When capital takes umbrage, its retreat is swift, as Chile’s recent endeavor to nationalize lithium production demonstrates. Upon the revelation of the government’s intention to assume greater control over this pivotal resource for energy transition, share prices of the two mining firms operating in the South American nation—Chilean Sociedad Química y Minera (SQM) and American Albemarle—plummeted.
Lithium, a metal widely employed in rechargeable batteries, such as those powering electric vehicles, is witnessing soaring demand amid the global energy transformation. The International Energy Agency forecasts electric car sales will achieve record-breaking figures this year. Chile, the world’s second-largest lithium producer with the most substantial proven reserves, extracts the metal from brine by pumping it into artificial ponds where water evaporates.
At present, SQM and Albemarle remit royalties to the Chilean government. However, President Gabriel Boric’s blueprint envisions a state-run lithium production company that mandates collaboration with the two private enterprises when their contracts terminate in 2030 and 2043, respectively.
Although seemingly distant, SQM, whose contract expires in 2030, seeks prompt discussions with the Chilean government. Negotiations will encompass not only revenue-sharing but also extraction methods, as current practices consume vast amounts of water in the water-scarce Atacama Desert.
According to Caspar Rawles, Chief Data Officer at Benchmark Mineral Intelligence, emerging technologies to extract lithium directly from brine without water evaporation are under development. However, these novel techniques have yet to prove their efficacy in the realm of lithium and cobalt extraction, essential battery components.
Compulsory adoption of these nascent extraction methods breeds uncertainty among businesses, as the efficacy and yield of these techniques remain unproven. Moreover, the mere mention of a “state-owned enterprise” unnerves investors, as it often connotes inefficiency and diminished profit shares. Consequently, SQM’s share price plummeted by nearly 20% last week, while Albemarle suffered a 10% loss.
President Boric’s primary aims are environmental protection and a more equitable distribution of lithium mining proceeds. He has proposed, for instance, that local communities surrounding the lithium industry should benefit from the revenues.
Boric’s plans await approval from the Chilean Congress, where he lacks a majority. However, he is not alone in his endeavors on the international stage. Mexico preceded Chile last year by nationalizing its lithium industry, while Indonesia took similar measures in 2020 by banning the export of its nickel ores, another crucial battery material.
The unveiling of these plans occurs at a critical juncture. Battery raw material prices are highly volatile, with lithium being no exception. After a meteoric rise, lithium prices plunged dramatically in November last year. Compared to the end of last year, lithium is now 70% cheaper.
This price drop may be attributed to a seasonal effect. In China, the world’s largest automobile market, several electric vehicle subsidy programs expired at the end of last year. Anticipating a temporary sales dip at the beginning of this year, cathode manufacturers for batteries began offloading their lithium stockpiles.
Experts highlight that lithium prices remain substantially higher than in previous years and maintain their demand projections. Consequently, lithium prices will likely rise again. This week, lithium carbonate—a heavily traded variant in China—increased in price for the first time this year on a daily basis, albeit modestly, with a 3% hike on Thursday.
Chile’s move to nationalize its lithium production has sent ripples through the industry, as businesses and investors grapple with the implications of this shift in strategy. While President Gabriel Boric’s plans are rooted in environmental protection and a more equitable distribution of profits, they have sparked concerns over the potential impacts on the extraction process, efficiency, and profitability of lithium mining.
As global demand for lithium continues to soar amid the energy transition, it remains to be seen how the nationalization efforts in Chile and other countries will impact the market and supply chain. With the Chilean Congress yet to approve Boric’s proposals, the future of lithium production in the country hangs in the balance. However, the recent uptick in lithium prices signals that demand remains strong, and the pursuit of sustainable extraction methods will be crucial for the long-term health of the industry and the environment.
