The Lithium Test: How Chile Can Leverage Its Resource Advantage

Kuwaiti scientists noted recently that global production of petroleum will reach its maximum level in 2014, and crude reserves will gradually decline until they are exhausted in 2050 — or even earlier given the dizzying growth in global demand. Lithium is considered the fuel of the future, since can be used as a replacement for contaminating hydrocarbons in manufacturing the batteries used in hybrid and electric vehicles. This mineral is found in abundance in Bolivia, Argentina and Chile, in a region that some are already calling "the new Saudi Arabia."

Lithium ion batteries are also being used in such devices as cameras, smartphones, laptops, tablets and MP3 players because they are lightweight, powerful and have a long lifecycle. But the mineral is also used intensively in the glass and ceramic industries because lithium reduces the temperature required for fusing together materials, saving a great deal of energy as a result. In recent years, practical applications for lithium have also increased in the steel industry because lithium carbonate offers greater speed and fluidity in the molding process. In the future, experts forecast that lithium will be significantly developed in the cement industry, in aluminum alloys and in nuclear fusion reactions.

Boliviais home to 50% of the world's lithium reserves, located in the Salar de Uyuni region in the southeast of that country. Chile comes next, with 25% of global reserves, located in the Atacama Desert in the north. Argentina has 10% of global reserves in its provinces of Salta, Jujuy and Catamarca in the northeast. Despite the fact that Bolivia has a higher concentration of lithium, Chile leads the way in commercialization, producing 44% of global output in 2011. For their part, Australia, China and Argentina contributed, respectively, 25%, 13% and 11% of global production last year, according to Argentina's National Agency of Scientific and Technological Advancement.

Until recently, global lithium production had only grown by about 6% over the past decade, according to SignumBOX, the Chilean natural resources consulting firm. SignumBOX forecasts that this figure could rise from 140,000 tons produced annually today to more than 400,000 tons in 2030, propelled largely by strong demand for lithium batteries used in hybrid and electric vehicles. It's all part of the automotive industry's strategy to break its dependence on petroleum.

These sorts of batteries triple the performance of vehicles, says Alonso Arellano-Baeza, professor of geophysics and satellite teledetection at the University of Santiago de Chile (USACH). Moreover, users can recharge them easily by connecting to an electric current. "The problem is that it costs US$18,000 to produce a lithium battery," he notes. "As a result, the price of an electric car continues to be very high." Arellano-Baeza adds that continued research is needed in order improve the efficiency of electric batteries so that vehicles cover greater distances and their prices are more attractive to end users. Chile should take advantage of its leadership as one of the largest producers of lithium, and develop its research capabilities, particularly in the area of lithium batteries, suggests Alberto Cortes, professor of mining economics at the University of La Serena in Chile. "Why not create a lithium industry cluster in Chile?" he asks.

Competitive Advantage

In an attempt to make the Chilean lithium sector more competitive, the government of Chilean President Sebastian Piñera is trying to attract more companies to exploit lithium resources in various locations in the country by offering a so-called "Special Contract for Lithium Operations." This initiative opens attractive opportunities for new players to join this market. Until now, Chile's SQM (Sociedad Quimica Minera de Chile, S.A.), which produces 24% of the world's lithium, and Germany's Chemetall, which produces 16%, have been the only producers in Chile.

These companies have special contracts for operating in the Salar de Atacama region in the north of Chile. The contracts are very hard to obtain because during the 1970s, the Chilean government declared lithium to be a strategic resource, given its potential in nuclear fusion (the liberation of nuclear energy.) As a result, the government previously could not provide any concessions for lithium exploitation. However, the Special Contract initiative changed the entire landscape. According to Cortes, this measure makes it viable to increase lithium production in Chile, since there are other salt deposits containing lithium in the country that have not yet been exploited. This represents a great opportunity to capture future demand, he notes, adding that Chile has a labor force specialized in exploiting lithium.

Arellano-Baeza has a different view, arguing that the Special Contract initiative is "more a reflection of a desire propelled by the lithium boom, but lacking policies that will wind up promoting an industry that provides added value." He notes that there have been other big governmental measures in Chile's energy sector that have never prospered. The most emblematic example is that of geothermal energy: Eight years ago, the Chilean government established a series of mechanisms for promoting companies to undertake geothermal drilling in the country, Arellano-Baeza says. The goal was to promote local production of electric energy based on geothermal resources. This promising initiative was rooted in the fact that Chile's electricity network is highly dependent on such hydrocarbons as imported diesel fuel, as well as coal and hydroelectric power.

