develop the mineral. But these contacts will not be extended as they are. Though the government has stated it will respect existing contracts with SQM and Albemarle, which expire in 2030 and 2043, respectively, the state intends to become the majority stakeholder in both lithium projects after the contracts end.
That is why the agreement between Codelco and SQM is the crystallization of Boric´s administration´s lithium strategy. This partnership, which will begin on 2031, will give the Chilean government 85 percent of the operating margin of the new output through payments to Corporación de Fomento de la Producción (Corfo), taxes, and the payments received by Codelco as a shareholder. Concretely, the agreement outlines the future production plans under the new structure, which will give operational continuity to SQM’s operations in the Atacama salt flat through 2060, as under the existing leasing contract between SQM and the state development agency CORFO, which owns the salt flat property, was set to expire on December 31 of 2030.
This agreement raises questions about the potential impacts of increased state control over this strategic resource. Although the strategy aims to ensure that the benefits of lithium production are distributed more equitably among all Chileans, it has drawn scrutiny from mining executives and analysts alike. Critics argue that the plan could have the opposite of its intended effect, further diminishing the attractiveness of the world’s second-largest lithium producer as an investment destination, potentially benefiting lithium competitors like Australia and Argentina. Daniel Jimenez, who spent 28 years at SQM, remarked, “If it were my money, I would go and explore Argentina, Brazil, and Africa. You’ll get ripped off in Chile.” This scrutiny stems primarily from the uncertainty surrounding state-run operations and the diminishing opportunities for private companies to operate freely. The new approach has also been compared to similar policies instated by left-wing governments in Bolivia and Mexico to generate greater state control over critical industries. The move comes as part of a more significant global trend where governments are adopting statist policies in mining as resource nationalism gains prominence amid efforts to reduce carbon emissions.
Boric’s strategy also presents significant risks that could undermine the country’s economic growth and competitive edge in the long run. U.S. cooperation and investment have always been a critical resource for Chile, and today, with U.S. President Joe Biden’s most ambitious plan to help boost green, sustainable energy in the Inflation Reduction Act (IRA) and a Chile-U.S. tax treaty being discussed in Congress, both countries have a lot at stake in the future of lithium in Chile. Chile accounts for 43 percent of U.S. lithium imports today, and with China taking a big lead in lithium capacity, the U.S. is looking to expand on this number, putting Chile in a great position to expand its market share. However, U.S. investors are more likely to be cautious as they enter heavier negotiations involving the state, for which China has a much higher tolerance. Juan Ignacio Lagos, a Chilean tax lawyer, says in the Financial Times: “Jointly with the battery tax credits outlined in last year’s U.S. Inflation Reduction Act, the approval of the Chile-US tax treaty may have the combined effect of ramping up American investments in the Chilean lithium scene. The ball is in the U.S. Congress.” The fear of losing U.S. investment is a concern both for Chile and the U.S., and today, the Boric government could be falling short in securing that partnership.
While the vision of increased state participation in Chile’s lithium industry aims to maximize national benefits, the potential downsides must not be overlooked. The risks of reduced foreign investment and inefficient use of state-managed funds could significantly hinder Chile’s economic development and its competitive position in the global lithium market. It’s crucial to be aware of these potential risks and to carefully monitor the implementation of the strategy to mitigate any negative impacts.
Juan Diego Solis de Ovando Bitar is a research intern at Global Americans.
Next Generation Commentary is a Global Americans series offering fresh insights from young analysts on the Americas, including our talented staff and interns.
