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Is Chile Losing Ground to Other Lithium Producers?

Photo of lithium deposits in Chile Chile’s lithium production slipped to second place in the world in 2017, and it is expected to fall to third place by 2028. // File Photo: Chilean Government.

Chile is home to the world’s largest reserves of lithium, a mineral that is key to the energy transition. However, the South American country is currently the world’s second-largest producer of lithium after Australia surpassed it in 2017, and Argentina is also expected to overtake Chile in lithium production by 2028, according to a recent forecast from JP Morgan. How important is lithium to Chile’s economy? What are the biggest challenges for the sector, and why is the country losing ground to competitors? To what extent is the Boric government expected to support the sector? What lessons can Argentina learn from Chile’s experience?

Gal Luft, co-director of the Institute for the Analysis of Global Security in Washington: “In the early days of the oil industry, Azerbaijan was the world’s biggest petroleum producer. But as demand for automotive fuel spiked, the country lost its hegemony to other producers, mainly in the Middle East. Chile is poised to meet a similar fate when it comes to its lithium. The country has already lost its number-one producer status to Australia and it is expected to slide even lower on the producers list as new projects are coming online in China, Argentina and elsewhere. The Chilean lithium industry scored a lot of headlines thanks to its role in the global green energy transition, but in reality, it is not a big player in Chile’s economy, and it is not expected to ever become one. Lithium carbonate makes up barely 1 percent of Chile’s export revenues. The industry faces many detractors and challenges. Environmental groups and the Indigenous population are becoming increasingly agitated by the environmental impact of lithium production. The industry is increasingly being viewed as a liability rather than an asset. In addition, the idea of increasing mining royalties and even nationalization of key resources by a socialist government, while presently not on the agenda, is still in the public discourse, chilling investors’ appetite to partake in the future development of the industry. Many investors, including top Chilean producers SQM and Albemarle, are seeking greener pastures in neighboring Argentina, where the regulatory conditions appear to be more favorable. This may be misleading. Argentina is now desperate for foreign investment and may be more welcoming, but it too is expected to face similar problems as Chile. It is encouraged to proceed with caution, ensuring that the industry grows in a healthy pace and remains transparent and ecological. Rapid industry expansion is hugely risky. The sharp spike in electricity prices throughout the world could dampen demand for electric vehicles and reverse optimistic projections about a lithium boom, leaving enthusiastic lithium investors in Latin America with big holes in their pockets.”

Carla Bass, Latin America editor at Argus Media: “The strategic and future importance of Chile’s lithium reserve outweighs its immediate economic contribution. Copper dominated all but a sliver of the entire mining industry’s 14.6 percent share of Chile’s GDP in 2021. Restrictive regulations have limited the number of lithium producers to two, while other countries have taken a more open approach to international investment. The Boric administration’s focus is on launching a national lithium company and creating value-added lithium products domestically. Chile will need a significant infusion of funding to do this. It has not ruled out public-private partnerships for the state firm, which could provide a boost. Yet, the new administration has tasked itself with numerous priorities including writing a new constitution—even if lithium is also a focus —and it could struggle to maintain momentum. Argentina’s new energy minister, after several cabinet shakeups, is Flavia Royón, who in her previous post in Salta province worked to open development of lithium there to both domestic and foreign companies. This could help cement the sector in Argentina, although it faces additional economic challenges, including energy subsidies that could reach 3 percent of GDP this year. Argentina’s new reference prices for lithium carbonate could also deter investment, some industry groups warn, while Chile may offer preferential prices and guaranteed supply agreements for makers of value-added products. Mexico and Bolivia are striving for value-added approaches as well but are progressing slowly. Yet more competitors will eventually emerge, and Chile will need to be proactive for lithium to form a larger share of its economy.”

James J. A. Blair, assistant professor in the Department of Geography and Anthropology at Cal Poly Pomona: “Chile is well known as a source not just of lithium but also copper, with mining contributing more than 60 percent of the country’s exports. However, a series of scandals, some involving litigation, have halted expansion of lithium mining. While some benefit-sharing agreements do exist, there has also been a lack of timely consultation of Indigenous communities. There have also been several controversies over corruption and data transparency, as well as widespread concerns over water depletion and wetland conservation. The reliance on brine evaporation as an extraction method for lithium mining has exacerbated conditions of ecological ‘exhaustion.’ There is an ongoing debate about how brine resources are connected to nearby lagoons, but scientists have already demonstrated that lithium mining is linked to declining local populations of two of the three species of flamingo in the Atacama salt flat, suggesting that impacts could worsen as lithium mining expands. If the new constitution is approved in Chile, it could offer mechanisms for stronger monitoring and governance through specific articles related to mining and water. Chilean President Gabriel Boric has shown support for the sector by proposing the creation of a state lithium company that would partner with private firms to expand and offer more shared regional governance with Argentina, Bolivia and Mexico through a lithium association. As far as what lessons these countries could learn from Chile, Indigenous rights to free, prior and informed consent must remain paramount, and it may be prudent to be less reliant on brine evaporation as an extraction method, while instead encouraging faster, potentially more sustainable ways of obtaining lithium through battery recycling or direct lithium extraction, particularly in arid areas where brine deposits are connected to freshwater aquifers and fragile wetlands. Nonetheless, it is critical for freshwater use and brine disposal to be closely monitored and regulated.” 