The measure was outlined in the government's plan for the development of unconventional, renewable energy sources. The plan quickly attracted the attention of numerous multinational companies since Chile already has 10% of the world's active volcanoes, and 86% of those volcanoes are available to be exploited as potential sources of geothermal power.

Chilewas a pioneer in the field of geothermal exploration and exploitation, notes Arellano-Baeza. "However, today we are not capable of generating a single megawatt of electrical energy based on geothermal sources because the country has never had a public policy aimed at developing its geothermal potential." The authorities have opened up opportunities for companies to begin to drill, but have not provided incentives for companies to invest more of their resources in geothermal projects, he adds. Nor has the government established timelines for electricity firms to begin to produce energy derived from geothermal resources. "The way things look, they are not going to do that, and I doubt that the situation is any different in the case of lithium."

Arellano-Baeza predicts that the same thing is going to happen to lithium as with the country's copper industry. "Chile is going to wind up being a mere exploiter of lithium, without adding greater value to the sector because it's quite likely that it will lack appropriate public policies for developing this market," he says. In 2011, Chilean copper exports reached a record-high US$42.629 billion, or 6% higher than the figure recorded in 2010, according to the Central Bank of Chile. The world's largest copper producer, Chile contributes one third of the world's entire demand.

The Chilean copper sector continues to be eminently extractive, Arellano-Baeza states. "There still hasn't been any qualitative leap forward in the manufacturing and commercialization of value-added products based on [copper]." Cortes shares Arellano-Baeza's view that in the case of lithium, the Chilean government must quickly complement its Special Contract policy with specific measures for adding to the value chain. He says the country has an exceptional opportunity to develop a sector that has great technological potential, considering the many ways lithium is being used.

Stimulating R&D

Nevertheless, Jorge Oyarzún, a professor of mining engineering at the University of La Serena, does not believe that Chile will attract a great deal of research in lithium. That's because a great deal of scientific, technological and economic resources, along with a more qualified workforce, are already being used in other countries to develop lithium batteries and other applications based on the mineral.

Arellano-Baeza agrees, noting that many of foreign companies today are working on the manufacture of lithium batteries. "Why should they lose time and money in our country by starting anew with these sorts of development projects?" he asks. "Besides, there is only a very low level of investment in R&D in Chile." The numbers speak for themselves: Chile's Center for Lithium Innovation has barely managed to collect $1 million to finance four research and development projects aimed at improving the technology of lithium batteries. Yet a single U.S. program focused on lithium recently announced an investment of US$120 million.

Because R&D investment in Chile is precarious, Arellano-Baeza suggests that the best strategy for the government to follow is to negotiate with the manufacturers of lithium batteries and other technologies based on this mineral, and to offer those manufacturers a series of incentives "so that they set up operations in [Chile], and continue their developmental work there. I believe that you have to establish ties with those players who can contribute to industry in Chile."

Advances in Argentina and Bolivia

While the debate about the best strategies for industrializing lithium has barely begun in Chile, Argentina and Bolivia are making progress in launching their own respective projects.

In Argentina, an Australian firm called Orocobre has joined forces with Japan's Toyota Tsusho to develop the lithium deposits of the Salar de Olaroz, in Jujuy province in the northeast of the country. The Olaroz deposits are highly appealing because of their high concentration of the mineral, their potentially high return on investment and the low technical risks involved. The Orocobre-Toyota Tsusho partnership would face competition given "the number of unexplored salt deposits in Argentina that we [in Chile] would like [to exploit]," Roberto Mallea, an expert at the Center for Mining and Metallurgical Research of Chile (CIMM), told the regional press.

Although Bolivia's Salar de Uyuni is far from being the most coveted salt deposit by automakers, the government of Bolivian President Evo Morales wants his country's lithium industry to be 100% state-owned, notes Cortes. So Japanese firms like Mitsubishi and Sumitomo, along with the governments of South Korea, Russia, China and Brazil are lining up in an attempt to negotiate with the Bolivian authorities "who have, until now, avoided any formal commitment, while keeping others who are interested in suspense," he adds.

If the Bolivian government persists in this strategy of "exploiting lithium so it can obtain the maximum benefit from this natural resource, and bring its population out of extreme poverty," then Bolivia will be confronted with such challenges as how to develop an infrastructure for this sector ad hoc, Cortes notes. At the moment, the government does not have sufficient financial resources to invest in exploration, exploitation and technological development. Bolivian authorities must even clash with the communities that live around the "salar" (salt deposit), as well as with certain negative effects on the environment, Cortes adds.

On the Internet, people are already advancing the idea that "the new Saudi Arabia" of lithium-rich countries in Latin America should be incubating the idea of creating their own version of OPEC. For the moment, however, that sort of talk is only a dream.

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