Following Chile's announcement that it will accelerate the nationalization of lithium mining, Mexico, another resource country in South America, has also tightened mining-related policies again.
A few days ago, the Mexican Senate approved a series of new laws, including a new mining law. The mining law shortens concessions for the mining industry from 50 to 30 years. However, the law was immediately condemned by the Mexican Chamber of Mining and the Canadian government.
Without opposition lawmakers present, representatives of President Andres Manuel Lopez Obrador's Morena party and its allies passed the laws almost unanimously, with little debate, Reuters reported.
The mining law not only shortens existing concessions in the mining industry, but also tightens water extraction permits and requires that some mining profits be returned to local indigenous communities. The initiative was promoted by President Andrés Manuel López Obrador, who initially proposed reducing the concession to 15 years.
Mexico, the world's largest producer of silver, has not approved any new mining concessions since taking office in late 2018. He believes that previous administrations granted too many licenses to exploit the country's resources, including gold and copper.
Commerce Canada immediately said that the legislation could affect Canadian investment in Mexico's mining industry, where a number of Canadian companies currently operate. Camimex, Mexico's National Chamber of Mines, warned that such reforms could cost the country about $9 billion in investment and up to 420,000 jobs.
Earlier, in February, Andrés Manuel López Obrador also signed a decree aimed at accelerating the nationalization of lithium mining in the country.
Just before April 21, Chilean President Gabriel Boric announced plans to create a lithium state-owned company. If the legislation is passed later this year, private companies will have to form joint ventures, while state-owned enterprises will hold majority shares.
Currently, in Bolivia, the lithium industry is almost entirely run by the state. The governments of Argentina, Bolivia, Brazil and Chile are discussing the creation of a lithium OPEC organization to control global lithium prices.
Green resource nationalism is surging in South America for three main reasons
As can be seen, green resource nationalism in South America is part of a global trend.
A new article published in The Economist pointed out that in response to rising commodity prices, some resource-rich countries have tightened their grip on their own resources, such as Indonesia, the world's largest nickel producer, banned nickel ore exports and promised to do the same for bauxite. The Governments of the Democratic Republic of the Congo, Kyrgyzstan and Madagascar are also trying to strengthen national interventions on resources that support green technologies.
However, the speed with which South American countries wield state control is remarkable. The Resource Nationalism Index, compiled by consultancy Verisk Maplecroft, monitors the growth of royalties, the demand for locally produced goods and the expropriation of assets around the world. In this year's latest ranking, Mexico jumped from 98th to 3rd in 2018, Argentina from 41st to 19th and Chile from 89th to 70th in 2018.
This is largely due to the fact that leftist governments are coming to power in South America. In the past, on the South American continent, wealth from raw materials flowed either abroad or into the pockets of crony capitalists. According to the Economist article, these ruling South American New Left have three goals, the first of which is to increase national income and economic influence.
According to an IMF report, global lithium, copper, cobalt and nickel producers' revenues could quadruple to achieve global net-zero emissions by 2050. Between 2021 and 2040, the cumulative value of global oil production could reach $13 trillion. And the enormous wealth created by these green resources is about the same as the predicted value of global oil production over the same period. Since South America controls many of these vital resources, this means that the transition to green resources could transform the entire continent.
For example, in addition to lithium mines, which account for more than half of global reserves, Mexico is the world's largest producer of silver, which is used to produce wind turbines and solar panels. Brazil has about one-fifth of the world's known reserves of nickel, graphite, manganese and rare earth metals, and Chile and Peru alone produce nearly 40% of the world's copper. These metals can all be used in green technology.
Salt lakes in South America
Global lithium resource reserves ranking
Chile is one of the countries most likely to benefit from this windfall. In 2021, Chile's copper-dominated mining sector accounted for 15% of its GDP and 62% of its exports. According to Chilean think tank CENDA, Chile's national copper mining company Codelco generates more than three times as much tax per unit of production as private companies.
Undoubtedly, Chilean President Gabriel Boric hopes that the newly formed National Lithium Company will do the same. Chilean Chemical Mining Group (SQM) is one of only two lithium mining companies in Chile. Last year, the company paid more than $5 billion to the treasury, making it Chile's largest contributor to corporate taxes. Chile's lithium production quadrupled between 2009 and 2022.
