20 June 2018

Why Cashing in on Lithium in South America Won't Be Easy


Argentina, Bolivia and Chile will increase in importance as the global demand for lithium rises. Political, logistical and regulatory challenges will prevent the three countries from developing their lithium reserves to their full potential. Because of Chile's quotas and Argentina's shift in economic outlook, Chile is likely to benefit most from the larger global demand for lithium.

South America is home to a veritable goldmine. The mountainous border region shared by Argentina, Bolivia and Chile — dubbed the South American lithium triangle — holds some of the world's largest reserves of lithium, making it poised to rise in importance as the demand for the globe's "new oil" increases in the years to come. However, a host of political and regulatory risks, as well as logistical impediments, will hamper the development of lithium in the area, meaning the only country to fully benefit from the riches that lie beneath could be Chile. 

The Big Picture

South America’s large lithium reserves will bring the region into the global spotlight in the coming years. As the demand for lithium increases significantly, so will the importance of countries that produce this strategic metal. The South American lithium triangle, consisting of Argentina, Bolivia and Chile, boasts some of the richest lithium reserves in the world, meaning that the countries could benefit greatly from the resource. But as Stratfor noted in its 2018 Third-Quarter Forecast, countries like Argentina face difficult challenges ahead, meaning that it might fail to take full advantage of the demand for lithium.

Dealing with Political Risks

Politics represents one of the primary risks threatening the development of South America's lithium. Presidential elections will occur next year in Argentina and Bolivia, where Mauricio Macri and Evo Morales will respectively seek re-election. The Argentine leader faces an uphill battle to re-election, especially as his political capital wanes due to a foreign currency crisis that prompted him to sign an unpopular agreement with the International Monetary Fund.

Macri’s administration succeeded in implementing a series of economic liberalization reforms, including an end to foreign currency restrictions and a tax reform that made Argentina more attractive to foreign capital. However, the unpopularity of the president's reforms could catapult a populist into power, ushering in heavier state intervention in the economy. In fact, Macri announced a tighter fiscal adjustment plan this month that will force the government to further cut public spending and negotiate lower wage increases with labor unions.

In Bolivia, Morales is also losing popularity but has reason to feel confident of another presidential term due to divisions among his opponents. The threat of nationalization and heavy state intervention will remain ever-present if Morales secures re-election — a prospect that might discourage foreign investors interested in the country's lithium reserves. In fact, foreign companies seeking to invest in Bolivia's lithium industry are obliged to partner with the country’s state-owned hydrocarbon company, YPFB.

Politics is not the only impediment to the development of lithium, as the logistical challenges of exporting the element to international markets are also considerable.

Among the three countries in South America’s lithium triangle, Chile enjoys the most political stability. Parties from either side of the political spectrum have alternated control of power since the end of Augusto Pinochet's dictatorship in 1990 without ever imposing any major changes to the country's mostly conservative fiscal policies. Moreover, the country's center-right president, Sebastian Pinera, is likely to push for economic liberalization reforms that could reduce corporate taxes from 27 to 24 percent.
Grappling with Logistics and Red Tape

Politics, however, is not the only impediment to the development of lithium, as the logistical challenges of exporting the element to international markets are also considerable. Argentina's lithium reserves, for example, are mostly located near the border with Chile, putting them far from its ports on the Atlantic coast. And Bolivia's lack of maritime access limits its ability to trade with countries outside South America. Thus, in spite of its electricity problems and water scarcity, Chile might be best-placed to benefit from the world’s hunger for lithium, especially because the reserves' proximity to Pacific ports will simplify exports to China.

