Latin America is home to some of the world’s largest lithium reserves (approximately 60%), with Argentina, Bolivia, and Chile making up the so-called “Lithium Triangle.” Lithium is a key component in batteries, and it is becoming increasingly important as the world transitions to electric vehicles (EVs) and other forms of renewable energy. The demand for lithium is expected to grow significantly in the coming years representing a huge opportunity for economic development in Latin America. Lithium mining will also come with challenges as it can be environmentally harmful, and there is a risk that foreign powers could take advantage of the region’s resources. This article will explore the complexities concerning lithium extraction in Latin America to fulfill the global green agenda.
Demand for lithium made prices explode
Lithium prices skyrocketed by 1,000% in two years to a record 597,5000 CNY/tonne by November 2022, driven by the increasing demand for EV batteries. The perfect storm of increasing demand and narrowing supply caused the rise to record highs, although the price has since corrected. Demand for EVs remains high, especially after the regulatory backing of Western countries to aim for a 100% electronic vehicle fleet in the coming decades. Tesla CEO Elon Musk’s reference to lithium as “the new oil” indicates the importance lithium will play as a commodity in the future. The International Energy Agency (IEA) estimates that the demand for lithium could reach 500,000 tonnes by 2025.
Lithium prices soared in a speculative boom fueled by the renewable energy transition (Source: tradingeconomics)
Resource curse remains a difficult hurdle to overcome
History shows that Latin America has a troublesome relationship with successfully managing its abundance of resources. This phenomenon is also known as the resource curse, a hypothesis suggesting that countries rich in natural resources are more likely to experience poorer economic growth and other developmental problems. Often these countries have a tendency to rely on large revenues from resource extraction to generate capital for public spending instead of levying taxes on their citizens. This can lead to a number of problems, including:
- Lack of public involvement and scrutiny as citizens do not directly feel affected by inefficiencies in government spending when it does not concern the spending of their tax money.
- Opaqueness about the true revenue numbers from resource extraction makes it difficult for citizens to hold their governments accountable. Corruption often occurs as the country’s elite fill their pockets using a complex web of sovereign wealth funds, state-owned enterprises, and contractors for extractive operations to enrich themselves.
- Inefficient government policy relying too heavily on resource revenues resulting in fewer investments in other sectors of the economy, such as education and healthcare.
Regime shifts quickly change the business environment
High income inequality is a major challenge in most Latin American countries. A small percentage of the population controls most of the wealth, while the majority of the population struggles to make ends meet. This lack of opportunity and social mobility can lead to social unrest and political instability.
The middle class, which typically acts as a buffer between the rich and the poor, is relatively small in most Latin American countries. This means that there is a large gap between the haves and the have-nots resulting in big political shifts where left-wing and right-wing regimes succeed each other. Usually this is accompanied by abrupt far-reaching policy changes impacting the economic landscape.
One such example has been Chile where the newest government has taken steps to nationalize its lithium reserves. Albermarle and Sociedad Quimica Minera are the biggest miners of lithium in the country. The news spooked international investors leading to a drop in the share prices of both companies and a combined loss of these two companies is estimated to be $8.5 billion since announcement.
Latin American regimes unify in leftist movement
Latin America is experiencing a political movement of more left-wing government also referred to as the Second Pink Tide. The first Pink Tide occurred in the late 1990s and early 2000s, and it was characterized by the election of leftist leaders such as Hugo Chávez in Venezuela, Lula da Silva in Brazil, and Evo Morales in Bolivia.
The Second Pink Tide began in the late 2010s, and it has seen the election of left-wing leaders such as Andrés Manuel López Obrador in Mexico, Alberto Fernández in Argentina, and Gabriel Boric in Chile. The Pink Tide governments are characterized by their opposition to neoliberalism and their support for social programs and economic redistribution. They also tend to be more critical of the United States and its foreign policy in Latin America.
Generally, it is considered to create a hostile environment for businesses which led to a sharp reaction of the market to the possible nationalization of mining activities in Chile. The pink tide movement stands for:
- Social justice: The second pink tide governments are committed to reducing inequality and poverty. They have implemented a number of social programs, such as universal healthcare and education, to help the poor and the marginalized.
- Economic equality: The second pink tide governments believe that the economy should work for everyone, not just the wealthy. They have implemented a number of policies to redistribute wealth, such as raising taxes on the rich and increasing the minimum wage.
- Democracy: The second pink tide governments are committed to democracy and human rights. They have strengthened democratic institutions and protected the rights of all citizens.
- Environmental protection: The second pink tide governments are committed to protecting the environment. They have implemented a number of policies to reduce pollution and promote sustainable development.
ESG policies show commonalities with the Pink Tide values
Different from the first pink tide movement is the global increase in socioeconomic and environmental issues at which companies are now upheld. Environmental, social, and governance (ESG) investing is a metric for corporations to act more responsibly and sustainably. Sometimes the political push behind the movement seems to have a “green or else” mentality.