Daniel Jimenez, partner at iLiMarkets in Santiago: “Indeed, Argentina will overtake Chile in lithium production. Lithium legislation in Chile has been the biggest deterrent to the industry’s development because the owner of a mining property is not the owner of any lithium resource found there. The miner would need to apply for a special exploitation license, which no privately owned company has yet been granted. So, the incentives to explore have not been there. This, added to populist proposals to nationalize lithium, creates perfect conditions not to invest. Finally, permitting is a nightmare in Chile, and it is becoming worse. In terms of the importance of lithium to Chile’s economy, recent lithium prices have certainly changed things in a big way. During the first half of 2022, SQM alone contributed more tax revenues and royalties than Codelco, the state-owned copper company. The biggest challenges for the sector, however, remain jurisdiction and permitting. Instead of supporting the sector, the Boric administration is planning to create a state-owned lithium company, which will most likely not develop anything in the next 10 years. Argentina should not try to learn any lesson from Chile’s experience and should continue doing what it has done: treating lithium like any other mineral and allowing the industry to flourish.”

Manuel Agosin, professor in the school of economics and business at the University of Chile: “The problem is government policy. The current government wants to establish a state-owned lithium company without having the technical knowledge of how to extract and commercialize the sector. This is a rapidly moving story. Those who don’t get into the act soon are bound to be left on the sidelines. Having lithium is not enough. It is essential to go beyond ideology so that the Chilean people can benefit from this resource. Using lithium as a springboard to a new era of advanced manufacturing will not happen. Instead, the government should try to extract as much value as it can from multinationals willing to enter the sector.” 

William Tahil, research director at Meridian International Research: “Chile’s difficulties in increasing lithium production are due to physical constraints. Since 1978, the lithium reserve base of Salar de Atacama has increased from 2.2 million metric tons (Mt) to 25 Mt based on considering greater depths into the Salar. In 2017, SQM presented its analysis with Atacama divided into three brine aquifers–a surface, intermediate and deep aquifer. SQM shows the upper aquifer containing a measured 1.9 Mt of lithium. The intermediate layer has 2.2 Mt measured, 5 Mt indicated and 7 Mt inferred. The lowest layer has 9.7 Mt inferred only. This gives a total ‘proven and probable’ of 9 Mt and inferred of 17 Mt. Therefore, the reserves consider that the deep halite body contains brine. However, earlier surveys showed the halite to be solid below 30 meters. Only the top 30 meters had high transmissivity. Therefore, the most accessible and easy to extract resource only contains 1.9 Mt of lithium, spread out over 1,100 square kilometers of the salt body. Also, the ‘sweet spot’ of highest lithium concentration has been in production since 1984. Since then, some 300,000 metric tons of lithium metal has been extracted. In 2008, I estimated that the central region of high lithium concentration, 30 square kilometers in extent, contained 450,000 metric tons of lithium before production started. Two-thirds of that may therefore have been extracted. This means that more brine now has to be processed for equivalent production than in the past. Another critical issue is water. Water resources are scarce and disputed. Growth has already been and will be restricted due to this. Although Chile has 59 lithium deposits, the second most promising resource, Salar de Maricunga, only has reserves of 390,000 tons, with much less favorable extraction conditions. With around 50,000 metric tons of lithium carbonate equivalent production, at current near record prices of $70,000 per metric ton, lithium is worth about $3.5 billion to Chile. Production might be doubled, but the electric vehicle industry is looking for prices to return to $10,000 per metric ton. It is in the interests of lithium producers to keep supply tight.” 

Macarena Michienzi and Nicholas Wehner, both specialists in the public policy, risk & strategy practice at Cefeidas Group in Buenos Aires: “While Chile’s copper exports account for roughly 17 percent of its total GDP and more than half of its export volume, the country maintains a strikingly different relationship with its lithium reserves. Chile’s lithium exports in 2021 were 50 times less than those of copper, amounting to just under $1 billion and only 0.3 percent of the country’s gross GDP. While countries such as Australia and Argentina have prioritized lithium production in response to the green energy boom, Chile’s lithium production has foundered and not broken 0.2 percent of its total reserves. This is due in part to unclear regulations and elusive mining contracts. Likewise, uncertainty surrounding the newly drafted constitution, which Chileans will vote to approve or reject on Sunday, and its impact on the mining industry has hampered production. Environmental regulators have sanctioned mining initiatives in Chile’s lithium-rich Salar de Atacama, citing often opaque regulatory stipulations, while mining operations in Argentina are subject to provincial laws that are often more forgiving. In Argentina, the Fernández administration recently lowered export taxes for the mining sector from 12 percent to 8 percent. In neighboring Chile, the Boric administration’s proposal to increase industry taxes and impose mining royalties—aimed at funding social programs—has unnerved mining companies. In a moment of skyrocketing demand for lithium that has driven prices upwards by more than 350 percent from mid-2021 to mid-2022, the financial incentives for lithium-rich countries have never been greater. Both Chile and Argentina can attract greater foreign investment by streamlining the mining contract application process, clarifying ambiguous regulations and establishing expectations for future changes to industry taxes and tariffs.” 

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