With recent mention of Argentina promoting the idea of an OPEC-like cartel to control the supply and pricing of lithium this week, what exactly would that mean?
Rodolfo Tecchi, director of technology and science promotion of the Argentine Ministry Science and Technology recently quoted that “In the near future and with our production at such a high level, Bolivia, Argentina, and Chile will control the lithium market”. He added “They could do it with a sort of OPEC-like arrangement”.
Forbes recently ran an article describing these 3 countries are considered the “Saudi Arabia of lithium” with the major benefit of controlling mechanisms for the sale of lithium carbonate and avoiding the lower prices that may come with overproduction. In fact, Bolivia has about 50 percent of the global reserves, Chile controls about 25 percent, and Argentina having approximately 10 percent in its possession.
It’s true that these three countries in particular if ever combined as a cartel would have an enormous amount control on who to sell to, how it’s distributed, and at what price. Three important aspects when a near monopoly is created. But what exactly is the motivation behind this talk?
For one, It’s definitely to further generate interest and investment in the area of South America for business in these countries. Governments in the area recognize their own domestic resources and have a mission to further grow their key industries and need for lithium to allow their businesses and more importantly, their community, and GDP to grow long term.
With greater eyes and ears drawn to this sector, you can bet that more funding towards mining operations and related investments would be among its main intentions. However, the more important matter is the drive to centralize and develop a known market pricing structure for lithium from a global supply and demand viewpoint. Similar to how oil, uranium, and other commodities have a global market price, this would essentially drive the price per tonne and develop a better structure of higher margins for those already in the mining business. Existing producers are also very much in favor of this, as it would increase their profit margins.
It is definitely a realistic future possibility as these countries and their deposits are known to be rich in lithium and are close proximity to each other, just like OPEC is closely aligned in the middle east. However, at this point in time when both, the lithium mining companies and battery manufacturing companies are still trying to develop its core business to a respective level, some are still relying on its loans and funding. Investments still need to be made and materialized as demand for lithium continues to grow worldwide.
But one should question if such a cartel could control the supply of lithium in the long term as more junior companies ramp up and go into commercial production, especially in the second half of this decade. TRU group earlier in the year warned of a possible oversupply of lithium by 2017 especially as many juniors try to accelerate into commercial production. End users who do not want to be controlled by paying higher prices for lithium could also turn to partnerships with mining companies through joint ventures.
By witnessing in recent history how America relies on imported foreign oil, and how China similarly controls the amount of exports of rare earth elements that are critical to many applications to the rest of the, these actions can have their fair share of risks. U.S. President Obama also recently expressed no interest in transitioning from importing oil from the OPEC cartel in the middle east and trading it to only answer to another new cartel in South America for lithium.
However, the main reason for talk about a possible cartel is known to benefit all parties involved in the business, as higher prices typically translate to higher profit margins, contribution to local communities and governments.