by Laura Molloy

South America holds 70% of the world’s lithium reserves, led by the “Lithium Triangle” nations of Bolivia, Argentina and Chile. Despite demand being projected to more than triple by 2025, prices have fallen since 2019 as a result of oversupply, with Australia overtaking Chile as the world’s largest producer and China becoming a major competitor.

Depressed Prices

This negative trend has been compounded by the massive slowdown in global manufacturing caused by Covid-19, undermining demand. Nevertheless, fundamentals for lithium are strong, as it is a strategic mineral for powering electric vehicles, portable electronic devices, grid storage applications, and critical medical devices.

Lithium will likely enter the EU’s list of critical raw materials later this year due to its increasing relevance to the automotive industry. Given the minimal level of production in the U.S. and Europe, U.S. tariffs on Chinese products, and higher labor costs in Australia, South America is positioned to move to the forefront of the global supply chain.

Chile

For long-term investors, it may be an opportune time to buy into lithium producers while prices are depressed. The largest market, Chile, is dominated by two large, publicly traded players. Shares of Chilean firm SQM, the second largest lithium producer in the world, hit a low point in mid-March and have since gradually climbed. Number-one producer Albemarle, a U.S. firm with Latam headquarters in Santiago, is down about 50% from its peak in late 2017.

Although both firms reported the spread of coronavirus among miners and undertook temporary shutdowns or staff reductions, they denied that supply had been affected. The growing outbreak in Chile and pressure from unions to improve conditions is likely to put downward pressure on stocks in weeks to come, with a recovery once the crisis is abated and global automakers return to pre-pandemic production levels.

Argentina

In Argentina, lithium production has been severely affected by the national lockdown – one of the strictest and longest in the world. In April, the main lithium mining projects were reportedly operating under 50% of their capacity. Nonetheless, by early June 2020, the three principal lithium-producing provinces exited the final phase of lockdown. This has resulted in an uptick in activity, with reports of new cross-border joint ventures and the recommencement of industrial-scale operations.

In addition, Argentina’s President, Alberto Fernández (in office since December 2019) has focused on lithium mining as a key source of income and employment, with new attention on the development of value-added products derived from lithium. This development would be transformative for the region, as initiatives in Argentina, Bolivia, Brazil and Chile reportedly failed to deliver a single lithium cell factory as of October 2019.

Progress is underway – on June 15, a provincial government agency formed a joint venture with Italian battery developer Seri to produce the first lithium batteries made in Argentina, which will have preferential access to European markets. Later in June, a SME called Sol.Ar announced it was in the prototype stage of developing the “first 100% national lithium battery,” with the support of a public agency. As Argentina gradually shifts toward a vertically integrated market, keen investors may identify opportunities particularly through public-private partnerships.

Demand Expected to Soar

Despite ongoing volatility in lithium markets, operations in South America present opportunities for future growth once conditions return to normal for industries reliant on lithium. Long-term profitability will likely be driven by soaring demand as a result of the transition to electric vehicles, especially in the U.S. and Europe. With support from governments and their respective regulators, investors can participate in all stages of the value chain – a revolutionary departure from the traditional extractive model applied to Latin America.

For additional information on Gryphon’s LatAm team and Global Strategic Advisory Practice, please contact Laura Molloy at [email protected].