Mexican nationalization of lithium

Mexican lithium nationalization faces lack of capital and possible corruption


01 | 02 | 2023


The development sector may be slow without increased foreign investment; for the time being, existing concessions will be maintained

In the picture

Lithium mining in Bacadéhuachi, in the Mexican state of Sonora [@outletminero].

Mexico approved in April 2022 the reform of the Mining Law which, with the political goal to protect the country's energy sovereignty, proceeded to nationalize the lithium sector, which is of a particularly strategic nature. Although effective in curbing foreign penetration in the mining activity and ensuring the protection of national resources, the initiative threatens to increase institutional corruption, hinder access to the necessary extractive technology and reduce the arrival of foreign investment, all of which puts the country's economic stability and development at stake.

In the process of nationalizing the energy sector, reversing the liberalization approved in the previous six-year term, President Manuel Andrés López Obrador promoted the reform of the Mining Law a year ago. Following the revision of the oil and electricity liberalization, the Mexican government proceeded to nationalize lithium, following the initiatives that other countries in the region -such as Bolivia, Chile and Argentina, which account for 60% of lithium reserves- have been approving to ensure greater control of this mineral of strategic value as it is essential for the manufacture of batteries, essential today in telephony and automobiles.

In its new wording, the Mining Law prohibits the bidding of new extraction projects and seeks to reevaluate the legality of private projects already established, such as the case of the bidding of business Bacanora Lithium in the state of Sonora, in the area with the largest reserves in the country. The business, of Anglo-Canadian origin, has been bought by a Chinese company, which sample the interest of the great powers for this mineral.

Due to the growing international demand for lithium and other minerals related to the production of electric motors, the government of President Andrés Manuel López Obrador maintains the nationalization of that resource as an important element of its protectionist diary . At promote this law in the Chamber of Deputies, the ruling party, MORENA, made special emphasis on the need to maintain the energy sovereignty of the Mexican people. The government considers that the protection of strategic resources such as lithium or oil is necessary to maintain effective control over its own national security.

The fear of dependence on foreign capital is not a thing of the present. Historically, given the enormous economic weight of its northern neighbor, the Mexican state has sought a balance between participation in the global market and the protection of its own economic and political interests. The nationalization of lithium is reminiscent of President Cárdenas' effort to nationalize oil in 1938. Thanks to this process and the creation of Petróleos de México (Pemex), the country enjoyed complete control over the extraction and distribution of crude oil nationwide. The complete nationalization of this industry was maintained until 2013, when President Peña Nieto's energy reform sought to encourage private participation in these activities.

Although the Government's arguments present the nationalization of lithium as beneficial 'per se', it can only bring economic benefits in the long term deadline and in the event that the existing reserves are profitable to extract. Analysts warn that the economic terms of its exploitation are yet to be determined and that it may take two decades to reach its optimum level. The effective exploitation of the mineral requires specialized technology that the Mexican State does not currently have. Only to continue with the development of the Bacadéhuachi beta, which is still awarded to the Bacanora company, would require an approximate public investment of 420 million dollars.

With the current austerity policy imposed by López Obrador, it is uncertain whether the government would have the capacity to properly manage the investment at project. While the budget annual federal allocated in 2022 to environmental protection, for example, is 17.804 billion pesos ($948 million), the development and expansion of Bacadéhuachi is estimated at 16 billion pesos ($852 million). The incapacitating problems of corruption and mismanagement of public revenues further emphasize the uncertainty about the success of nationalization, as it is based on examples such as the enormous debt acquired by the state-owned Pemex, whose oil production is well below its historical maximums.

Protection of energy sovereignty

Due to its growing importance for battery production, lithium has acquired an important geopolitical weight for nations such as Bolivia, Chile and Argentina, which constitute the so-called "lithium triangle" (due to the characteristics of the Andean Altiplano and the Atacama Desert) and which have the largest reserves and some of the largest productions. But Mexico also faces interesting prospects.

From agreement with the latest report from the USGS, the U.S. Geological Survey, in 2021 Chile was the second largest lithium producing country, with an estimated 26,000 tons, second only to Australia. The third was China and the fourth Argentina, with 6,200 tons. Although Bolivia is somewhat behind in extraction volume, it is the country with the most identified reserves, some 21 million tons, followed by Argentina, with 19 million, and Chile, with 9.8 million. Mexico ranks ninth in the world in terms of reserves, with 1.7 million tons.

In Bolivia, lithium production has decreased dramatically since the nationalization of all lithium-related activities in 2008. The extraction of only 500 tons per year has little weight togive the country greater international influence. Bolivia has little financial muscle to make the necessary investments, but at the same time is wary of the interests of international companies.

Precisely, both former President Evo Morales and his colleague and current president, Luis Arce, have attributed the political episode that ousted Morales from power in 2019 to the desire of the United States and its company Tesla to control the lithium sector in the South American country, although in reality the government provisional that succeeded him did not announce any intention to proceed with the liberalization of this industry.

In Argentina, Kirchnerism has also promoted bills in favor of the nationalization of lithium. In that country, discussion focuses on the control of production by government versus the control of the resources desired by the provinces of Jujuy, Salta and Catamarca.

Chile, for its part, is taking a more tentative approach. Gabriel Boric's new government has opted to propose the creation of a state-owned lithium company, but it will be able to count on the participation of private companies through tenders. business state-owned lithium company, but it will be able to count on the participation of private companies through tenders.

Difficulties of development

Following the entrance reform of the Mining Law, Mexico created a decentralized national body to carry out the administration of the lithium sector. Under the Ministry of Energy, LitioMx or Lithium for Mexico is the public business in charge of managing the capital allocated to this activity, as well as the manager of all current exploration operations.

This statist mentality is solidified when recalling the abusive and illegal practices of foreign mining companies in the country, such as their participation in several murders of Mexican environmental activists, as well as the links discovered between different foreign extractive companies and organized crime. The Mining Law is based on a review of old international investment agreements that have left much to be desired.

However, the lack of technology needed for extraction, as well as the political barrier of access to economic funds are not the only challenges to be overcome by the Lopez Obrador government. The most difficult problem to overcome remains the corruption that exists at various levels of the Mexican government.

Parallel to the case of the Federal Electricity Commission (CFE) and Pemex, it is feared that the nationalization of lithium will only benefit a few politicians and will not really represent a popular benefit, despite López Obrador's promises. It is vitally important that efficient measures are sought to reform accountability, the justice system and the excessive exercise of authority by Mexican presidentialism.

The nationalization of lithium may be a good step to avoid dependence on outside interests in Mexico's economic and political life; however, there is a long way to go for the social benefits of the Mining Law to materialize. Furthermore, if the fight against corruption is not stepped up, the initiative will be weighed down by the mismanagement of state resources.