Chile Unveils State-Led Policy for Lithium

President plans to create a state-owned company for the metal used in electric cars

· Chile has the world’s biggest lithium reserves but it has struggled to develop new mines because of tight regulatory control over the mineral that has prevented foreign companies from investing in the industry.

Shares of some of the world’s biggest lithium mining companies traded sharply lower on Friday after Chilean President Gabriel Boric unveiled a new state-led strategy to develop its vast resources of the metal, which is vital for the development of electric vehicles.

Mr. Boric, a leftist former student protest leader who took office last year, announced late Thursday plans to create a state-owned lithium company to develop Chile’s lithium resources, a key campaign promise. In a televised address, Mr. Boric said the state would take a majority stake in partnerships with private companies to develop lithium.

“The state will participate in the entire productive process of the mineral,” Mr. Boric said. “This is the best chance that we have to transition to a sustainable and developed economy. We don’t have the luxury to waste it.”

Shares of Sociedad Química y Minera de Chile SQM -18.57%decrease; red down pointing triangle, one of the world’s top lithium producers, and partially owned by China’s Tianqi Lithium Corp., fell Friday nearly 19% in New York. U.S.-based Albemarle Corp., ALB -10.00%decrease; red down pointing triangle the only other producer in Chile, was down 10%. Both companies extract lithium from salty brines located under Chile’s northern Atacama salt flat.

A spokesman for SQM declined to comment. Albemarle said it expects “no material impact” on its operations as the government will respect existing mine contracts.

“We will continue to collaborate with the government of Chile regarding the proposed national lithium strategy,” it said. “We have many shared interests to include how best to grow the lithium market and deploy new sustainable technologies.”

Mr. Boric’s announcement drew criticism from business leaders. Industry chamber Sofofa said in a statement that it was surprised and concerned by the president’s proposal, which it said would undermine the private sector in developing Chile’s lithium.

“We hope the government rectifies this policy to re-establish confidence with the private sector,” it said.

But the U.S.-Chile Chamber of Commerce said it believes U.S. companies will be able to play a role in the development of Chile’s lithium under Mr. Boric’s proposal.

“We firmly believe that this initiative opens the door to the development of the lithium industry,” the business group said in a statement.

Chile has the world’s biggest lithium reserves but it has struggled to develop new mines because of tight regulatory control over the mineral that has prevented foreign companies from investing in the industry. As a result, Chile, the world’s second biggest lithium producer, has lost out market share to top producer Australia and neighboring Argentina, which has attracted Chinese, American and European miners to its lithium fields.

By 2027, Chile is expected to supply about 15% of lithium globally, down from a quarter of the world’s supply last year as other countries increase production, said Alice Yu, a mining analyst at S&P Global Commodity Insights.

Chile’s failure to develop new lithium mines has raised concerns among officials and industry experts that the country could miss out on surging demand for the metal that is used in batteries for electric vehicles and smartphones.

Chile’s government has been under pressure to increase public spending on education, pensions and healthcare even as its economy slows. Chile’s gross domestic product is expected to contract 1% this year, according to the International Monetary Fund.

Last year, SQM’s tax payments in Chile surged thanks to higher lithium prices. It contributed more than $5 billion to the treasury, according to a previous company statement, making it the country’s biggest corporate tax contributor.

In his speech, Mr. Boric said state-owned copper giant Codelco would hold talks with SQM and Albemarle to negotiate a deal for the state to take a stake in their operations before their contracts expire. SQM’s contract to extract lithium in the Atacama salt flat expires in 2030. Albemarle’s contract expires in 2043.

“The state of Chile will completely respect what is established in the existing contracts,” Mr. Boric said. “In other words, an early participation by the state in the Atacama salt flat will be the fruit of an agreement with those who currently have rights to exploit the lithium.”

Codelco and another state-owned mining company, Enami, will pursue projects in other salt flats, and tenders will be held for foreign companies to come in, Mr. Boric said.

Rony Zimerman, a mine lawyer in Santiago who has represented lithium miners in Chile, said Mr. Boric’s state-led lithium proposal could still be attractive for foreign investors looking to tap in to Chile’s deposits.

“I think companies will start calling Codelco and Enami today and asking, ‘How do we do this?’” he said. “The final conditions may be attractive for a company.”

Mr. Boric’s policy will require approval in Congress, where he has struggled to approve legislation since last year’s rejection of a new constitution that he backed and that would have ramped up the state’s role in the economy.

Juan Ignacio Guzman, a mining expert at Chile’s Catholic University, said he expects Mr. Boric will struggle to win approval in Congress for his lithium proposals. He said those proposals would further erode Chile’s competitiveness and undercut future production.

“People in general do not want the state to be in charge of business in Chile, but to effectively manage the wealth created by private companies,” he said.