Big profits: A worker looks at melting copper in the foundry of the Chuquicamata copper mine, in Santiago, Chile. The country is the largest producer and exporter of copper in the world. — AFP
THERE’S nothing that gets private investors more alarmed than the prospect of nationalisation.
So it’s little wonder that mining companies are taking fright at plans announced in Chile last month to give the state more control over production of lithium, a crucial ingredient in rechargeable batteries for electric vehicles and power plants.
“Money is a coward – it runs away at the first sign of trouble,” Canadian mining billionaire Robert Friedland said in an interview with Bloomberg News after the plans were announced.
Latin America’s “lithium triangle” – the high-altitude desert on the borders of Chile, Argentina and Bolivia, where the element is precipitated from brines pumped to the surface of dry salt lakes – has been losing ground for many years to mines in Australia and China, where it’s ground out of hard rock instead.
An ill-conceived government takeover by Chile’s leftist president, Gabriel Boric, might seem just the thing to kill it stone dead.
That would be bad news for the global climate. Production of lithium carbonate (the standard compound in global trade) needs to increase nearly five fold, from 737,000 tonnes last year to more than three million tonnes in 2030, if we’re to meet soaring demand for electric vehicles and battery-power storage, according to McKinsey & Co.
If those supplies aren’t available, or are too costly, then the switch away from fossil fuel on the roads and on our grids will be slowed or halted, dimming hopes of averting climate change.
Battery prices rose 7% last year due to increasing expenditure for raw materials including lithium, according to BloombergNEF.
That’s a shocking reversal for a commodity whose costs fell 80% over the previous eight years, and one that makes it harder for electric vehicles to compete on price with conventional ones.
Still, a look at the history of Chile’s own mining industry suggests that government intervention needn’t be a death knell for private enterprise.
A greater role for the state may even help to solve some of the issues that have held back brine lithium, a cleaner, more profitable variety than the hard-rock compounds extracted elsewhere in the world.
It’s tax policy, rather than government ownership, which is most likely to determine whether Chilean lithium is about to boom or bust.
Chile’s most important export, copper, saw production soar in the five decades since Boric’s ideological forebear, Salvador Allende, nationalised the industry under Corp Nacional del Cobre de Chile, or Codelco.
The country’s output rose from about 686,000 tonnes in 1970 on the eve of the state takeover to 5.7 million tonnes in 2020, overtaking the United States to become the largest copper producer with a 28% share of the market.
Nationalisation was so successful that even Augusto Pinochet, the dictator who deposed Allende in a 1973 coup, didn’t attempt to reverse it.
It’s too simplistic to say that state-owned companies will always fall short of private sector ones. For every crumbling Petroleos de Venezuela SA out there, there’s a profitable, richly endowed Saudi Arabian Oil Co.
Codelco’s financial returns are unspectacular, but the ability to grow production from vast, venerable pits shows copper consumers needn’t fear its ability to deliver the metal.
Chile’s lithium sector may even benefit from a greater state role. In the decade before nationalisation, Chile’s share of the copper market withered as overseas mining companies saw better prospects in other parts of the world and starved the local industry of capital.
One of the biggest drawbacks of brine production is also an issue of capital: Precipitating lithium from the evaporation of salty water can take years, tying up funds and making the process unattractive for private investors who want a quick return.
Brine’s high cost of capital can overwhelm the higher profit margins the operations churn out once they’re in production, and even the substantial environmental benefits that derive from a process driven by the sun rather than industrial grinding and flotation machines.
The state has a longer-term outlook than the private sector, so is well-suited to being a provider of more patient capital.
None of that is to denigrate the role of the private sector.
Chile’s copper boom since the 1980s mostly came from independent companies developing resources that had been overlooked by Codelco, in their turn encouraging the state miner to operate in a more entrepreneurial manner.
If the country is to build a position in the lithium market analogous to its one in the copper supply chain, it will need to learn from the places where the state stepped back, too.
The most important of those centres on tax. The private capital that came to Chile’s copper sector in recent decades was tempted by rock-bottom royalty rates that made the country a highly attractive place to invest.
For those investors, the most alarming aspect of the country’s lithium reforms in recent years was not the prospect of a state-owned competitor or partner, but the chance that higher royalty rates might destroy the profitability of their projects.
That’s looking less likely by the day.
The latest version of the government’s lithium plan contains much lower tax rates than suggested in previous iterations.
With Boric’s major initiatives stalled in a congress where his allies are in the minority, it’s possible even this version won’t make it onto the statute books.
The groundswell of popular discontent that swept him to power is unlikely to dissipate overnight, though.
State and independent investors are likely to be stuck with each other in Chile’s lithium industry for years to come. That need not be reason to despair.
A public sector competing and collaborating with the private sector can often be a healthy way of ensuring ample flows of essential commodities.
There’s no reason that Chile’s history on that front won’t repeat itself. — Bloomberg
David Fickling is a Bloomberg Opinion columnist covering energy and commodities. The views expressed here are the writer’s own.