Argentina expects to invest $4.2 billion in lithium over the next five years, or 0.7% of GDP. Last year, the value of the country's metal exports soared from $200 million to $700 million (from 7% of all mineral exports in 2021 to 18% in 2022).
Brazil's nickel production increased by almost a tenth between 2021 and 2022. Last year, Brazilian mining company Vale signed a long-term deal to supply nickel to electric car maker Tesla, although the value of the agreement was not disclosed. On April 10, Brazilian regulators approved startup Sigma Lithium to mine lithium from hard rock in Minas Gerais, a project worth more than $5 billion.
The second reason Latin American politicians reinforce resource nationalism is the desire to create more jobs and business opportunities. So far, the region has failed to produce higher-value products due to a poorly skilled workforce, insufficient investment in R&D, and an unpredictable regulatory environment. By 2020, Chile, Mexico, Colombia and Argentina spent an average of 0.3% of GDP on R&D, compared to 2.7% for the Organisation for Economic Co-operation and Development (OECD). Only 15 per cent of industrial workers receive some form of skills training, compared with 56 per cent in the Organisation for Economic Cooperation and Development.
These politicians in South America also believe that natural resources should be used as inputs for local manufacturing, not as raw materials for export. On the same day that the lithium state-owned plan was announced, Chilean President Gabriel Boric said: "This is our best opportunity to transition to a sustainable developed economy." We can't afford to waste it. ”
Western governments are catering to this desire. In January, German Chancellor Scholz said in Buenos Aires that German companies would be "true partners" in South America, asking, "Can't we transfer the processing chain of materials that create thousands of jobs to the source of these materials?"
Finally, a sense of social justice also drives the plans of these South American politicians. Many of them hope that the new policy will not only increase revenues, but also reduce conflict. According to the Autonomous University of Barcelona's research project Atlas of Environmental Justice, more than one-third of the world's project-related conflicts have occurred in South America since 2000. Mexico's new mining law will require companies to hand over 5 percent of their revenue to indigenous communities where they are mined. Chilean President Gabriel Borici's proposal would require companies to use lithium-extraction technology that consumes less water to minimize the drought that has been a source of anger among local and indigenous groups.
The risk of resource nationalism
However, the risk of resource nationalism in South America cannot be ignored. First, the Economist article points out that in South America, the nationalization of resources has a bad record. Mexican national oil company Pemex is the most indebted oil company in the world; Venezuela's state-owned oil giant PDVSA is synonymous with the country's collapse; Petrobras, the national oil company of Brazil, is at the heart of the region's biggest corruption scandal.
Second, SOEs may not have access to the cutting-edge technology typically possessed by established multinationals. Mexico's newly formed state-owned lithium company, LitoMx, for example, is unlikely to grow on its own. To date, Mexico has not been able to produce lithium on a commercial scale, in part because most of Mexico's lithium resources are found in clay rather than salt lakes, making it difficult to extract. Lithium extraction requires technology, expertise and capital, which many analysts believe is exactly what LitoMx lacks.
How has this wave of resource nationalism in South America affected local investment so far? It can be seen that in some places where "property rights are thrown into the mine", capital flows are reduced. According to Bolivian government statistics, the country has the second largest lithium reserves in the world, but no lithium mines have been mined from the ground on a large scale. In 2019, after local protesters demanded higher royalties, the government issued a decree overturning a lithium mining project involving a $1.3 billion investment by Germany's ACI Systems.
One alarming question, however, is whether the piece of cake that gets gets will end up being smaller than expected. Chile offers a cautionary tale. In Chile, where royalties for lithium mining are as high as 40 percent, compared to just 3 percent in neighboring Argentina, mining companies are also required to sell up to 25 percent of production below market average to producers who have committed to domestic lithium processing. Under such strict requirements, Chile is gradually losing share of the global lithium market. The Economist predicts that Chile's lithium production will increase by only three-fifths by 2026, compared with Australia, the world's other lithium resource powerhouse, which is expected to double production.