- Chile nationalizes its lithium reserves, in another sign of Latin America’s left turn.
By Mary Anastasia O’Grady
It’s never a good idea to allow career politicians to manage the economy. They’re not a financially astute bunch and their incentives are all wrong. Yet developing countries rich in natural resources continually repeat the mistake.
In Latin America, it’s as if abundant blessings from above come with instructions prohibiting their productive use. For the latest example, see Chile’s socialist President Gabriel Boric’s April 20 announcement that his government will nationalize the lithium industry.
Chile has one of the world’s largest lithium reserves and in 2021 it was the second-largest producer of the mineral, after Australia. This “white gold” is a key component in rechargeable-battery technology.
In an address to the nation, Mr. Boric called the country’s vast reserves “the best chance we have at transitioning to a sustainable and developed economy.” He added: “We can’t afford to waste it.”
The implication of Mr. Boric’s remarks is that Chile has an enviable supply of something the world will want for years to come and that the only way to ensure that the nation captures its maximum value is to make the state its owner. Both suppositions deserve scrutiny.
It’s tempting to call the Boric declaration the top of the market, but that may have already happened. Lithium prices have retreated some 70% since November, mostly due to falling demand in China. The mineral remains important in today’s battery market, but it’s by no means the surefire future of rechargeable technology.
No one knows where the search for reliable, low-cost energy storage will lead, but the hunt is on to replace lithium. A November piece—in the North American industrial-sourcing platform Thomas—titled “7 Lithium Battery Alternatives” noted that industrial demand combined with “issues surrounding lithium extraction and safety are forcing markets to find batteries independent of the alkali metal.”
Among these, the report says are “sodium-based battery technologies,” through which “several ventures are threatening to kick lithium out of the battery equation entirely.” Solid-state technology is also gaining ground, with Toyota Motor Corp. “on track to roll out solid-state EVs by 2025.” If that technology is successful, the report said, it could “propel the industry beyond its lithium-based constraints that are currently causing low EV adoption rates.”
As the Thomas report notes, the development of energy storage to replace lithium has to be both feasible and scalable. Science isn’t yet there. But the idea that mankind will be satisfied with the limits of lithium production goes against experience.
“Human beings are intelligent animals who innovate their way out of shortages, real and imagined,” the Cato Institute’s Marian Tupy wrote in 2018 in reference to alarms set off by China’s dominance of rare-earth minerals. The national-security crisis predicted by New York Times columnist Paul Krugman and others hasn’t happened because the market has produced searches for new deposits and substitutions, Mr. Tupy explained.
But let’s suppose that lithium is the silver bullet for humanity that Mr. Boric describes. A second problem is the unlikely assumption that state ownership is the best way to capitalize on it.
There are currently two companies mining lithium in Chile: Sociedad Química y Minera de Chile (SQM) and Charlotte, N.C.-based Albemarle Corp. (ALB). Mr. Boric has said that their concessions—expiring in 2030 and 2043, respectively—will remain in place. But he also said that he hopes the companies will work with the state before those expiration dates, which sounds like they’ll be pressured to do so.
When those concessions expire, and for any new entrants in lithium, only minority ownership by private investors will be permitted. The state will become the 51% owner of the business. The day after the Boric speech, SQM shares lost nearly 20% while ALB was off almost 10%.
The government says that minority partners will put up capital and know-how to explore and exploit Chile’s lithium reserves and the Chilean state will provide “financing.” But the Associated Press reported on April 21 that “it remains unclear whether the government would contribute capital in direct proportion to its ownership stake.”
How excited will investors be about risk-taking with a government partner that has final say over management and keeps a majority of the profits? Perhaps China will take the bait. But for private capital much will depend on alternatives. Shares in Australian lithium miners rallied on the Boric announcement; neighboring Argentina also has large reserves and allows private mining concessions.
Mr. Boric thinks Chile is so special that investors will go along with his plan to increase their risk and decrease their returns. He’s also licking his chops at the prospect of a new state company whose patronage jobs and budgets will increase his power. Clearly, it’s a moment he doesn’t want to “waste.”
Write to O’Grady@wsj.com.
Mary Anastasia O’Grady is an Opinion Columnist, writes “The Americas,” a weekly column on politics, economics and business in Latin America and Canada that appears every Monday in the Journal. Ms. O’Grady joined the paper in August 1995 and became a senior editorial page writer in December 1999. She was appointed an editorial board member in November 2005. She is also a member of the board of directors of the Indianapolis-based Liberty Fund. Energiesnet.com does not necessarily share these views.
Editor’s Note: This article was originally appeared on the WSJ in the May 1, 2023, print edition as ‘The Oldest Mistake in Economics’. All comments posted and published on EnergiesNet or Petroleumworld, do not reflect either for or against the opinion expressed in the comment as an endorsement of EnergiesNet or Petroleumworld.
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