What Chile’s government lithium policy means for the future of the electric vehicle industry

The global boom in electric vehicle production has caused demand for lithium-ion batteries to skyrocket.

That has made Chile’s vast, lithium-rich salt flats an important national resource.

Nearly a third of the world’s lithium is extracted from brines in Chile’s Salar de Atacama, near the border with Argentina and Bolivia.

But South America’s fifth most populous country is losing market share on the world stage to Australia, which overtook Chile in 2017 to become the largest lithium producer.

Argentina is also gaining momentum thanks to increased international investment.

Facing increasing pressure to boost production, Chile’s leftist President Gabriel Boric recently announced a government-led plan to develop the country’s lithium industry.

The policy, announced in April, calls for private companies to work with the government to develop all future lithium mines.

The only two lithium companies currently operating in Chile are North Carolina-based Albemarle, the world’s largest lithium producer, and SQM, the second-largest producer headquartered in the Chilean capital of Santiago.

Both companies’ stock prices plunged after the new policy was unveiled amid fears that the government would exert too much control over future projects.

For Boric, it’s a delicate balancing act that goes far beyond economic growth and global competition.

The impact of brine mining on ecosystems and water supplies is an ongoing concern, and the consequences are not yet fully understood.

And Chile’s indigenous communities have traditionally opposed the expansion of mining.

Boric’s policies represent a compromise between the two wings of his governing coalition, composed of leftists who favored full nationalization and a more free-market group that advocated that the private sector take the lead.

Brine mining involves pumping extremely salty water from underground reservoirs to the surface and evaporating it as it flows through a series of large, extravagantly colored ponds, leaving behind high lithium concentrations.

At Albemarle‘s facility, the brine takes about 18 months to reach optimal concentration.

The liquid is then trucked 200 kilometers to Albemarle’s processing plant near Antofagasta, where it is further purified into battery-grade lithium carbonate.

Chile led the world in production until six years ago, when Australia, where lithium is mined from hard rock, took the lead and continued to expand. In 2022, Australia produced about 47% of the world’s lithium supply, while Chile produced about 30%.

China ranked third, followed by Argentina, which accounted for about 5% of global supply.

While this South American rival’s market share remains relatively small, the country has become an attractive location for development after opening its doors to foreign investment.

“Some even talk about Argentina challenging Chile for second place,” says Patricia Vasquez, a fellow at the Wilson Center, a research institute in Washington, DC.

Although Chile is typically considered one of the region’s most business-friendly economies, the country’s lithium industry has always been heavily regulated.

In 1979, then-dictator Augusto Pinochet classified lithium as a strategic resource because of its use in nuclear weapons and allowed the government to restrict mining.

No new lithium mines have been opened in Chile for decades, leaving Albemarle and SQM as the only major producers.

Both companies pay high taxes and royalties to the government.

Lenny-Pessagno explained that Albemarle paid more than $600 million to the Chilean government in 2022.

“We pay the highest commission in the world to extract lithium here in the Salar de Atacama,” she affirmed. Chile’s lithium is strategically important to the US, which has a free trade agreement with the country but not with neighboring Argentina.

THE POLITICS OF MINING

The business community is trying to work within and around Boric’s plan for a state-controlled lithium industry.

The new framework is expected to provide more opportunities than in past decades for private producers to enter the market and explore resources outside the Atacama region.

“It’s helpful that it looks like Chile is welcoming new investment in its lithium sector and is now officially committed to new projects,” said Benjamin Gedan, the Wilson Center’s Latin America Program director.

“In that sense, it’s a positive development.”

“The plan calls for creating a national lithium company to work with any private companies wanting to enter the sector.”

“It also recognizes Albemarle and SQM’s existing government contracts, which expire in 2043 and 2030.”

“However, Boric has said he wants to negotiate with the two companies for government participation in their operations before their contracts expire.”

Reuters reports that SQM will begin talks with the government in the coming months and invest US$2 billion in sustainable technologies to meet the environmental goals of the new plan.

In a statement to CNBC, Albemarle said, “We do not expect any material impact as the Chilean government has made it clear that it will fully comply with existing contracts.”

The company will therefore continue to work with the government in the future.

However, it could be years before the national lithium company can begin operations.

Its creation must first be approved by Congress, where Boric struggles to pass legislation.

His party does not have a majority, and his key tax reform bill was recently rejected.

That setback came after Chilean voters overwhelmingly rejected a progressive new constitution last year.

In the meantime, two existing state-owned companies will be responsible for handling all new lithium contracts – mining company Codelco and minerals company Enami.

Boric also wants Chile to invest in downstream processing for the battery supply chain.

Chinese electric car giant BYD reportedly plans to build a US$290 million cathode manufacturing plant in Antofagasta.

The government has given preferential prices for lithium carbonate, the cathode feedstock.

It’s a controversial strategy because the country’s electric car industry is virtually nonexistent.

CLEAN IMAGE IN THE WORLD

Environmental and climate issues have been central to Boric’s election campaign, and he has stated that strengthening social and environmental sustainability in the mining sector is a priority.

Indigenous community members, however, said they remain very concerned about the environmental and social damage mining is doing to their ancestral lands and way of life.

“Mining companies are occupying our identity to give the world a clean image for the extraction of lithium water, which is not the case,” said Christian Espíndola, an indigenous farmer from Atacameña.

The Atacameña de Camar Indigenous Community represents 18 communities around the Salar de Atacama, and 3.5% of Albemarle’s revenue from its Chilean operations goes to the council, which can use the money as it sees fit.

However, Sonia Ramos, an indigenous activist of the Atacameñas, lamented that she has seen how the money has divided her community.

“When you see how we are at the mercy of an economic system that is not ours, you have to forget your worldview, laws, and word, right?” said Ramos.

“And to see this world so Western, so material, but without spirit. Our cultural history is the spiritual world, which is not spiritual.”

Indigenous communities have successfully stopped the development of lithium mining projects by BYD and Chilean company Servicios y Operaciones Mineras del Norte in the past.

Moreover, with Chile suffering from a megadrought for over a decade, many fear the evaporation of so much brine in the Atacama Desert will exacerbate the problem.

Albemarle counters, however, that brine is different from freshwater because it is too salty to drink or use in agriculture.

The extent of the potential environmental impact is a major topic of discussion.

Cristina Dorador is an associate professor of microbial ecology at the University of Antofagasta.

Her research suggests that lithium mining has led to the death of microorganisms important for scientific research and the ecosystem in general.

“When we think about life, we must include everything,” Dorador said.

“And microbial life is the predominant life form on our planet. Everything is interconnected.”

There are no easy answers when it comes to reconciling the various interests.

While Boric has laid out an overall strategy for the country’s lithium industry, there is still a lot of ambiguity about his plan.

“The devil is in the details,” says Luciano Cruz Morandé, a partner at Chilean law firm Arteaga Gorziglia who focuses on energy and project development.

“The main problem here is that we are losing time. We expected a solid policy with answers, not something so fuzzy that only raises more questions.”

As battery recycling technology improves, less lithium-intensive battery chemistries are explored, and other countries ramp up production, Chilean lithium could lose global importance.

While this is welcome news to some environmentalists and activists, it has created a sense of urgency among Chilean business advocates.

“I think Chile is trying to find a middle ground,” Gedan said.

“Some countries want to control every aspect of this industry.”

“Others, like Argentina, are taking a very market-friendly approach.”

Gedan said Chile is trying to protect the environment and local communities while becoming more attractive for foreign and private investment.

“It’s not clear if that will succeed,” he said. “But I think it’s a pretty reasonable, logical approach.”