Tipping point for Chilean copper output

In 2007, Chile was responsible for 36% of the world’s copper mine production while Peru and Africa accounted for 8% and 6% respectively. Last year, these numbers were 24%, 11% and 15%; and by 2027 we forecast 25%, 11% and 17%. How those numbers will be impacted by the approval of the new royalty bill and the announcement of the new lithium framework remains to be seen.

The short-term future of Chile’s capacity to sustain and grow its copper production capacity will depend in two factors: Codelco’s ability to correct course and perform as expected; and the forward movement of uncommitted projects as regulatory uncertainties ease. In 2022, Codelco saw its worst performance in over a decade, representing the tipping point of a steady drop in production since 2010 (13% drop of annual production 2022 respect to 2010). In order to correct course, operations must overcome disruptions and new projects such as the Teniente New Mining Level Project and Rajo Inca Project must move forward as planned. If Codelco can accomplish these goals, then in five years the company could reach historical production level of over 2 million tons of refined copper per year.

Beyond Codelco, the pipeline of projects for the next 5 years are mostly brownfield expansions and approximately 50% of the potential production is not yet committed. However, the environmental approval of Los Bronces Expansion boosted the sector confidence that the current administration is taking a more reasonable approach to approvals. Simultaneously, the new clarity on royalties means that industry players can finally evaluate the financial performance of new projects with a degree of regulatory certainty. Thus we could expect projects to get to board approval levels in the short term, which is something the country needs if it wants to retain the copper crown.

Words to actions, still an uncertain outcome for lithium

Global lithium demand will almost reach one million tons annually by 2023. Furthermore, for the 2022-2027 period CRU expects to continue to see impressive growth rates: 18.5% compound annual growth rate in lithium demand (in terms of lithium carbonate equivalent, LCE). For the same period, however, Chilean committed production is expected to grow by only 6% CAGR growth, while Argentina, for example, will experience a 46% CAGR growth in the period. This means that in 5 years, committed annual production in Chile and Argentina would reach 289 kton LCE and 232 kton LCE respectively, but for the same period Argentina also has potential uncommitted projects for an additional 258 kton LCE, while Chile’s potential pipeline we estimate to be only 80 kton LCE.

As the world increases it decarbonizations efforts, lithium and other battery metals will continue benefiting from soaring increases in demand and positive price environments. However, growth will be shaped by a third factor, regulatory support, which leads to uneven development across jurisdictions.

The lithium triangle is an excellent example of the impact of regulation. Argentina’s positive regulatory environment for lithium mining has translated in double digit growth. On the other hand, Chile’s uncertain framework and increasingly state-centric focus has resulted in stagnated growth, while Bolivia’s state-controlled industry has failed to even start competing.

While it has been wrongly stated that lithium is being nationalized in Chile, this does not mean that the government, and particularly the executive branch, will in fact become central players in the development of the industry. The mining code in Chile excludes lithium as a substance subject to exploration or exploitation under a mining concession right. Therefore, there are no actual current private right owners who could be subject to a hypothetical nationalization (except for mining concessions granted under the 1932 code). In this context the lithium industry has already been under “state-control”, as there is no regulatory certainty to obtain a lithium special permit. The recent announcement doesn’t materially change the landscape, although sets stronger guidelines that it will at least remain unchanged.

The current contracts that SQM and Albemarle have to operate in the Atacama Salar have resulted in record royalty payments to the Chilean government, as the higher 40% tax rate over revenues applies for lithium prices over 10,000 $/t LCE (limit well below prices in the last two years and to our mid-term forecast). However, the new model the Government is pursuing through renegotiation of the SQM contract, expiring in 2030, is a joint venture structure in which the state will own no less than 50% of the new entity. While this is a sign that the Government is looking for its state-owned lithium company to work and invest alongside private companies, still offers no clarity in how this could translate in a higher government take or in a boost of new lithium capacity.

With great power comes great responsibility

The Chilean government is increasing the tax burden for copper miners and is compelling lithium miners to negotiate with the acting administration (leading to concerns about a lack of consistent rule of law, as negotiations will be subject to changes every term). In order for these new policies to support mining development in the long term, the country must provide sufficient stability and exceptional conditions in order to maintain and gain competitiveness. Geological endowment must be paired with long-term stable conditions in order for the industry to invest and operate. As such, regulators must find the right formulas to achieve these conditions, focusing on pressing issues for the industry such as efficient permitting processes and continuing to foster the conditions to attract investment.