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Analysis

Will Lithium Power Mexico Into the Future?

By Alejandro Ehrenberg | Wed, 11/04/2020 - 10:29

Nationalizing lithium is now on Mexico’s official public agenda. MORENA, the majority party in both houses of Congress, made it part of its Senate program for the current legislative period arguing that the battery metal is pivotal to the country's development. The move, if approved, would require deep legal reforms. It also raises questions about technical and economic feasibility. Most importantly, the proposal may be missing the point about Mexico’s role in the geopolitics of lithium.

 

LEGAL PERSPECTIVE

It is essential to understand what “nationalization” means 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. Private entities can only exploit these resources through a concession, which is granted by the executive branch of government. Put differently, lithium is already “nationalized” and the government lets companies exploit it in return for duties and taxes.

Oil and other hydrocarbons are a special case. Up until the 2013 Energy Reform, private players were barred from their exploration and extraction, which could only be done by state-owned companies. But the reform opened the door to non-state players, which can currently participate in the sector through a contract with a state-owned company.

Given that lithium, like all other minerals, is already considered national property by law, then surely what MORENA senators mean when they speak of nationalization is to raise lithium to the same status as oil and other hydrocarbons. A state-owned lithium company would have to be set up, and the private sector would only be allowed into the market through contracts with it.

But if the point 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: there are private companies currently participating in the oil and gas sector,” Jesús Enrique Pablo-Dorantes, Chairman of the Advisory Board of the Mexican Academy of Environmental Impact, told Mexico Business News.

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 hold. Midterm elections are due in June 2021. If MORENA achieves the necessary majority, then the attempt to change Article 27 could potentially be made.

Nonetheless, prominent members of the federal executive, including MORENA’s founder President López Obrador, have expressed indifference toward the proposal to make lithium’s exploitation exclusive to the state. “It is not necessary to nationalize lithium,” López Obrador said earlier this year. “There is a mechanism for granting contracts and concessions for mining exploitation. We have to make sure these contracts and concessions are granted (under the best) conditions.” On Oct. 16, 2020, Minister of Economy Graciela Márquez disagreed with MORENA’s proposal during an address to the Senate. “Mexico does not even produce lithium at present and the metallurgical process for obtaining the metal is very expensive,” she said.

 

MONEY AMONG THE OBSTACLES

Even if the political will to ban the private sector from exploiting Mexico’s lithium existed, numerous practical obstacles would complicate the formation of a viable state-owned lithium company. Budget constraints immediately come to mind. The coronavirus crisis has exacerbated an already fragile economic landscape in Mexico, making the mammoth investments a lithium enterprise would demand look like the stuff of fantasy. “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?” Armando Alatorre, President of Mexico’s College of Mining Engineers, Metallurgists and Geologists, said to Mexico Business News.

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 in Sonora,” said Pablo-Dorantes.

Bacanora was granted the Sonora project’s concessions in 2010 and published its bankable feasibility study eight years later. In 2019, Ganfeng became a shareholder and signed a 50 percent off-take agreement. The project has recently gained public attention for holding one of the world's most significant lithium deposits. “We will commence initial site works at Sonora in 1H21, subject to completion of financing, which would enable commencement of production at the plant in 2023,” said CEO Peter Secker in a company press release.

Another lithium project in Mexico is located in Zacatecas, whose 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 company’s history is a good example of the metallurgical intricacies of lithium production. After running tests, Organimax realized that the lithium in its deposit is actually contained not in the brine but in the clay underneath it. The clay has to be calcinated at more than 900 degrees Celsius and then dissolved in water to create a sort of artificial brine for processing — a complex and costly process.

Organimax has refocused its activities on the extraction of other valuable minerals from the brine in an effort to raise funds for eventually extracting lithium. “The metallurgical processes needed in Zacatecan lithium deposits have been thoroughly researched. The technical treatment has been resolved, but not the economic viability. Given current market and scientific circumstances, lithium’s commercial exploitation is not affordable in the state,” Rubén del Pozo, President of the Zacatecas Chapter of Mexico’s Association of Mining Engineers, Metallurgists and Geologists, told Mexico Business News.

This is not to say that developing the Zacatecan deposit is impossible. As Bacanora’s example shows, given the right financial and technical instruments, even a challenging project can move forward. In addition to the deposits already mentioned, Mexico has a lithium deposit in Baja California — under development by Vancouver-based One World Lithium — two more in Sonora, one in Jalisco and one in Puebla. The federal executive has not yet assigned the latter four deposits to a private company through a mining concession.

