🔋Lithium Takeover
Chile's plan to nationalize lithium mining could have multiple ramifications in the US and has an ugly historical precedence.
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If you’re invested in lithium miners it’s probable you already know about this news. Last Friday, Chile announced plans to nationalize its lithium mining industry. This news comes at a cost to the share price of of large publicly traded companies like Sociedad Química y Minera de Chile S.A. (SQM) and Albermarle (ALB) which have mining interest in the country. Both stocks saw their prices plummet double digit percentages Friday.
Chilean president said that private contracts in place will be honored through the conclusion of the agreement. The contracts for SQM end in 2030 and ALB in 2043, so nothing really is drastically happening here… right? Like any emerging market, there is higher political risk like this. SQM and ALB face a likely decision of handing over a large share of control of mines or risk losing access to the mines altogether so investors may be weary of what outcomes these companies end up with and want to sell to hedge against potential future downside. This decision will also no doubt slow down new investment for the time being until details about the public-private partnerships materialize later in the year. The preliminary plan also emphasizes direct lithium extraction instead of the famous evaporation ponds under use currently. This technology while promising is still undergoing research and trials. This could be less cost effective but more sustainable for the environment.
The South American nations of Chile, Bolivia, Argentina, and Brazil want to become the “OPEC” of lithium so to speak. While Brazil doesn’t have the same reserves as the other three it holds influence in South America and can potentially add value in other areas of the lithium supply chain. The three nations minus Brazil house about 65% of the worlds lithium known resources and are in charge of about 30% of current production. Chery Inc. will build an EV and battery plant in Argentina along with potential investment in lithium refineries coming to the region in addition to the large interest in mining.
Chile is no stranger to policies like this and I’m referring to its own copper industry in the 1970s. The 70s have similarities to today with high inflation, geopolitical tensions, and more which I discuss in Crude Awakening. At the time, Salvador Allende, a socialist leader was elected in Chile in 1970 and nationalized copper mines. Economic and political drama ensued [1, 2]. By 1973, a CIA led coup (actually pretty well documented at this point and not a conspiracy theory, even going as far as funding known human rights violators) led to the installation of infamous dictator Augusto Pinochet whos rule lasted until 1990. For those who are not aware, Pinochet excecated thousands of political opponents, threw tens of thousands in interment camps, and ended up being charged with things like embezzlement and various human rights violations. Pinochet renewed private ownership in all industries but copper. In the 90s following his departure from power, copper industry became more privatized once again.
Back to today. Chile has a free trade agreement with the United States, meaning the country is vital to the inflation reduction act. This action could severely hamper that bill if automakers were left with only Australia to source lithium from. Let’s hope the US doesn’t organize another coup. In reality though, they may still be able to pressure Chile away from going through with their nationalization efforts, as this is definitely on their radar.
Taking state control over lithium is a popular tactic for many emerging market governments to take. Just yesterday, Chad is trying to nationalize a pipeline effecting companies like Exxon. With foreign investment in the mining infrastructure, the motive to keep the value of their resources within the country makes sense. If someone was coming and taking your stuff in your backyard, its natural to think that you should be well compensated, albeit it’s your property. That’s the dilemma these emerging market governments face; the precious lithium resources are valuable and they want to make sure they are getting the most out of it and not being taken advantage of as the demand for lithium is high.
This is a conundrum at the core. Just how much profit should the mining company be allowed to carry in a certain jurisdiction. What is the line between a fair price and a mining company siphoning value out of the country and by extension citizens and employees? Conversely, how much control or taxation is inhibitive to the company to provide the best value for shareholders and the government by extension through its revenue? I’d argue it’s rather ambiguous and why these nationalization policies can draw so much popularity. While its easy to imagine that in developing countries we have this all figured out, but in reality we went through the same process just at different times, and perhaps taking different paths eventually. Here in the US to this day there is stringent regulation that stifles mining activity. Furthermore, there are still debates within the government about the fair share of profit that resource companies should be allowed. Higher oil prices exacerbated by the Russian invasion of Ukraine led to record profits for oil companies in 2022. There was serious debate over a windfall profits tax on oil companies to capture some of this value and take it away from the undeserving oil companies.
Under government control and without proper market signals, the state owned company is more likely to make arbitrary business decisions and potentially lead to market disruptions or the failure to foresee changes in the economic environment. Nationalization efforts may also stunt innovation without competition and create a natural floor for prices as the government will always be there as a buyer.
Another concerning thing about nationalization is the susceptibility to changes in future market conditions. Governments, like all of us have the psychological tendency to project the past into the future. With lithium prices going to the moon they take this action to capitalize on the value and assume it will continue indefinitely. As we are starting to see now, lithium prices are coming off. What if they go down more? While I am of the belief that the lithium supply/demand will tend towards unbalanced to the upside in the long term, I could easily see a counter political push or economic slowdown causing a sharp decline in prices in the short term. In the 1970s, that is exactly what happened. An economic downturn ensued, and even with a trajectory for higher copper demand, the economically sensitive metal (Dr. Copper) was hurt by the deteriorating demand from lower economic activity. This caused issues for the newly created state run enterprises in charge of the sector and certainly didn’t result in record income for the government.
I think commodities will gain influence in the coming decade as loose monetary policy and structural underinvestment in natural resources loom large. Under this backdrop I think we could see more nationalization attempts in the years to come as various materials become expensive and highly sought after. Add rising geopolitical tensions to the mix and you have the perfect recipe. It could be something like oil or copper which we have seen the playbook for, or other items like lithium, rare earths, gold, or even semiconductors. We will see how it plays out.
Until next time,
-Grayson
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Does Chile think the world will run on lithium based batteries forever? Solid state batteries made with cheaper materials are where we are headed...other solutions like sodium ion batteries are already being used in some applications. There is not anywhere near enough lithium in the world to run a battery based world anyway.