Policymakers in the US and Europe strive to get to a zero-emissions society with policies aiming at mass adoption of EVs. Latin America is left behind in the energy transition as EV adoption is increasing but still very low. There is hardly an infrastructure for EVs and the industry is very much in a nascent stage. The lack of presence of Tesla in the region with only branches in Puerto Rico and Mexico is telling for the low adoption of EVs in the region.
Another issue with ESG is the difficulty fulfilling the promises that ESG principles entail. The risk of greenwashing is high as lithium mining in the region is associated with environmental pollution, corruption cases, and detrimental effects on local indigenous communities.
Latin Americans also want to benefit from the transition but not just to be seen as solely the supplier of resources. It reminisces of colonial times as the continent was plundered for resources without experiencing the benefits itself. They will demand a global solution to a global problem.
Latin American point of view on key ESG pillars
Shining some light on the issues surrounding lithium mining shows that it is not so much a no-brainer as thought of in the West. Countries of the Lithium Triangle seem they get the short end of the stick in the ESG deal, as there are more cons than pros.
Mining always is a business that leaves its mark on natural landscapes. Also, lithium mining affects natural surroundings as freshwater sources are turned salty in a region already suffering from water shortages. Mining activities might also impact the local flora/fauna and put an end to the subsistence farming of local indigenous communities.
The salt lakes high in the mountains have formed a unique ecosystem of flora/fauna not found somewhere else. Micro-organisms living in the water underneath the salt function as a forest in the mountain contributing to the environment. Changes to this environment will be irrevocable.
Considerations in Latin America will concern two other sorts of EV: 1) environmental value and 2) economic value. Environmental value seems hard to obtain, but another party is willing to do business for the region’s resources to benefit its own energy transition, China.
China provides options to Latin American lithium mining nations
Latin America is not just looking at Western nations anymore for trade opportunities. China’s influence in the region has been growing for years particularly with nations shunned by the West as they are considered rogue states such as Venezuela Although the communist party rules in China which could fit the political ambitions of some of the Pink Tide governments interests seem to remain strictly business. This provides the nations of the Lithium Triangle with an alternative to the West.
As the number one producer of EVs in the world, Chinese interest is large in the lithium mining. Several Chinese mining companies are already operating in the region. China is expanding its influence in the continent interested in the resources provided.
Business deals with Chinese partners seems often coincide with corruption. Lithium mining is often touted by Latin American politicians as a great opportunity to bring wealth to a region with high inequality and poverty. However, in reality, shady deals with local political elites prevent the population from benefiting from the generated revenues.
Consciously stimulate best practices in lithium extraction
- Protect and benefit local communities: Lithium mining has a significant impact on local communities, both positive and negative. It is important to ensure that the mining process does not harm the environment or the people who live in the area. It is also important to ensure that the profits from lithium mining are used to benefit the local community, not just a small group of elites. Cooperating with local communities might lead to more support from the community.
- Strengthen environmental regulatory framework and anti-corruption laws: Increase transparency about resources revenues: open ledger to track resource revenues. It is important to be transparent about how the revenues from lithium mining are used. This will help to ensure that the money is used for the benefit of the local community and the country as a whole.
- Involve resource nations in the energy transition: It is important to involve resource nations in the energy transition so that they can benefit from the transition and help to ensure that it is fair and equitable.
- Use water-efficient mining techniques: Lithium mining can be a water-intensive process. It is important to use water-efficient mining techniques to minimize the impact of lithium mining on water resources.
- Reclaim and restore mined land: After lithium mining is complete, it is important to reclaim and restore the mined land. This will help to protect the environment and ensure that the land can be used for future generations.
- Invest in research and development: Lithium is a valuable resource, but it is also a potential environmental hazard. It is important to invest in research and development to find new ways to use lithium that are less harmful to the environment. This will help to ensure that lithium is used in a sustainable way.
- Resource revenues to be used to diversify and make the economy more robust: resource revenues should be reinvested in other sectors to make the economy more heterogeneous and less resource-dependent
Enable sustainability globally by stopping to think locally
Nations of the Lithium Triangle have a window of opportunity to drive economic growth profiting from the world’s transition to renewable energies. The US, Europe, and China are all demanding the region’s lithium resources for their agenda to transition to renewable energy, for example, by stimulating EV adoption. The only EVs counting in Latin American nations are the environmental value and the economic value linked to lithium extraction. Leftist governments which have come to power try to balance the dilemma of distributing the resource revenues more equitably in a region characterized by high levels of inequality.
A lack of American and European presence in recent years, deterred by high levels of corruption, allowed China to increase its power in the region. The diplomatic relationships of China are focused on business, whereas the US tries to force its values of democracy and human rights upon other countries. China’s clean energy ambitions seem to be based more on economic opportunism rather than eco-friendliness, as it regularly disregards environmental standards making it more of a necessity than a preferred business partner.
ESG policies would perfectly fit the needs of many Latin Americans as it protects the environment, increases socioeconomic equality, and counter corruption cases. A willing effort to practice what you preach could make American and European counterparties the preferred business partners. Global sustainability will not be achieved if Latin America is left behind without a sustainable pathe of its own. Investing in a sustainable relationship with Latin America would lead to a more sustainable world.