A further angle to consider is lithium’s long-term centrality to the transition to a low-carbon economy. The battery industry is wary of limitations posed by lithium and is on the lookout for other options. “While lithium has long been touted as the future of advanced batteries, the technology’s limitations and accidents at lithium facilities have encouraged manufacturers to consider alternatives to power the battery revolution,” according to an article in Power Technology. In the same vein, Elisa Crespo, President of the State of Mexico’s Automotive Cluster, commented to Mexico Business News that the automotive industry is actively seeking better alternatives, such as zinc-oxygen and sodium-sulfur batteries, as well as hydrogen cells.

Nonetheless, as technology currently stands, lithium remains the power and transport industries’ go-to for energy storage. A recent Nature article reported that, at present, lithium is critical to achieve a sustainable energy transition. “The demand for automotive applications is estimated to grow by more than 30 percent per year until 2030. Major battery manufacturers are committed to invest 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,” the article notes. The white metal’s strategic importance in the coming years can hardly be exaggerated.

 

AVAILABLE OPTIONS?

Given the prohibitive legal and technical hurdles the Mexican state would face if it wished to become a producer, what options would Mexico have to reap the potential benefits of its lithium deposits? First, MORENA legislators should not make hasty proposals that, from a constitutional perspective, amount to an attempt to squaring the circle. As Juan Pablo Gudiño, Founding Partner of Igual Social Consultores, said to Mexico Business News, calls from public officers for nationalizing lithium disincentivize investment, which is the sine qua non for capitalizing on Mexico’s mineral wealth.

Instead, lawmakers could contribute by finetuning the country’s legal framework with the aim of regulating lithium in particular, as this mineral has taken on an importance that current regulations do not stipulate. “Congress should push for a reform of the National Property Law to better define how the executive branch of government will administrate lithium in Mexico,” Gudiño added. Along the same line of thought, Pablo-Dorantes observed that a profitable course of action for the Mexican government would be to develop a special tax for the exploitation of lithium, through changes in the Federal Duties Law, in such a way that the environmental liabilities involved in producing the battery metal be compensated.

Furthermore, international analysts caution that, if Mexico does not take the reins swiftly, it may get caught in an uncomfortable geopolitical spot. China is notoriously interested in lithium, controlling roughly 60 percent of global battery production. However, the Asian giant’s lithium reserves are scarce, prompting Chinese companies to aggressively invest in producing countries, including Mexico and other Latin American states.

For its part, the US has enshrined lithium as a critical national security mineral. As geopolitical analyst Javier Arreola wrote in a piece for Forbes, the US will spare no effort in procuring international sources of critical raw materials, stopping China from doing so whenever possible. Lastly, the EU recently presented an action plan to reduce its dependency on other countries, diversifying supply from both primary and secondary sources. The plan notes that Europe will need up to 60 times more lithium by 2050, stressing that “we cannot allow to replace current reliance on fossil fuels with dependency on critical raw materials.”

Mexico will need to commit to rigorous standards when deciding which players will be allowed to invest and develop its lithium resources. Maria Fernanda Bozmoski, Associate Director at the Atlantic Council’s Adrienne Arsht Latin America Center, explained to Mexico Business News that the white metal’s potential abundance poses environmental, security and geopolitical dilemmas for Mexico — “especially given China’s approach to mining.” Bozmoski pointed out that the USMCA’s entry into force earlier this year outlines upgraded provisions for private investors considering business in the region. “China is known for its disregard of environmental and labor considerations, which would be at odds with the new USMCA,” she cautioned.

 

COMPARATIVE ADVANTAGE

Mexico, the US and Europe’s shared philosophy with respect to mining, which at least officially privileges environmental and social responsibility, makes them natural business partners. Moreover, in addition to USMCA, Mexico has a free trade agreement with the EU.

But to take full advantage of its lithium wealth, Mexico should seek to do more than just producing large amounts of the metal and shipping 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, using mining activities as a springboard for furthering Mexico’s overall development.

To that end, Mexico already has a comparative advantage with respect 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. Even though electric vehicle (EV) production in the country is still 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.

Mexico would therefore 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: 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, the 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, told Mexico Business News. It is up to the Mexican people and government to seize the opportunity.

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Alejandro Ehrenberg Alejandro Ehrenberg Journalist and Industry Analyst