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Why does Chile want a 75% lithium stake? It’s “nationalisation”?

Earlier this month, Chile’s President Gabriel Boric announced plans for the state to take a majority stake in the country’s lithium industry, sending shock waves through the new energy metals sector.

According to the proposal, a state-run lithium company will be set up to take control from private players, and any new lithium contracts will only be issued as public-private partnerships with state control. Notably, current contracts will not be terminated.

In a televised nationwide broadcast, Boric said, “We want Chile to become the world’s leading producer of lithium, while protecting the biodiversity of the salt flats… This is the best chance we have at transitioning to a sustainable and developed economy.”

The South American country is currently the world’s second-biggest producer of lithium and has the largest reserves. Boric’s decision is likely to have a global impact as lithium is today one of the most sought-after metals on Earth. Also referred to as “white gold”, the metal is used in rechargeable batteries, which power not only laptops and mobile phones but also electric vehicles (EVs) — a crucial part of the world’s plan to tackle climate change.

Why has the Chilean government decided to take a majority stake in the lithium industry?

The reason behind this decision is two-fold: to boost Chile’s economy and protect its environment.

In recent years, Chile has struggled to keep up with the rising demand for lithium as countries transition to green energy. It dropped to the second spot on the list of the largest lithium producers in the world in 2017 — Australia jumped to the number one spot — and is poised to slip to the third position by 2028, as per a recent JPMorgan report. Hence, analysts expected the president to come up with a plan.

Boric said he wants to create a state-run lithium company, which will “promote, expand and control” the lithium industry, Al Jazeera reported. The new company will be set up on the lines of Codelco, a Chilean government-owned mining company which is now the world’s largest copper producer.

Formed five years after former socialist President Salvador Allende nationalised the country’s copper industry in 1971, Codelco has been a significant contributor to Chile’s GDP for decades. In 2021, its pre-tax profit surged to $7.6 billion from $2.1 billion a year earlier, Reuters reported. Boric seeks to build the lithium industry’s future on the illustrious legacy of Codelco.

The president also hopes that his plan would help limit the damage to the environment. The brine evaporation method used in current production has been widely criticised by local indigenous groups and environmentalists as the process consumes vast amounts of water, which is already scarce especially in the Atacama Desert, where most of the lithium reserves are located.

Also, lithium mining has damaged Chile’s biodiversity: a 2022 study found that the process has led to a decline in the number of flamingos in the area. Reuters reported that as water was becoming more scarce in the Atacama, fewer flamingos are reproducing, which could impact herd numbers.

Boric said that future mining projects will be implemented after consultation with local communities. “These salt flats are not just lithium, they are people, they are communities, they are water in the desert…. They are the home of cultures thousands of years old,” he said.

Currently, the country has two big lithium producers, the local company SQM and the United States-based Albemarle, whose contracts run till 2030 and 2043 respectively. As mentioned earlier, Boric has assured that these contracts will be honoured, but any new contract will have to have the state as a partner.

The president also hopes that before the contracts of SQM and Albemarle expire, the companies and the government would be able to find a way to boost state participation in their operations. While SQM earlier this week signalled that it was ready to start talks with the government soon, Albemarle said it would discuss state participation only when its contract is about to expire.

Some reports and experts have dubbed Boric’s announcement as the “nationalisation” of the lithium industry. Many have, however, pointed out that Chile’s constitution already defines lithium as a strategic and exclusively state-owned mineral, because of its possible use in nuclear fusion, the Al Jazeera report noted.

“Phrasing it as nationalisation is too strong … it’s a quasi-nationalisation in that the playing field will now be levelled in favour of the state,” Nicolás Saldías, senior analyst at the Economist Intelligence Unit for Latin America and the Caribbean, told CNBC.

What are the challenges to Boric’s plan?

Boric’s proposal to exert state control over lithium production in Chile will have to overcome several steep challenges. One of the biggest roadblocks is getting it approved by Congress, where the President’s party doesn’t have a majority, and would need the support of Opposition parties. Several other ambitious plans of Boric have already been buried by the legislative body.

Another challenge is the creation of a state-run lithium company. Experts believe that it could take years for Boric’s government and Codelco to implement the proposal as the latter doesn’t have any experience in lithium mining.

National elections slated for 2025 could also impact the plan. “If negotiations (between the private players and the government) drag out, the 2025 electoral cycle will begin to play a larger role as some candidates could offer a different vision for the country’s lithium,” according to a report from the Eurasia consultancy, Reuters reported.

Source: indianexpress