Last week, Chile’s president unveiled the long-awaited national lithium strategy. The strategy is in-line with industry expectations, removes significant political risk, and paves the wave for a multi-decade upcycle of tech-enabled domestic lithium production within a public-private development framework. However, surprisingly, it was met negatively by the financial community and market observers.
Conversely, following the announcement, we are even more excited about Chile’s lithium outlook. Chile is a country with strong institutions, attractive geology, good relations with more neo-liberal economies, and deep historical mining roots. Our team has had the chance to meet local community leaders, has had straightforward conversations with government officials, and is working with environmentally conscious and tech-minded mining companies well positioned for the coming boom in Chile’s lithium production.
So why is Wall Street and the media so negative on Chile’s lithium strategy, and what are they missing, misinterpreting, and underappreciating?
There are three important and positive aspects of Chile’s lithium strategy that are being missed, in my view. Importantly, these three elements reinforce each-other and should position Chile as a lithium powerhouse in the coming decades.
- Creation of a domestic value chain will encourage development
- Strengthened environmental standards support innovation and investment
- Public-private partnership can be a powerful development model
Domestic Value Chain in Focus
President Boric highlighted the aim of Chile capturing more economics across the value chain through domestic refining. Today, Chile exports lithium in its natural state (lithium chloride) to Asia for conversion to battery-grade lithium (lithium hydroxide or lithium carbonate).
By establishing a full domestic supply chain, Chile will not only benefit from the additional economics associated with the foreign direct investment in its downstream subsector, but it will also develop a more dynamic domestic infrastructure base that will reinforce additional investment, production, and innovation.
Further, the broader lithium market will benefit from increased diversity of supply and be less susceptible to supply-side price shocks. While lithium miners and investors enjoy demand-driven robust prices, price spikes from supply-side shocks due to an overreliance on any one region or shipping route can leave consumer nations and industries scrambling for alternative commodities and technologies, threatening long-term market health.
The mining companies operating in Chile significantly benefit from selling a higher value commodity (battery-grade lithium), providing numerous strategic and financial benefits, including an enhanced ability to enter into off-take agreements with the automakers themselves.
Strengthened Environmental Standards Encourages Investment and Innovation
Today, the process for producing lithium in Chile includes archaic methods, including evaporating water in pits, followed by boiling the remaining brine in large industrial pots. These practices are disastrous for the environment, let alone for investors, communities, and the future of the industry.
The emergence of new technologies, including Direct Lithium Extraction (DLE) and Vacuum Membrane Distillation (VMD) make the old way of doing business unnecessary.
Higher environmental standards discourage reverting to dated processes and will lead to an influx of foreign direct investment and participation by international technology companies excited to disrupt the highly attractive Chilean lithium market. KMX, a U.S. company with a leading VMD laboratory in Canada, is a perfect example.
Other resource industries show that strong environmental oversight can lead to innovation and outsized economics (the U.S., Canada, Norway, and U.K. have all spawned vibrant tech-enabled oil service industries as part of adhering to higher environmental standards). The alternative can be a rent-seeking resource-cursed country aiming to maximize low-cost production and missing the broader economic opportunity. There are unfortunately countless examples of this in traditional resource industries.
Chile is well positioned to become a lithium innovation center through its strong domestic governance institutions, substantial legacy mining infrastructure and workforce, and its western-style open-market system (which enjoys free trade status with the U.S.).
In this regard, President Boric’s correct focus on environmental protection, particularly water, should pay dividends for Chile and those participating in its lithium development through the coming investment cycle.
Power of Public-Private Partnerships
Lastly, one could argue that the western media enjoys branding foreign government involvement in the resource industries as a nationalization, particularly during today’s increasingly polarizing international political economy backdrop.
Chile’s lithium strategy is not a nationalization. It is a public-private partnership that has been well telegraphed, and one that can work well with the participation of private players.
Norway, another resource-rich country with strong governance institutions, provides an example of what is possible with a quasi-state led development, looking at offshore oil & gas development. Argentina is also steadily growing shale oil & gas production through a mixed strategy of leveraging a national company and encouraging private development.
Importantly, under the proposed public-private partnership, a state company can provide political and community support, allowing private lithium development companies to focus their efforts and investment on innovation and operations. Investors that are not sensitive to in-country community and political dynamics should welcome the removal of project risks related to licensing and local opposition.
Lithium Presents Significant Long-Term Opportunity
In addition to the media reaction, I believe the downward Wall Street analyst revisions in the wake of the announcement are symptomatic of Wall Street’s short-term view and fail to appreciate the joint production and profit growth which will be unlocked by this powerful public-private partnership model.
Alternatively, these measures work together to reinforce a compelling domestic lithium market underpinned by a significant long-term opportunity.
We are excited to be part of this and look forward to working with other stakeholders who can recognize the growth potential of Chile’s lithium industry as well.