How lithium-rich Chile botched a plan to attract battery makers
By Dave Sherwood
SANTIAGO (Reuters) - In March 2018, the Chilean government unveiled big news: Corporate investors, including South Korean electronics giant Samsung, would build three factories in Chile to produce battery parts for electric vehicles.
Chile had lured the companies with an enticing offer. In exchange for helping the South American country, the world's No. 2 miner of lithium, jumpstart its own EV battery industry, the firms would get a guaranteed supply of the coveted metal at attractive prices for nearly three decades amid a global race to lock down supplies.
GRAPHIC: Global Lithium Production, https://tmsnrt.rs/2HLefGh
Now that arrangement is falling apart. Chile's government has failed to deliver the bountiful, bargain-priced lithium it had promised in a fast-changing market, according to a Reuters review of regulatory filings and internal documents from a state development agency.
Chilean chemical company Molymet <MOL.SN>, which had planned to build one of the battery parts factories, last week announced it is scrapping that effort; it declined to say why. That follows a similar defection by South Korea's POSCO. The steelmaker in June said it was pulling out of a joint venture to build a Chilean plant with Samsung's battery unit <006400.KS>, citing worries about lithium supplies. Samsung told Reuters it is now reviewing the project.
China's Sichuan Fulin Transportation Group Co <002357.SZ>, meanwhile, has yet to get its planned Chilean factory off the ground. Fulin did not respond to requests for comment.
The deals hinged on the globe's top producer of lithium - Albemarle Corp <ALB.N> - boosting output from its Chilean operations to supply the planned factories. But Albemarle's expansion has been hampered by technological and regulatory hurdles. The U.S.-based miner has feuded with Chile's government over the price battery makers would pay for its lithium. And it does not produce lithium hydroxide in Chile, the type of processed lithium required by POSCO-Samsung.
While Chile possesses the world's largest reserves of the "white gold", it has not capitalized fully on those riches. Like Albemarle, the nation's other big lithium miner, SQM <SQMa.SN>, has struggled to boost output amid strong global demand, which is expected to triple by 2025. The government, meanwhile, has been slow to allow new players to enter the market.
Chile's latest stumbling effort to woo battery makers shows that uprooting that industry from Asia will not be easy, says Emily Hersh, a managing partner with the Washington, D.C.-based consultancy DCDB group.
"It's a big reality check," Hersh said. "Chile is a powerhouse in the production of battery chemicals. If they can't do this, everybody needs to pay attention and figure out why."
Then-President Michelle Bachelet in late 2016 struck an unusual deal with Albemarle, the source of nearly half of Chile's lithium production.
Her center-left government gave Albemarle the green light to more than double its output through 2043. In return, Bachelet mandated the U.S.-based miner guarantee a quarter of its annual production at favourable prices to battery makers willing to set up shop in the country.
Chilean development agency Corfo opened a tender to prospective investors in April 2017 with the hopes of new factories breaking ground by early 2020. It received 12 bids.
But behind the scenes, Chile worried about its ability to deliver the promised lithium, according to government documents viewed by Reuters describing the decision-making process.
State projections showed Albemarle producing 64,000 tonnes of lithium by 2020, with as much as 16,000 tonnes of that earmarked for the new factories, according to the tender documents.
But the three winning projects combined called for 28,496 tonnes of lithium, according to the documents, nearly twice the amount Albemarle was required to supply.
"It would only be possible to satisfy the requirements of Fulin and Molymet, on the one hand, or Posco-Samsung, on the other," said an internal Corfo memo dated March 9, 2018.
The documents show the agency pinned its hopes on Albemarle speeding its expansion. The company in March 2018 applied to increase its export quota to as much as 145,000 tonnes of lithium annually.
But Chilean regulators in September rejected that plan, saying the miner had failed to prove it had the technology necessary to produce the extra lithium without straining water resources.
Albemarle now says it is on track to boost production capacity to over 80,000 tonnes of lithium by 2021, still short of what the government needs to make good on its promises to the tender winners.
The state has "mistaken its wishes for reality," said Jaime Alee, a Santiago-based lithium consultant.
Corfo declined repeated requests for comment.
Albemarle and the government also bickered over the price at which the company was obligated to sell its lithium.
Corfo, now under the direction of center-right President Sebastian Pinera, threatened Albemarle with arbitration in October 2018. In January, the parties struck a deal but have not released details of their agreement.
An Albemarle spokesman told Reuters that Corfo had misrepresented to the battery makers the way the price was to be calculated.
Eduardo Bitran, the former head of Corfo, said the terms were clear.
The dealbreaker for POSCO was product mix.
Albemarle produces only lithium carbonate in Chile, used commonly in consumer electronics. The proposed POSCO-Samsung plant required 14,231 tonnes of lithium hydroxide, increasingly preferred for making EV battery cathodes.
Talks between POSCO and Albemarle to produce the material collapsed in June, POSCO said, propelling the company to hit the exits.
Amid the disarray, Chilean officials recently took to the road in Europe, Japan and South Korea to pitch another auction to battery makers, this one slated for early 2020 and offering discounted lithium from SQM for companies willing to build plants in Chile.
InvestChile, the nation's investment promotion agency, told Reuters the rules are more clear this time around.
"This is important to guard against the types of situations which have happened in the past," the agency said.
GRAPHIC: Game of Mines, https://tmsnrt.rs/2WiWp6o
(Reporting by Dave Sherwood; Additional reporting by Natalia Ramos in Santiago and David Stanway in Shanghai; Editing by Marla Dickerson)