President Boric just announced that Chile would nationalize the lithium industry going forward. Predictably, this elicited a bunch of positive and negative fact-free commentary. So let’s get some facts!
But first, the TLDR. (1) Lithium is unlikely to be a big source of resource rents, mostly because lithium can be found all over the place. (2) Even if you believe that prices will remain in orbit forever, governments can seize those rents without nationalization. (3) Nationalization would make sense if private interests were reluctant to invest, but that doesn’t seem to be the case. (4) The above three points explain why Chile isn’t really nationalizing anything. When you read President Boric’s speech, it seems like a bunch of hopey-changey wishes and vague intentions. I personally doubt that the announcement will be good domestic politics either, but President Boric is in trouble and throwing a Hail Mary.
And now, a bit more detail!
First, lithium is found all over the planet. Chile has the largest reserves, but Australia is the biggest producer. And not by a little: according to the USGS, Aussie mines extracted 47% of worldwide production in 2022. Here is a useful map showing just how dispersed production is:
In other words, this is going to be an extremely competitive industry. Unless South American costs are significantly below costs elsewhere—of which there is no evidence—then dreams of a South American lithium cartel are just dreams.
Second, lithium’s place in the world energy landscape is far from assured. Sodium batteries are not as ready for prime time as this New York Times article implies, but the technology is improving fast. Even if you could establish a lithium cartel, it would eat its own lunch quickly enough as substitutes hit the market.
Third, lithium can be recycled. In fact, McKinsey expects that recycled lithium will make up 6% of the market by 2030. If lithium prices are high, then that share will assuredly rise.
Put that together, and lithium in the 2020s doesn’t look anything like oil in the 1970s. Don’t trust any analyses of nationalization that assume producer cartels or ever-rising prices or inelastic demand or whatever. In fact, lithium prices are already falling fast:
Sure, in 2022 the industry generated $5 billion in tax revenue for the Chilean government, but as you can see above, lithium prices were off exploring Mars in 2022. That could not last: 2022 was a price bubble driven by a rapid demand explosion combined with widespread shipping shortages.
When prices were more normal, the industry didn’t generate that many rents, save during a previous (and much smaller) bubble in 2017-18:

But let’s say I’m wrong, and current prices are here to stay. In 2018, the Chilean government received only 41% of lithium rents. One could argue that they should receive more. Sure! But governments don’t need to nationalize in order to seize windfall rents or direct resource flows. Windfall taxes are a thing.1 Similarly, the Chilean government right now can force producers to sell lithium at lower prices to domestic battery producers: the contracts with Albemarle and SQM require them to sell up to 25% of production at lower cost to Chilean battery manufacturers.
Is there any reason to nationalize lithium? Well, yes. Sometimes for whatever reason private companies don’t want to invest. In that case, one of the easiest tools that a government can employ is to take over the industry and increase investment. For example, over the Andes in Argentina is it pretty clear that YPF was doing just that before the 2012 nationalization.
But that doesn’t seem to be a problem in Chile. Production almost quadrupled between 2015 and 2022.
So why nationalize?
Well here it gets weirder: Chile isn’t nationalizing. The plan seems to be to ask the two big current producers, SQM and Albemarle, to sell part of their operations to the government before their current contracts expire in 2030 and 2043. A national lithium company would run the state operations. New mines would have to be in a 50-50 partnership with the state company, but only if the government declared the project to be of “strategic value.”
In other words, the Boric administration is making big public announcements as if it were nationalizing, with references back to Salvador Allende, without actually nationalizing. It’s weird. The speech itself was also weird, filled with words like “transversality.”
At the end you have a policy that won’t result in more revenue or more investment or more control, but will slow investment down and give everyone a headache as new contracts are negotiated and the National Lithium Company constructed.
There may be a political reason for the announcement, but Chile in 2023 isn’t Argentina in 2012. I haven’t seen any evidence that pretending to nationalize the lithium industry will produce a big political bump for Boric. And I don’t have much faith in Boric’s political instincts.
I’m left with two hypotheses.
