Courtesy of Stratfor’s Worldview, a look at the impact of Chile’s decision to nationalize its lithium industry:

Increased state control of Chile’s lithium sector may lead to a mechanism for new investment, but higher associated costs could limit investor interest. On April 20, Chilean President Gabriel Boric announced that he would seek to “nationalize the country’s lithium industry” through a proposed “National Lithium Strategy.” This strategy would require all new lithium contracts to be public-private partnerships in which the state has majority control over mining. However, the strategy does not include any immediate expropriation of assets; instead, it would simply let private companies’ existing lithium mining contracts expire, which would mitigate the short-term impact of the new strategy on the country’s lithium output. The proposed National Lithium Strategy also stipulates that Chile, via its state-owned mining companies, would be able to exercise veto powers over key decisions related to lithium exploration and extraction. The government also charged state-owned copper companies Codelco and Enami with developing lithium on existing salt flats under their purview until the National Congress approves the creation of a National Lithium Company to take over the effort. However, these copper firms do not have the lithium-specific expertise or financing to meet this charge on their own, so it is highly likely that they will pursue public-private partnerships.

> Lithium is a key material in lithium-ion batteries and is, consequently, central to the production of electric vehicles, energy storage units and batteries for portable electronics. Therefore, lithium is a vital part of the global energy transition.

> Chile is currently the second-largest producer of lithium in the world, after Australia, and has 29% of the market share.

> Chile currently exports the raw materials for batteries (lithium carbonate and lithium hydroxide), though the Boric government is considering refining the raw material into specialist battery chemicals domestically using technical assistance from German companies.

> The only privately-owned lithium production companies in Chile are the United States’ Albemarle Corp. and Chile’s SQM, and their contracts are set to expire in 2043 and 2030, respectively.

Boric’s National Lithium Strategy is, in part, an effort to make it easier for more private-sector lithium mining companies to gain concessions, through which the government grants private companies the right to extract lithium from public land. Currently, lithium is classified as a “strategic resource” in Chile and concessions are granted on a case-by-case basis, necessitating congressional approval. However, legislators’ inability to agree on terms for new lithium concessions has prevented any private companies from gaining new concessions over the last 30 years, which has severely limited investment in new operational facilities. Therefore, investors may be enticed by the idea of a streamlined concessionary model for Chile that could open the door to new investment in the country. However, if the Boric administration is unable to pass the National Lithium Strategy through Congress, the country’s current model would remain in place and likely continue to hinder the granting of concessions for new lithium mining projects.

> In 1979, the government of Chilean dictator Augusto Pinochet passed a law declaring lithium to be a strategic resource, stipulating that its production was “the exclusive prerogative of the state.” In practice, this has meant that the state has majority ownership of development projects but can offer concessions to the private sector.

> Chile’s government granted concessions to Albemarle and SQM in 1982 and 1985, respectively.

The same political constraints that currently hinder the concessionary process will likely impact Congress’ ability to successfully negotiate and pass the National Lithium Strategy, at least in its current form. Chilean lawmakers will heavily debate the plan in the second half of 2023, and it will need support from four-sevenths of these lawmakers to pass. However, many of the center-left parties on which Boric’s government relies will likely disapprove of the National Lithium Strategy’s requirement for state majority control of public-private partnerships. While it is possible that Boric will gain their support if he meets the center-left’s still unannounced demands, this would still likely result in a weakened version of his proposal. Additionally, a concurrent process to draft a new constitution in Chile could stall efforts to pass the legislation, especially should the constitutional drafters seek to change the way the state views metals and minerals like copper and lithium. As a result, there is no guarantee that Congress will pass the National Lithium Strategy at all, much less with all of its stipulations intact.

