Situation report: Political risks in South America’s lithium triangle

South America’s ‘lithium triangle’, which straddles the tri-border region between Argentina, Bolivia, and Chile, is seeing a rush of new development activity. Political risks, however, are many, and they vary on each side of the border

Bolivia's Salar de Uyuni
Bolivia’s Salar de Uyuni

 

Overview

With lithium-ion batteries powering mobile phones, laptops and now electric cars, lithium has long attracted the attention of investors looking for sectors with a decidedly 21st Century bent. While lithium reserves are difficult to estimate prior to exploitation, up to two thirds of the world’s lithium is likely located in South America’s so-called ‘lithium triangle’ straddling the border between north-western Argentina, south-western Bolivia, and northern Chile. The largest reserves are found in Bolivia and are concentrated in the Salar de Uyuni, which at over 10,000km2 is the world’s largest salt flat and is estimated to hold up to half of the world’s lithium. The triangle extends south-westward to Argentina’s Salinas Grandes, the world’s second-largest flat, encompassing many smaller and under-exploited reserves, and south-eastward to Chile’s Salar de Atacama, the third-largest slat flat.

Despite lying in the same geographic area, the tri-border that runs through these major deposits of lithium raises political risks that vary on each side.

Argentina

Argentina’s reserves have long been under-exploited as a result of investor worries about the leftist government of Néstor Kirchner (2003-2007) followed by that of his wife, Cristina Fernández de Kirchner (2007-2015). These presidencies accompanied the decade-long political domination of the country by the left wing of the Partido Justicialista (‘Judicialist Party’), more commonly known as the Peronists. Both of the Kirchners leaned heavily on the rhetoric of economic nationalism to maintain the support of their constituency. This rhetoric often translated into policy, most strikingly during the renationalisation of YPF, the country’s largest energy company, which had been privatized and sold to Spain’s Repsol in 1992. Faced with a sagging economy, the government led a campaign of harshly criticising the foreign ownership of YPF and signed into law legislation that forced Repsol to sell 51 per cent of the company back to the state. The Kirchners also implemented an onerous currency control system which made the repatriation of profits difficult and required many firms to set up blue-chip swaps – purchases of dollar-denominated bonds in pesos so that they could be resold abroad in dollars – as a means of bypassing government regulators.

The investment climate has dramatically changed over the past year, however. In a surprise election result, conservative market-oriented businessman Mauricio Macri was voted into the presidency, an office he assumed in December 2015. Since then, President Macri has used executive decrees in an effort to quickly and radically increase the amount of foreign direct investment in Argentina, particularly in the extractive industries. Macri completely scrapped, for example, the country’s currency control system, and he further eliminated a 5 per cent export tax on metals mined in Argentina.

Macri’s ability to promote lasting change is blunted by two major obstacles

Investors, including those interested in lithium extraction, have responded to Marci’s new policies. Earlier this month, a government official claimed that lithium carbonate production could more than triple by 2019 as a result of the government’s friendly attitude toward the extractive industry, which has recently helped coax firms such as Australia’s Orocobre and Canada’s Lithium Americas and Lithium X into making substantial investments in the country.

However, Macri’s ability to promote lasting change is blunted by two major obstacles. The first is Argentina’s mining code, which allows individual provinces to determine whether or not their lithium deposits are ‘strategic’, with strategic deposits being off-limits to private investment. The law also allows provinces to enact regulations designed to frustrate, or even effectively prohibit, extractive ventures within their territory. The province of Chubut, for example, has succeeded in preventing its silver deposits from being exploited by Pan American Silver Corporation with a blanket prohibition of open pit mining and the use of cyanide by extractive firms. Similar regulations could affect the lithium industry.

The second obstacle faced by Macri is the cyclical nature of Argentinian politics. Since democratisation in 1983, conservatives have only held the presidency twice before Macri, and in both cases their efforts to bring market discipline to an unwinding economy spurred a backlash, putting the Peronists back in power in the following elections. There are already signs that such a backlash is developing under Macri: a number of unions, particularly those in the public and banking sector, have greatly increased their labour activity, sometimes with the explicit goal of destabilising Macri’s administration, and the president’s willingness to negotiate with corporations, including one owned by his father, has sparked howls of protest by the left. There is a serious possibility that the 2019 elections will be won by a Peronist willing to enter into rhetorical and policy battles with foreign mining firms as a way of burnishing his nationalist credentials.

Bolivia

Bolivia has the largest deposits of the three countries of the lithium triangle, but also the most considerable political risks. Under President Evo Morales, a socialist, the country has expropriated companies in the extractive sector, most notably by completing Morales’ campaign promise of nationalising the entire natural gas sector within 100 days of being sworn into office in 2006, a move that seriously impacted Brazilian state-owned firm Petrobrás, which was heavily invested in Bolivian gas fields. While the rhythm of nationalisations has tempered since then, Bolivia’s lithium policy under Morales has remained one of promoting state control of the resource: shortly after being elected, he vowed that ‘the state will never lose sovereignty when it comes to lithium’.

Morales put those words into action when he rejected half-a-dozen investment proposals submitted by firms attracted to the country’s lithium deposits, saying that Bolivia is not open to companies merely interested lithium carbonate exploration, production, and exportation, but is instead looking for a ‘strategic partner’ to help industrialise the country by building a domestic lithium battery production centre and the infrastructure needed to fully exploit the Salar de Uyuni’s resources.

Last year, the government found two such partners: K-UTEC AG Salt Technologies, a German firm that agreed to build a lithium processing plant in Bolivia, and China CAMC Engineering Company, which will build a potassium salt industrial plant in the country to further exploit its salt flats. A separate Chinese firm, Linyi Dake Trade Compay, earlier built a lithium battery manufacturing plant in Bolivia.

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