The socialist Chilean government last week announced a nationalization of its lithium mines.
Stock of affected miners like SQM and ALB imploded on the news. While SQM won’t have much say in the matter being a Chilean company, ALB is a US-based enterprise. Diplomatic pressure will mount to reverse such blatant government intervention. The last time something like this came along, it ended in a US-supported coup d’état. As history likes to rhyme though, I have a feeling that there won’t be much tolerance by the Chilean government for outside opinions.
Government arguments were brought forward that the nationalization is for environmental reasons and to eventually kickstart the economy – two things that are a lot of the time diametrically opposed, even more so for a relatively poor nation and developing economy.
The DLE technologies that the government wants to impose to turn Chile into a “developed and sustainable economy” are expensive, resource-intensive, and further are more of an experimental nature at this point. Definitely not something that the future of an emerging market system should be bet on – the lithium industry represents a linchpin (~10%) of its GDP.
I think the Chilean government will find that they can’t have their ESG cake and eat it too.
Chile is the second-largest Lithium producer in the world, with Australia being the biggest and the now shunned-by-everybody China on third. Considering that the future of electric cars is forcefully shoved down consumers’ throats at every juncture, why not appropriate the very source that dishes out one of the most crucial EV raw materials? SQM’s earnings and revenue have exploded and grown many hundreds of percent over the last few years – a cyclical company, but a profitable one nonetheless.
I’m sure, despite all the virtue-signaling, there are some personal profits to be had for some officials. If plans proceed as expected, this move does not only affect current mines, but also all future ones – a momentous factor, given that Chile is the world’s richest country in lithium deposits, of which a large part is unexplored.
Boric, Chile’s president, cited the supposed successful precedent of his Marxist predecessor Allende’s copper nationalization in the early 1970s, also done “in the best interests of the Chilean people”, as a reason to repeat the drama.
However, there was nothing successful about Allende’s policies – by 1973 the Chilean economy was completely in shambles, plagued by poverty, inflation, strikes, food shortages and violent riots. Allende died in the coup d’état that year – is that what Boric considers a success? The only thing positive about Allende’s policies was their eventual reversal, as they can be considered an exercise in futility and an abysmal failure in both economic reality and domestic & international policy.
There might even be a repetition of the concept of “excessive profits” when the indemnification for nationalized foreign mines such as owned by ALB will be considered. Under Allende, this subjective scheme subtracted past profits from compensation for the mines that exceeded what the government thought a fair mining business ‘should’ earn – you could call it a ‘greed fee’. Thus, they grossly underpaid on their actual value. There is no reason this could not happen again, since we’re dealing with a Socialist president and just went through a period of massive global asset price inflation producing what I’m sure some consider ‘excessive profits’ for these companies. To boot, for many foreign-owned mines in the 1970s there was compensation at all.
The best case scenario at this point would be for the US to use their large national expected future lithium demand for the EV industry as leverage to structure some sort of a compromise that does not end in flat-out looting of private companies.
