Chile has decided that it’s going to try to nationalise the lithium miners in that country. The two major extant Chilean lithium miners, Sociedad Quimica (NYSE: SQM) and Albemarle (NYSE: ALB) dropped 20 and 10% respectively on the news. The different reactions being about how much of their production comes from that country.
This is to get the correct reaction to that event, the proposed nationalisation, the wrong way around, in the wrong direction. Because the announcement is positive for the lithium price, positive for these two specific miners. We all know that nationalised mineral production is inefficient, plagued by delays and generally pretty much no good. So, nationalising it makes it worse – that’s going to reduce the future supply of lithium, not increase it. Lower supply puts up lithium prices and the profits of those who mine for it.
It’s not quite the nationalisation of the current mines
More, in the details of the announcement about Chilean lithium nationalisation there is the point that extant contracts will be maintained. Oh, sure, there’s some shouting about how “the state should get involved” but that’s all much more about wanting to add value, further up the production chain, than the mines themselves. Good royalties are already paid on the mining. Further, any nationalisation that does happen has to be paid for by the state at full market prices.
A useful expectation is that once the first reaction wears off then prices will recover.
Other lithium miners will benefit from this
But more than this, this is also good news for all other lithium miners. For again, we know that Chile has some of the largest and easiest to mine lithium deposits. Getting he state involved is going to cripple their exploitation. Therefore, in the future less lithium is going to get mined, the lithium price will be higher than it would be without this move. This is a positive for the sector – restrictions upon supply always are a positive for extant producers and those others not affected by the restriction.
The real restriction is, after all, that Chile is nationalising all new lithium production. Or demanding that the state be given a big role in it. The inefficiencies in that do mean less future supply.
But are we short of lithium in the first place?
Now, of course, this might not be all that much of an issue anyway. There are those who insist that lithium production is going to go into oversupply soon enough and they might well be right. As that Tesla Master Plan 3 points out the electrification of the entire planet and transport sector only requires 20% of current lithium resources. Resources are, recall, the stuff we know is out there, that we’re reasonably certain we can mine. All we’ve got to do is add capital and effort and we can have it. A gradual realisation of this is why that China spot lithium price is declining – down some 60% over the past 6 months in fact. Yes, that’s the current, not future, price and yet it is indicative. Something that people are worried about becoming in short supply does not decline in price.
This is also entirely normal in mining. Demand rises, supply is constrained, the price goes wild. That’s great for the extant miners, their profits soar. For mining costs don’t rise as revenues do, the higher prices feed directly through top the bottom line. That leads to many others – and it always is many, many, others – working on those resources to turn them into mines. Near always supply therefore gets ahead of demand and prices then plummet again. That’s just the mining cycle.
The net effect of Chile’s action is thus complicated
We’ve thus the two entirely different issues here. It’s a respectable – not necessarily correct, but respectable – view that lithium is going into long term oversupply. It certainly is in this short term, that might well extend as ever more mines come online. That’s bearish for the lithium price and for all lithium miners. But we’ve also this Chilean move which is going to limit new production from the most obvious source, the Chilean salt flats. Even if the terms aren’t too harsh on new miners they will make mining there less attractive and therefore there will be less of it. So, that’s bullish for the lithium price and for the share prices of current lithium miners.
Exactly how this works out for the short to medium term prices of SQB and ALB is obviously unknown. But we’d expect considerable volatility as opinion as to the end result here swings one way and the other.
