Chile Plans to Nationalize Lithium Production; Miners' Shares Tank - Investopedia

Shares of lithium producers plunged Friday after Chile, the second-largest lithium producer in the world, proposed nationalizing its production of the rare earth metal, a key component of electric vehicle batteries.

Chilean mining company Sociedad Química y Minera de Chile (SQM) lost almost a fifth of its value, and shares of Charlotte, N.C.-based Albemarle Corp. (ALB) fell 10%.

KEY TAKEAWAYS

• Shares of two large producers that mine Chile's lithium fell sharply Friday.
• Lithium prices have plunged this year but remain much higher than late 2010s.
• Chile's lawmakers resisted a similar plan last year.

Chilean President Gabriel Boric proposed Thursday that the country's state-owned copper producer, Codelco, work with the two lithium producers to negotiate contracts moving forward, though no existing contracts would get canceled.

Chile boasts about 40% of the world's known lithium reserves, more than any other country. However, its mines rank a distant second in lithium production to Australia, which produce twice as much but have just a quarter of the world's reserves. No other country has more than 10% of the world's reserves.

Impact on Lithium Prices

How the nationalization plan would affect global prices for lithium—for which three-quarters of global production goes to car batteries—remains less clear. But fewer players and state-owned operators negotiating contracts could imply a departure from current sliding prices.

Increasing supplies, slowing electric vehicle demand from China and contract reviews by electric vehicle producers have pushed spot prices for lithium down dramatically this year.

Global production, which rose just 1% last year, could increase by as much as 20% this year as production from new mines hits the market. Cash prices in the spot market have plunged 60-70%—but they're still about four times higher than they were in the late 2010s.

However, electric automakers such as Tesla (TSLA) are still feeling the pain on their margins because they signed supply contracts at higher prices. Other electric automakers that recently signed contracts at higher prices have expressed a desire to renegotiate.

Nationalization Movement

Chile's plan to nationalize the country's lithium industry could further complicate the global market for the highly sought mineral resource, especially with growing calls of a greater state involvement in lithium mining in its neighboring countries such as Argentina and Bolivia.

Last year, Mexico took over control of its lithium industry, and Zimbabwe banned exports the unprocessed raw material. Indonesia curbed exports of some rare-earth commodities, including nickel also used in car batteries, beginning in 2020.

Chile's Lawmakers May Push Back

Boric took office last year promising to promote left-wing policies after years of government rule, dating to the mid-1970s rise of former dictator Augusto Pinochet, that generally favored private enterprise.

This idea, though, may face resistance. Last year, the country's constitutional assembly voted against a similar plan that would have given the government exclusive mineral production rights.

The new plan appears to offer a compromise by still allowing a partnership with private sector companies. Still, Boric clearly expressed the proposal's intent.

"Any private company, whether foreign or local," he told Financial Times, "that wants to exploit lithium must partner with the state."

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