There is a political logic that I am missing.
Gabriel Boric is simply not very good at politics.
Is there any evidence in favor of (1)?
One "political reason" is that its a relatively easy campaign promise that Boric can at least appear to be trying to fulfill, while the govt. is paralyzed or failing on other fronts. Also, it should be noted that the law is already facing pushback and Boric govt (which needs COngress approval) has signaled willingess to negotiate. So this is an opening negotiating position, and perhaps even at that not so wild-eyed as you seem to be making it.
You're the expert on property rights and commitment. One could view this as a leftist govt suddenly and wrecklesly threatening to expropriate mining operators in a way that will only scare investment and harm the country by breaking commitments not to expropriate. But I Boric was brought to govt by a wave of discontent... the shift in property rights legitimacy was in the air, and Boric is now articulating a vision. He's no Chavez or Morales. More of a moderating figure within his weak leftist coalition, hemmed in by weak support in Congress and rising unpopularity.
Chile has exclusive right to all mineral resources and GDP and state finances depend heavily on natural resource rents. Chile's state CODELCO extracts about 30% of copper, but most mining is based on leases or concessions. This creates an inherent dilemma. Leases can be expropriated/renegotiated before expiration (particularly when demand surges for a resouce like lithium). In a simple environment with perfect commitment, the optimal policy to avoid a resource trap would be to offer a very long contract (in effect sell the resource) at a competitive price. But the real world is more complicated -- the costs of expropriation are not infinite but finite and politically determined, and bidding is not always competitive (a few large firms dominate).
In Chile there is a widespread and not entirely incorrect perception that many great fortunes were made from insider dealing in the privatization of state natural resource assets in the Pinochet era, cemented in place by the Pinochet constitution, and that these companies have corrupted the political system via bribes and illegal campaign contributions, and revolving door relationships. I'm not here to debate the relative merits of such claims but the view is quite widespread and this is one reason why a 'new national lithium policy' became a campaign promise.
SQM one of three largest lithium producers in the world, started as a state corporation but was privatized in 1983, w/ 93% of shares in the hands of then 37-year old forestry school graduate Julio Ponce Lerou, who just happened to be Pinochet's son-in-law and who had, until the year before headed the state development corporation CORFO which had held the privatized companies, and also negotiates lithium concessions. In recent years SQM was caught in high-lvel tax fraud and bribery/illicit political campaign contribution scandals (they were illegally finacing politicians across the party spectrum). This and other scandals and revolving door relations contributed to cynicism, especially among younger voters, and loss of popularity of most of the concertacion and traditional right parties that ruled Chile in democracy. The last election was a two-way race between the current populists on the left (which won) and the extreme right.
This is a proposed partial nationalization in that future lithium production contracts would have to be joint public-private ventures with 51% state participation (I thought it incentivates but does not compel SQM and Albemarle to renegotiate current contracts -- and as recently as March the Boric govt completed long-term leases with other companies that had been initiated by his conservative predecessor). Boric camp claims this will help shape a more developmental rather than 'extractivist' path, with more value added in Chile. Private companies are shouting bloody murder. I don't know enough about the industry to judge whether it's gone too far.. but I don't think this is the final draft.
From what I understand, there's also a law making progress to somewhat increase royalty rates in copper and other mining contracts. This would raise royalties slightly (to levels that industry of course describes as bloody murder) but at the same time makes royalty rates more contingent on market conditions meant to capture more for the state on the upside and penalize private investors less on the downside (whether they are involved or not I don't know but Chile has a track history of interesting procurement contract design).
Maybe things will go to pot, but I think that with negotiation there is room for things to move in the direction of a new institutional framework for natural resource exploitation that is seen as more legitimate by the broader polity, captures more of the resouce windfalls for society, but also does not scare away investors.
P.S. -- The Economist seems more bullish on Lithium prices. https://www.economist.com/business/2023/04/20/why-crashing-lithium-prices-will-not-make-electric-cars-cheaper
P.P.S. -- that came out longer and more rambly than planned... : )