It Looks Like One of Lithium's Leading Sources Could Be Shaky

There are exciting developments occurring in a country where more than any other country in the world, there are greater reserves of a precious battery metal.

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In Chile, the government is seeking majority stakes in new contracts with private companies involving lithium extraction and production as it is transforming its model. In attempting to provide a more equitable distribution of Chile's resources, President Gabriel Boric is treading a fine line between preserving Chile's place as one of the world's foremost players in the transition to clean energy, and preserving its position as a major player.

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When the No. 2 lithium producer globally begins to transition from a state-run system to a company-run system, the risk is that the supply of the most valuable mineral in the battery supply chain will be compromised at a time when the auto industry requires it more than ever.

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In an interview with TradeAlgo this week, Canadian mining billionaire Robert Friedland described money as a coward and admitted that it runs away when trouble comes knocking. "Money is a coward and runs away when it senses trouble," he said.

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A number of companies signed operating contracts with Chile, who then were assigned quotas. Chile is by far the highest paying country for lithium exports, with a marginal 40% rate of the price of lithium exports. It appears that Chile, which had only two operations on the same salt flat, has lost out on global production to countries with more investor-friendly rules, such as Argentina, because of its comparatively small number of operations.

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As the founder of Global Lithium advisory firm, Joe Lowry, stated, uncertainty over how the new state-owned lithium company will operate is one of the biggest negatives. After Boric announced his new strategy on April 21, shares of SQM, which operates the world's largest brine operation in Chile's northern desert, plunged a record 19%. The shares of Albemarle Corp., Chile's second producer, also dropped by 10%.

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After the protests that broke out in 2019 and continued for the next two years, Boric is trying to secure a greater share of the mining windfall for schools, hospitals, roads, bridges, and addressing inequalities. In addition, he has proposed that operations in one of the driest places on Earth adopt a new technique which uses less water, although the method is still relatively new and could result in lower output at first, since it is relatively untested on a large scale.

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According to Nicolas Grau, the Minister for the Economy of the Republic of Colombia, the objective is control over the companies, in order for the various fundamental decisions to be made, we should always take into account the nation's interests.

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A number of companies have indicated that they are interested in partnering with Boric's administration in projects that will allow them to tap more of the world's biggest resources, which has been well received by the administration of Boric.

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As a result of having the state as a partner, companies may be able to gain the acceptance of local communities and the broader society, as well as to navigate red tape more easily.

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According to Cesar Perez-Novoa, an analyst at BTG Pactual, these benefits may be appealing to smaller exploration companies, but more established companies would appreciate not having their roles lowered.

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Despite the government's vow to respect existing agreements, SQM and Albemarle, which supply companies such as Tesla Inc. and LG Energy Solution Ltd. of South Korea, are also suppliers to Tesla Inc. Two options were given to the two incumbents by the government: they could continue to operate for the remainder of their contracts, or they could allow the state to take a majority stake in the company earlier, with the understanding that they would be able to keep operating for a longer period of time.

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Albemarle, whose contract expires in 2043, will be able to continue production under the new model, as compared to SQM, whose contract expires in 2030. SQM expects to reach an agreement to continue production under the new model.

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Chile's new lithium model still surprised many investors, despite the fact that it was clearly telegraphed. Citigroup analysts predict that investors will remain on the sidelines until there is more clarity on financial risk-sharing. It was written in a report to clients this week that they might divert capital to Australian and Canadian companies if uncertainty persists. Argentina is also one of the likely beneficiaries if uncertainty persists.

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It is unlikely that the EV makers will have the time to wait for those early-state projects to ramp up and produce, which takes years, even if money shifts to another country. Other countries are also experiencing a rise in resource nationalism as well, as Mexico's President Andrés Manuel López Obrador declared lithium a strategic mineral too, and Myanmar, Zimbabwe, and Indonesia imposed restrictions on the production of various commodities as well.

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This particular event adds a fresh level of uncertainty to the supply chain for the electric vehicle market, according to BTG Pactual's Perez-Novoa, since Chile has an undisputed reputation for sourcing critical minerals for all of the world. It is counterproductive for the lithium market in general and, as a consequence, for the electric vehicle industry that requires lithium supply. This uncertainty will negatively impact both markets.