Lithium Production and Development

Indeed, the National Lithium Strategy is an excellent step for the industry. For a long time, no new lithium projects have been able to move beyond the exploration phase due to the lack of rules and clarity. The entire industry has been aware that the state would play a significant role in producing the already state-owned mineral but has been frozen while waiting for the country to decide what that role is. In a public statement, Cristóbal García-Huidobro, CEO of Lithium Power International, put the broader sentiment of the industry into words: "This is good news for the country. The policy determines clear general guidelines, which will give way to various projects in the existing salt flats network, incorporating the necessary competition in the industry and accelerating the processes of innovation and adoption of new standards for the lithium projects in Chile."

There is a general understanding that lithium belongs to the state and that the profits from lithium must be utilized to fund the nation's development. However, the inefficiencies of state-run mining organisations concerns players across the industry. Hemmerdinger of APRIMIN explained: “Government figures show that in lithium SQM and Albemarle paid US$3.1 billion to exploit their deposits and another US$1.9 billion in direct taxes, so a total of US$5 billion was paid to the government, with zero government investment. On the other hand, the government invested US$52 billion in Codelco, and it generates US$2 billion in taxes every year. The country could invest US$52 billion to make US$2 billion, or zero to US$5 billion.”

Codelco will be the central player in the new lithium regime. Andre Sougarret, CEO of Codelco, expressed confidence about Codelco’s ability to move lithium production forward: “We have the skills and experience in mining, commercial, legal, and financial matters, as well as a strong appetite to be a leader in the mining of the future,” and added: “We will focus on ensuring that Chile grows in production and recovers its position as one of the largest lithium producers, ensuring that the State benefits from this cycle of high prices.”

High taxes are seen by many as more efficient than state ownership, and the private sector would have preferred a model in which lithium producers paid the majority of the profits as a royalty to the present model of state involvement in production.

For the major producers, however, the National Lithium Strategy is not too concerning. Albemarle, in particular, is more protected as its contract does not run out until 2043. Ignacio Mehech, country manager of Chile of Albemarle, told us: "This policy doesn't negatively impact our operations. Born from a state association 43 years ago, we are experienced with and quite comfortable in public-private associations."

Both Albemarle and SQM will, however, have to come to the table with the government or risk losing the entirety of the company when their leases expire.

For Albemarle, the new framework is an opportunity to expand. "Should the state allow, we are interested in exploring growth alternatives in other regions within Chile, leveraging the technologies we are developing," said Mehech.

SQM's position is more challenging. Their lease expires in 2030, only seven years away, so their bargaining position is not as secure. However, there are two more elections before 2030, and Boric is notably unpopular, with approval ratings of 29% in late April 2023, according to a poll by Cadem. There is plenty of time for political winds to shift in favor of the major lithium producer.

And indeed, SQM's economic position remains strong. In March 2023, SQM announced that it had earmarked US$3.4 billion in new Capex by 2025, to boost lithium carbonate production capacity from 180,000 t/y to 210,000 t/y. This investment is no surprise considering the soaring profits the Chilean company experienced during last year's lithium price boom. In 2022, SQM's income amounted to US$3.9 billion, a transformational growth compared to 2021's US$585.5 million.

The lithium plan as it stands currently is not guaranteed to reach law. Boric does not have a majority in the National Congress, which must approve the move, and that lack of a majority will lead to negotiations that may change the law significantly before it reaches his desk for final signature.

The urgency of a push in the lithium industry cannot be overstated. Substitution of the mineral is expected to take place within the next twenty years. Therefore, the window to exploit lithium is limited.

For the state of the world, this forward movement is vital. 60% of the world's lithium reserves are located in the lithium triangle of Chile, Argentina, and Bolivia. "The lithium moment is undeniably now," Mehech said, continuing: "In the previous year, the demand was around 500,000 t, but by 2025, we anticipate it will exceed 1,800,000 t. Production in Chile must ramp up to meet future demand.”

Globally, the importance of Chilean lithium is continuously gaining steam. Currently, the race for electrification is one that China is handily winning, with the country buying 70% of lithium compounds and supplying 70% of lithium production, despite holding less than 7% of the world's lithium reserves. Six of the world's top 10 lithium battery makers are in China. Recently, the West has awoken to the need to pursue involvement actively. In January, for example, German Chancellor Olaf Scholz visited Chile and Argentina to reduce reliance on China and improve Europe's resource independence.

SQM and Albemarle are both poised to benefit significantly from demand driven by the US Inflation Reduction Act (IRA). The EV subsidy is oriented around the origin of the "critical minerals," which includes lithium, and 40% of these battery minerals must be sourced from the US or a free trade partner to qualify for the subsidy. By 2029, that percentage will reach 80%.

Chile and the US have had a bilateral free trade agreement since 2005. Of the 10 countries that qualify to supply these battery metals, Chile and Australia are the two biggest lithium producers. According to the US Environmental Protection Agency, 67% of light vehicle sales and 46% of medium-sized vehicle sales are expected to be electric by 2032. The US market has limited options for sourcing, and Chile is poised to reap the benefits.

On May 23, 2023, SQM and Albemarle signed agreements to supply Ford with lithium. In a statement, SQM declared that it would supply lithium hydroxide and battery-grade lithium carbonate, although it did not clarify how much. Albemarle announced it will provide over 100,000 t/y of lithium hydroxide, enabling Ford to produce about three million batteries from 2026 to 2030. The wave of demand for battery metals is beginning, and with regulatory clarity, Chilean lithium will play a crucial part.