Chile Awakens To The Lithium Boom

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Includes: LIT
by: Juan Carlos Zuleta

Summary

Last year I warned that both Chile and Bolivia were not ready to meet the lithium market requirements and that they’ve both been extremely slow in reacting to market signals.

I now discuss Chile’s decision to endorse realization of the world’s most important competition of electric cars in Santiago next February 2018.

Although this represents a good sign that Chile has started to awaken to the lithium boom, there are still some pending matters that need to be taken care of soon.

They pertain to regulations to exploiting the resource, technological development in extraction methods, and value-added lithium projects about which I make some comments.

The present article was first published on August 14, 2017, as a Marketplace piece for my subscribers only.

In a comment on an interesting article published by The Economist last year, I said:

“Not too many agreed with me eight years ago when I announced the advent of a new techno-economic paradigm with lithium as its key factor. Pressure now coming from the demand side has found Bolivia and Chile, the two countries with the most lithium on earth, not ready to meet the market requirements in the near term. Even though there's a sea of difference between Chile and Bolivia since the former was the world's second largest lithium producer in 2014 and the latter is still in the present day experimenting with its huge untapped lithium deposits, they have both been extremely slow in reacting to market signals that are now more apparent and visible. Time will tell whether they catch up in the years ahead. “

In this context, the recent news that the world’s most important competition of electric cars will take place in Santiago, Chile next February 2018 should not be overlooked. I can think of at least two reasons for that. One, that all of these cars are powered by lithium-ion batteries, Chile being the second lithium producer in the planet. Two, that this event is aimed at promoting electric transportation in the country which will eventually lead to a greater use of cooper, Chile being the first cooper producer on earth.

But there are two more things to say about this news. First, that the Government of Chile, through its Ministry of Energy, has committed a contribution in money that reaches $220 million (US$316,000) to ensure realization of the event. Second, that Italian state group Enel, with subsidiaries producing and distributing electricity in Chile, is already a global energy partner of the International Automobile Federation (IAF).

In what follows a complete translation of the news that appeared yesterday in the prestigious Chilean newspaper “La Tercera” is presented:

“Next February 8, in an unprecedented event, the streets of Santiago will host a world-class motoring race. Although it is not Formula 1 - the most prestigious of all - the competition in question is the increasingly followed Formula E, in which electric cars run.

In that context, in mid-July, Energy Minister Andrés Rebolledo met with the highest authorities of the International Automobile Federation (IAF) to formalize, along with the Minister of Sport, Pablo Squella, the support of the Government of Chile for realization of a date of this competition in Chile. What until now was not known is that Rebolledo had, in addition to that, committed a contribution in money on the part of the Ministry he heads that reaches US$ 220 million.

The resources, which were not considered in the original 2017 Budget, have been obtained from the funds allocated to other plans and programs, as a reallocation. In addition, the contribution comes even though Formula E already has important sponsors, including the Italian state group Enel, global energy partner of the International Automobile Federation (IAF) in this discipline.

Enel is, through its subsidiary Enel Generación, the country's main producer of electricity, while controlling the leading distributor by sales in Chile, Enel Distribución (ex Chilectra).

In addition to the Italian powerhouse, other Formula E financiers are Michelin, Visa, TAG Heuer, DHL and BMW, among others, as well as the private investment bank Julius Bär, which acts as a global partner in Formula E. The driving force behind the realization of a date in the country is the well-known former pilot Eliseo Salazar. In addition to the Chilean capital, the calendar 2017-2018 includes dates in Hong Kong, Marrakech, Mexico City, Sao Paulo, Rome, Paris, New York and Montreal.

Justification

The Ministry of Energy acknowledged this contribution in cash, ensuring that it is in response to a request made by IAF ​​to all countries hosting Formula E dates and to motor-racing competitions in general. As explained by that Ministry, it was done because it goes in line with the goal of promoting electric transportation in the country.

‘Because of the importance of this sports event in terms of the diffusion and visibility of electro-mobility in Chile, the Ministry of Energy has committed, in the budget for 2017, the sum of $ 220 million, equivalent to less than 0.2% of the annual budget of the undersecretary,’ was the official response of that Ministry.

Similarly, the contribution comes at times of fiscal tightening, which has forced several ministries to reallocate resources and even cut costs. In spite of this, in Energy they indicate that these resources will not have impact on the normal progress of the diverse programs that are being developed.

‘This amount has not affected or compromised, in any case, the normal execution of the programs of the divisions that compose this secretariat of State, considering that redistribution of resources and inclusion of new initiatives is normal during the year, by virtue of modifications of time, savings for efficiency or other reasons inherent to the nature and execution of the programs’, the ministry added.

Another element highlighted by the Ministry, which explains both the support for realization of this event and the contribution in committed money, is that the Government is interested in promoting electric cars because of the high use of copper and lithium they have. Something they believe will boost future demand for two of Chile's main export products.”

While all of the above constitutes a positive sign that Chile has started to awaken to the lithium boom in the world, there are still some pending matters that need to be taken care of in due course. One is certainly how and when the government converts the Special Lithium Operating Contracts (CEOL, in Spanish) into a practical instrument, including the necessary “procedures to engage with private entities in order to exploit the resource in line with legal standards.” Another one pertains to technological development in lithium extraction methods. As I argued in another comment on The Economist’s article, “this may require to go beyond solar evaporation with all that implies”. Lastly, Chile also needs to rethink its lithium value-added approach to surpass production of just cathode materials in the country and go for much more along the lithium value chain insofar as this will not put at risk any new lithium projects but rather enhance their economic soundness or viability.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.