> On March 8, Chile’s lower legislative house unexpectedly rejected a government tax reform that would have established an additional wealth tax, eliminated some tax exemptions and increased income taxes for high earners. Though the vote was close, some members of center-left parties voted against the reform, citing the potential for high earners to seek employment elsewhere should they be levied with higher taxes. This is an example of the difficulty Boric experiences pushing legislation through Congress.
> Chile is currently undergoing its second effort to rewrite its constitution, and the public will either approve or reject a final draft through a referendum in December 2023. The conservative Constitutional Convention may seek to make lithium or copper mining more accessible to the private sector, potentially leading to clashes between the National Lithium Strategy and the draft constitution.

But if Congress does pass the National Lithium Strategy, the rarity of the proposed ownership model for extraction projects could hamper investor interest drawn by the streamlined concessionary model. Though the details of the National Lithium Strategy have not yet been released, officials have indicated that Chile’s yet-to-be-created National Lithium Company would seek a 51% stake in any future consortiums. This is rare for the lithium sector, in which countries such as Argentina and Australia take their share via corporate income taxes, royalties, special export taxes or taxes on lithium companies. The sum of such taxes varies from country to country, but it rarely exceeds 20%-30% of revenue. By contrast, the partial ownership model proposed by the National Lithium Strategy indicates that the state will seek to take its share through a percentage of production or a percentage of revenue, raising the costs to companies interested in investing in Chile’s lithium sector. Other countries that have adopted similar nationalization strategies in their lithium sectors, such as Bolivia and Mexico, have not successfully attracted many new project startups since their implementation.

> Argentina’s mining investment law allows for duty-free imports of equipment, includes tax breaks and fiscal stability, and establishes export royalties of just 3%.
> Australia’s mining regulations establish a 5% royalty for any lithium concentrate at the first point of sale.

In addition, if passed, the new lithium regulations would likely increase overhead costs for companies looking to invest in Chile because of longer lead times and potential extraction technique requirements. Before presenting the National Lithium Strategy to Congress, the Boric administration will conduct a community consultation process with local Indigenous groups whose ancestral lands include areas of interest for mining, and the government may also require lithium companies to consult local communities themselves before beginning individual projects. Although the specifics of this process are unclear and could reduce potential Indigenous anti-mining protests, such consultations could significantly stall new projects, increasing already-long lead times. (That said, it remains unlikely that Congress would pass a National Lithium Strategy that enables local communities to single handedly veto new projects.) Additionally, Chile’s mining minister made comments in March suggesting that the National Lithium Strategy may require all private companies granted new lithium extraction concessions to use an uncommon production technique to save water amid a decade-long drought. If the government follows through on this requirement, the new extraction process could also increase overall costs for companies looking to invest in Chile, as research on the little-used method would likely need to be developed.

> Currently, the majority of lithium extraction is done through a technique involving piping out large amounts of lithium brine and then storing it in large evaporation ponds for over a year before processing it.

> The Boric government is proposing a process called “direct lithium extraction” that involves rejecting the brine back into the salt flats, which would reduce the environmental impact. However, the process would need to be developed to adapt to the physical condition of each particular salt flat, likely increasing research and overhead costs absent a major near-term technological breakthrough.

In combination, the stipulations in Chile’s new lithium strategy may dissuade new investment, potentially driving investors to countries with more business-friendly lithium policies. As the National Lithium Strategy may complicate project startup conditions — due to state control, higher overhead costs and longer lead times — lithium companies that had previously been interested in Chile may seek to invest elsewhere, particularly in Australia. Australia is the world’s top producer of lithium and offers investors the political and economic stability desirable for multi-year investments. Constraints in Chile could also lead to new lithium investment in Argentina due to its uncharacteristically favorable investment climate and similarly bountiful lithium reserves, though the country’s unstable economy makes this alternative less likely. If private mining companies do move their operations out of Chile, technology companies that currently rely on Chilean lithium, such as Tesla Inc. and LG Energy Solution Ltd., would need to further diversify their supply chains away from Chile or pay a higher premium for the raw materials for batteries.

As quoted in a Financial Times article from early May, a consultant for an Argentine lithium project who worked at SQM for 28 years said, “If it was my money, I would go and explore Argentina, Brazil and Africa. You’ll get ripped off in Chile.”