Thursday, July 18, 2024

Chile/Lithium: Boric needs to avoid hitting the golden goose


Resource nationalism is on the rise. As commodity prices climb, governments are clamoring for a bigger piece of the pie. Chile is the latest country to exert greater control over key resources. This week, President Gabriel Boric unveiled plans to nationalize the country’s vast lithium industry.

The plan, which still needs to be approved by lawmakers, will not affect existing lithium mining contracts. These are organized by two companies, Albemarle and Sociedad Quimica y Minera de Chile, or SQM. Shares of both fell heavily in response. Future contracts will be issued only in the form of public-private partnerships, with the state having majority control.

Borik must tread carefully, lest he run the risk of killing Chile’s golden goose. The country has the world’s third largest lithium reserves of about 11 million tonnes, after Bolivia and Argentina. SQM claims that under the current arrangement it already pays two-thirds of its gross profits to the Chilean government.

Lithium is a key component in the batteries that power electric vehicles. Weak demand for EVs in China has caused prices to fall nearly 70 percent from their November highs. But Borik is betting longer-term demand trends will provide the necessary leverage to retain foreign investors despite new government demands.

It’s a gamble. Albemarle and SQM are publicly listed companies that answer to their shareholders. Chile has been receptive to foreign investment in the past. This decision casts some doubt on that legacy. If the country makes contracts too expensive or difficult to operate, it risks losing out to other lithium-rich countries such as Australia.

State-owned companies in South America do not have the best record in managing natural resources. But more changes may be coming. One major concern is how the change in lithium policy will affect sentiment in the large copper mining industry, which accounts for more than half of Chile’s exports.

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