Earlier this month, the government of Chile announced that it would nationalize the country’s lithium industry.
As a reminder, Chile is the world’s second-largest producer of the metal. It also hosts the largest lithium resources in the world.
So this is a significant move, and a big deal for the lithium market.
The official reason for the nationalization is… unsurprising. The government wants to “boost its economy and protect its environment.”
We’re not surprised that the government of Chile feels like it could benefit from nationalizing one of the most in-demand metals in the world.
Lithium has been in the news for years as the metal critical for the electric-vehicle revolution and the global transition toward clean energy.
So what happens next?
Chile Follows Mexico’s Faulty Decision
Chile isn’t the first country to nationalize lithium.
Back in 2022, Mexico announced that it would nationalize the country’s lithium reserves, which at the time were the 10th largest in the world.
We wrote about it earlier this year and outlined these consequences of the Mexican government’s move:
First, Mexico will not be a desirable trading partner for its Western counterparties, such as the US and Canada. An abrupt nationalization could go against international trade and investing laws. Lawsuits from the companies that are already present there would follow and haunt the country’s lithium industry for years.
Second, the newly created state-owned company may be slow to respond to market conditions. Unlike its nimble privately owned peers, this government-owned conglomerate may be inefficient and unprofitable.
This would undermine the whole purpose of nationalization: to create a viable industry that would supply the government of Mexico with steady cash flow.
Third, the global lithium shortage would only become worse because of the potential production delays from Mexico.
And fourth, this move benefits US- and Canada-owned lithium miners.
A Reuters analysis echoes our points. And it confirmed our expectation that Mexico’s nationalization of its lithium reserves would hurt the global supply-demand balance.
The reason for that is that lithium in Mexico is found in clay soils… and the government doesn’t quite have the technology to mine it:
To date, no commercial-scale lithium extraction from clay soils has been deployed, meaning the Mexican deposits will likely require new technology, extra investment and perhaps on-site processing plants.
To an extent, the nationalized lithium reserves are now “trapped.”
The same could happen in Chile.
After a Weakness, Lithium Price Could Get a Boost
Lithium price has weakened by about 34% over the past 12 months.
We see it as an opportunity.
Chile is the world’s second-largest producer of the metal, and now the supply of lithium from the country to the global market could be limited.
Government-owned companies aren’t as efficient as their private counterparts. And governments that play with nationalization lose their status as a reliable investment jurisdiction.
As a result, we predict three outcomes.
First, Chile’s supply of lithium from its existing mines could decline.
Second, new projects will be developed slower and with little capital available. Foreign investors will shun the country that has shown to be willing to take away their rights to develop and produce lithium.
Third, much like Mexico, Chile has just become a second-rate investment jurisdiction.
This plays directly in the hands of lithium mining companies based elsewhere. Namely, in safer and friendlier jurisdictions such as Canada.
Canada-based lithium miners should be on every investor’s radar now.
Thank you for your loyal readership,
The Financial Star team