Argentina, meanwhile, has introduced new corporate tax measures that could entice foreign investors. The country passed a tax reform last year to reduce corporate taxes from 35 to 25 percent on the condition that companies reinvest part of their profits in the country, which could encourage companies to invest in lithium in Argentina. These regulatory changes are already making Argentina more attractive to foreign investments, including companies engaged in lithium production. Earlier this year, SQM, a Chilean lithium company that is currently the world’s largest lithium producer, and Canada's Lithium Americas announced plans to jointly invest $500 million in developing lithium in the Argentine province of Jujuy, with production expect to start in 2020. Exar, another Canadian mining company, also said last year that it would invest $700 million into lithium production in Argentina. The government is also expected to provide Congress with a new mining code designed to make mining laws, especially those regarding environmental regulations, more flexible. But as Macri's popularity plummets, this new mining code — as well as the rest of Argentina's planned reforms — could come under threat if the incumbent loses next year's election.

To the north, Bolivia might have the amplest lithium resources in South America, but its regulatory hurdles also present the biggest obstacle to production. The country does not permit any foreign company to extract lithium and only allows such firms to participate in the production of lithium if they partner with YPFB. Bolivia also lacks the technical expertise to accelerate the development of its lithium reserves — a fact evidenced by the government's failure to meet its production goals for lithium. Despite a goal to produce 40 tons of lithium carbonate every month from the Uyuni project by 2011, it currently produces a mere 10 tons per month. 

Though it has interfered in the industry, Bolivia did sign a $1.3 billion investment agreement last month with Germany's ACI Systems to construct four lithium plants over the next three years. However, the country does not currently produce enough lithium to supply the plants — which will manufacture batteries and other lithium products — meaning Bolivia must increase the extraction rate of the metal if the new venture is to succeed.

Ultimately, the prospect of nationalization will represent the biggest risk for foreign investors. Bolivia has toned down its previous rhetoric on nationalization, but its description of lithium as a strategic natural resource suggests that it could consider assuming control of the resource once production picks up and the metal fetches better prices. If that happens, lithium producers might cast a wary eye back at 2006, when Morales nationalized the Bolivian assets of major oil companies such as Petroleo Brasileiro (Petrobras) and Repsol.
Advantage Chile

Blessed with more favorable logistics, Chile appears most likely to capitalize on its lithium reserves — especially as the country is beginning to reduce quota limits on investors, which are the primary regulatory barrier to more lithium development projects there. Because lithium is considered a strategic metal, Chilean officials have imposed a maximum production quota on private companies to prevent any single firm from acquiring a monopoly on the resource's production. This policy, however, is gradually changing — and Chile’s investment prospects are changing with it. Last March, Chile’s Nuclear Energy Commission approved a request from SQM to increase its lithium production quota. As a result, the company will have the right to produce 349,000 tons of lithium per year by 2030, instead of the current 164,000.

The three South American countries in the lithium triangle stand to gain from the increased demand for the metal, but none seem likely to benefit as much as Chile.

A number of partnerships between Chilean companies and foreign companies are already in the works. In an effort to secure all aspects of new energy supply chains, Chinese company Tianqi Lithium is seeking to finalize the purchase of 24 percent of SQM. Chile’s regulatory agency Corfo could still block the deal, but the government's support for the agreement suggests that the sale will proceed — perhaps by next month. SQM has been negotiating a deal with Tesla to construct a lithium processing plant in Chile, while a South Korean consortium led by Posco and Samsung are planning to construct a cathode plant in the Chilean port city of Mejillones by 2021 as part of a $54.02 million investment. Such deals, however, would require greater lithium production — possibly in excess of the new quotas.

The three South American countries in the lithium triangle stand to gain from the increased demand for the metal. But thanks to a degree of political and economic stability comparatively absent in its neighbors, none seem likely to benefit as much as Chile. Argentina could surpass Chile if Macri can implement his economic liberalization plans — but the prospect that such reforms will continue is diminishing due to his fading political hopes in the face of a financial crisis. Likewise, Bolivia trails both of its southern neighbors, as there appears little chance that it will become a more welcoming place for investment. The opportunity is thus Chile's to lose as it aims to capitalize on the globe's growing appetite for lithium.

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