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Analysis

Government Misses the Point on Lithium

By Daniel González | Mon, 04/26/2021 - 15:49

MORENA, President López Obrador’s party, wants to nationalize Mexico’s lithium production and has a majority in both houses of Congress. The party wants to introduce in its Senate program for the current legislative period an initiative that would nationalize the country´s lithium production, arguing that the metal is pivotal to the country's development. This legislation move, if passed, would require legal reforms. The initiative also raises questions about technical and economic feasibility. Most importantly, the proposal may be missing the point considering Mexico’s role in the geopolitics of lithium.

It is important to understand what “nationalization” would represent in Mexico’s lithium debate. Article 27 of the Constitution states that natural resources on Mexican territory, including minerals such as lithium, belong to the Mexican nation. In regard to oil and other hydrocarbons, after the enactment of the 2013 Energy Reform, the door was opened to private and international investors. Prior to the reform, private players were barred from exploration and extraction; only state-owned companies were allowed to perform these activities.

Mexican law considers lithium to be national property and MORENA senators want to set up a state-owned lithium company where private sector participation would only be allowed through contracts.

Nevertheless, if the purpose is to keep lithium extraction exclusively in the hands of the state, that course of action would defeat the purpose. “Matching lithium’s rank to that of oil seems absurd: currently, there are private companies participating in the oil and gas sector,” says Jesús Enrique Pablo-Dorantes, Chairman of the Advisory Board of the Mexican Academy of Environmental Impact. Indeed, from a constitutional point of view, equating lithium’s status to that of oil would only be effective if the 2013 Energy Reform were rolled back through comprehensive legal tinkering. That would require a two-thirds majority in the lower house of Congress, which MORENA does not have. Nevertheless, midterm elections are set to take place and if MORENA achieves a majority, it could attempt to change Article 27 of the Constitution.

Even if the political will to ban the private sector from exploiting Mexico’s lithium were to take place, numerous obstacles would complicate the establishment of a viable state-owned lithium company. Budget constraints immediately come to mind. “The federal government suffers from an extreme limitation of resources, even for the most urgent tasks. Where would the money for such an undertaking come from? Moreover, the success of mining exploration is by no means guaranteed. The whole process would take several presidential terms and cost millions of dollars. Why not let private capital take on the risk instead?” asks Armando Alatorre, President of Mexico’s College of Mining Engineers, Metallurgists and Geologists. In addition, lithium extraction is notorious for its technical difficulties. “(Proponents of nationalizing lithium) overlook the technical complexities associated with the mineral’s exploration and extraction, instantiated by delays at the Bacanora Lithium and Ganfeng Lithium joint venture project in Sonora,” says Pablo-Dorantes.

Bacanora was granted the Sonora project’s concessions in 2010 and published its bankable feasibility study eight years later. Another lithium project is located in Zacatecas, where the climate and geological conditions resemble those of the famed lithium triangle in South America. Discovered more than a decade ago, the brine and clay deposit is under development by TSXV-listed Organimax.

“The metallurgical processes needed in Zacatecan lithium deposits have been thoroughly researched. Given current market and scientific circumstances, lithium’s commercial exploitation is not affordable in the state,” says Rubén del Pozo, President of the Zacatecas Chapter of Mexico’s Association of Mining Engineers, Metallurgists and Geologists.

Another issue to consider is lithium’s long-term centrality and importance to the transition to a low-carbon economy. A Nature article reported that lithium is critical in achieving a sustainable energy transition. “The demand for automotive applications is estimated to grow by more than 30 percent each year until 2030. Major battery manufacturers have committed to investing more than US$50 billion over the next five years to increase lithium-ion battery production capacity, which is expected to exceed 1.2 TWh by 2030,” according to the article.

Mexico, the US and Europe are business partners that share a common philosophy in regard to mining, one that privileges environmental and social responsibility. Moreover, in addition to USMCA, Mexico has a free trade agreement with the EU.

To take full advantage of its lithium wealth, Mexico should do more than just produce large amounts and ship it abroad for processing. Rather, a comprehensive, internationally-minded industrial policy needs to be promoted with the aim of moving up the lithium value chain, by using mining activities as a springboard to further Mexico’s overall development.

To that end, Mexico already has a comparative advantage to other Latin American countries, like Bolivia, Chile or Argentina. Its industrial matrix is world-class, making it the fifth-largest auto parts producer in the world. Despite having an  electric vehicle (EV) production in its early stages, industry trends are clearly leaving the internal combustion engine behind and it is expected that Mexican factories will soon begin assembling EVs in mass quantities.

As a result, Mexico would profit from investments directed not only at the first stage of the lithium-ion battery value chain — the extraction of raw materials — but also at the subsequent phases such as: synthesis of active battery cell materials, manufacturing of electrodes and cells and recycling. In fact, Ganfeng has already taken a step in this direction and is getting ready to build a recycling plant in Sonora.

The spirit behind MORENA’s initiative to nationalize lithium is to strengthen Mexico’s sovereignty and consolidate its standing in the international arena. However, lawmakers behind this proposal miss the point when they focus the conversation on preventing private capital from exploiting the country’s mineral resources.

A more fruitful approach would be leveraging Mexico’s particular assets to take full advantage of every link in the lithium value chain. “The political clout that a (strong lithium industry) can provide Mexico would make it less reliant on in its competitors, neighbors, allies and USMCA,” Anthony Alexiou, Principal at geopolitical risk consultancy The Minotaur Group, says. It is up to the Mexican people and government to seize the opportunity.

The data used in this article was sourced from:  
MBN, Nature, Senado de la República, Constitución Mexicana, HOW2GO, Deloitte, EconStor, Financial Times
Daniel González Daniel González Senior Writer