Source: AFP.
In late April 2023, the government of President Gabriel Boric announced a long-awaited plan for Chile’s lithium mining sector. The new policy line envisions a dominating state role with a junior partnership role for foreign companies. While the Chilean government has eschewed the term nationalization, much of the financial media have called it just that, evoking shades of Cuba’s Fidel Castro, Bolivia’s Evo Morales, and Venezuela’s Hugo Chávez, where little or no compensation accompanied the state takeover of private sector companies. This is hardly the case in Chile. Nonetheless, although the Boric administration wants to find an eco-friendlier way of mining and augmenting national wealth, some see the proposed lithium plan as a potential red flag for new companies looking for lithium in Chile. Additionally, it raises big questions over the geopolitics of Chile’s lithium, an element that both China and the United States need to make the great energy transition from fossil fuels to renewables.
Chile holds a significant position in the global economy. As the world shifts from a dependence on fossil fuels to clean and renewable sources of energy, batteries have become a key part of the transition. Lithium, sometimes called “white gold,” is a critical component in batteries. Chile is the world’s second-largest lithium producer behind Australia and is a major supplier to the United States and China. The country is part of South America’s “lithium triangle” that includes Argentina and Bolivia, which have slightly larger reserves than Chile. Consequently, what happens in Chile does not stay in Chile.
The Boric administration’s proposed lithium plan is based on greater state control over the national lithium sector, following an approach of state guidance and participation in the extraction and processing of lithium for export. There is also a desire to create a value-added dimension with the development of a local battery industry. To facilitate this, the Chilean government proposes to create a new state company, the National Lithium Company, which will manage the lithium sector. Codelco, Chile’s state-owned copper company, will serve as its model—which, unlike many state-owned companies, has a solid reputation in the global mining industry. While the state establishes the new lithium company, Codelco will be mandated to manage and negotiate agreements concerning lithium.
The proposed plan will see state control of a little over 50 percent of shares in joint ventures with private investors. Current agreements with the two major companies involved in Chile’s lithium sector are SQM and the world’s largest lithium producer, U.S.-based Albemarle (ALB). SQM and ALB have long-term contracts, expiring in 2030 and 2043, respectively.
According to the new plan thus far, the two companies’ contracts will be respected, but upcoming negotiations with the government could result in changes. Reports indicate that SQM has already agreed to invest USD 2 billion into sustainable technologies to meet the government’s environmental goals, possibly to create a positive path to negotiations. New companies will have to agree to terms that include using state-of-the-art technology to reduce or eliminate environmental damage, better conditions for workers, and consulting with Indigenous and other local communities in the Atacama Desert region.
Two other major provisions are worth noting. First, Codelco and Enami (another state-owned mining company) will be granted a special permit to explore and mine lithium in regions where they are active and in the salt flats that are of commercial interest. The second is that the government will run tender processes to grant exploration and exploitation in “special lithium operation agreements,” which will have relevant state participation.
President Boric went out of his way to clarify that the new policy is not a nationalization. Indeed, it can be argued that the Chilean government, dating back to the Pinochet era (1974-1990), had already put into place a law specifying that lithium could only be exploited by the state (either directly or through its companies), through administrative authorizations, or special lithium operation contracts. Companies such as SQM and ABL operate under concessions made in the pre-1979 legal regime.
Responses
The Chilean political left and fellow leftists in Latin America like the Chilean plan as it fits into a wave of resource nationalism throughout the region. It is also popular to some degree across Chilean society, considering the success of Codelco, which has helped share the national wealth. At the same time, international investor reaction was largely negative, including a sharp sell-off in SQM and ALB stock and with the financial press labeling the new policy as “nationalization.” It can be argued that it is a nationalization, but it appears limited to assuming a state majority control.
The outcome could range from 51 percent to 49 percent, but there is a potential for it to increase to 60 percent to 40 percent in the long term for all lithium production in the country, making Chile a major player in the sector the way Codelco is with copper. Daniel Jiménez, a long-time SQM employee of 28 years, expressed his thoughts on the matter: “If it was my money, I would go and explore Argentina, Brazil, and Africa. You’ll get ripped off in Chile.”
The main risk for Chile is that when foreign mining companies and investors look for lithium opportunities, they may regard the country as less attractive. Indeed, in March 2023, ALB, which has been less active in Chile on the investment side, made a USD 3.7 billion bid to acquire Liontown Resources, an Australian lithium producer. SQM is developing a USD 1.4 billion lithium project with a local company in Australia.
Although Chile’s program is less controlling than Bolivia’s—which has until recently prevented through its own policies a lithium export business—Argentina is more open to foreign investment and foreign companies have flowed in, including those from Asia, Australia, North America, and Europe. Moreover, the growing demand for lithium (and batteries) is resulting in new finds of the critical metal in Africa and India. There is a risk that Chile could outprice itself.
China’s Role in Chile and Beyond
What may help Chile with the development of its lithium and battery industry is a plan announced by China’s major elective vehicle (EV) battery producer BYD to build a USD 290 million cathode-manufacturing plant in Chile’s Atacama Desert city Antofagasta. The Chilean government has given it preferential prices on lithium carbonate, which is critical for battery making. Chinese companies have proven to be flexible with demands for enhancing the local value-added industry. Although the project has yet to launch, a deal with China’s CATL (the world’s largest EV battery maker) was recently announced with Bolivia to mine lithium and help develop a local battery industry.
Chinese companies already have a stake in Chile’s lithium business through partial ownership of SQM, and China is Chile’s major trade partner. In a strategic play, Chinese companies are likely to be willing to deepen their investment in Chile’s lithium sector. Despite tougher regulations, the policy changes could help them maintain and secure supplies of a key ingredient in the great energy transition. China’s economic statecraft has made China the market maker in the next wave of energy. China processes 69 percent of the nickel, 75 percent of the cobalt, and 44 percent of the lithium that goes into batteries, as well as 70 percent of the share of the global stock of batteries.
The United States and other Western Hemisphere countries are playing catch-up to China. The Biden administration’s ambitious electrification plan, pushed along by the USD 369 billion Inflation Reduction Act, is largely oriented to jumpstart the clean energy sector in the U.S. with an emphasis on EVs and battery production. However, environmental regulations in the United States have made opening new lithium mines difficult, leaving Chile—which has a free trade agreement with the U.S.—and Argentina as its main suppliers. Together they accounted for a little over 90 percent of imports in 2021. Chile’s new policy direction raises questions as to the future dependability of Chile as a major supplier, especially if China assumes a greater role in the sector.
Looking ahead, the Boric administration is walking a narrow path between maintaining Chile as a destination for investment in lithium mining and navigating through domestic political constituencies. Chile must balance national interests in an increasingly competitive global critical metals sector. In this, the attraction of a state-led governing model is understandable, especially considering President Boric’s ideological leanings and the country’s relatively positive experience with Codelco. However, one need only look at Bolivia’s unfulfilled dreams of a lithium industry and Venezuela’s oil sector to see the downside risks of too heavy a state hand. Watch this space, as there is more to come with Chile’s lithium policies.
Scott B. MacDonald is Chief Economist at Smith’s Research & Gradings, Research Fellow at Global Americans, and Founding Member of the Caribbean Policy Consortium. His latest book, The New Cold War, China and the Caribbean, was recently published by Palgrave Macmillan.
