Economy Politics

Is Argentina Going to Nationalize Lithium?

25th June 2020

By Emily Hersh

Is Argentina Going to Nationalize Lithium?

One of the things I have to respect about Argentina is that even in a year as awful as 2020 where it feels almost impossible to be taken by surprise by negative business news, Argentina has not disappointed. When Argentina’s government announced the nationalization of soy superpower Vicentin in mid-June, even those of us who are extremely negative on the business and economic outlook of the country were taken aback. And while there have been numerous protests and debates about the legality of such action, the fact of the matter is that Production Minister Matias Kulfas defended the move as part of a “statist vision for the 21st century.”

</p> <p class="p1"><span class="s1">Argentina’s economic strategy under Kulfas includes a greater role for the state and does not prioritize attracting international investment.</span></p> <p class="p1"><span class="s1">The next logical question has then been, what other industries could be next on the “nationalization” chopping block? <a href="https://www.iprofesional.com/economia/317567-litio-oro-cobre-por-que-ahora-ypf-se-expande-hacia-la-mineria">The troubling possibility of state intervention in gold and lithium</a> has been making the rounds in the local press. Even in the weeks before the government took action in the Vicentin case, the possibility of widening the mandate of state-owned oil company YPF to include agriculture and mining was being publicly discussed. </span></p> <p class="p1"><span class="s1">As tempting as it is to try to categorize Argentina’s flirtation with expropriation as either no big deal and not representative of things to come, or the first step on a slippery slope to Venezuela, it’s neither. </span></p> <p class="p1"><span class="s1">Argentina’s economic decisions in both the short and medium term can be boiled down to access to dollars.</span></p> <p class="p1"><span class="s1"><b>Dollars now, dollars later</b></span></p> <p class="p1"><span class="s1">Dollar scarcity is the overarching driver that is lurking behind short term decisions. Argentina has already missed several deadlines to either make payments on or renegotiate its international debt. Whether in the end a deal is reached or Argentina defaults, the final outcome will not include investors lining up to throw dollars into the country. Argentina’s only source of foreign currency will be from export-oriented industries.</span></p> <p class="p1"><span class="s1">In the context of access to dollars, Argentina’s only noteworthy export sectors are agriculture, oil and gas, and mining. Before COVID-19 wreaked havoc on the global economy, Kulfas’s economic recovery plan hinged on further developing the oil and gas sector. But petroleum demand is inconveniently tied to travel and industrial activity, both of which have taken a hit globally and walloped oil prices in the process. Ironically, Argentina will now be subsidizing oil prices for local production to prop up the local sector, so what should have been a boost in foreign currency <a href="https://www.batimes.com.ar/news/economy/government-fixes-oil-barrel-price-at-us45-to-protect-local-producers.phtml">will now function as kick in the coffers</a>.</span></p> <p class="p1"><span class="s1">So with oil and gas no longer the great greenback hope of the economy, the government will have to look elsewhere for foreign currency, which brings us to agriculture – and then mining. </span></p> <p class="p1"><span class="s1">There’s an old Aesop’s fable whose moral is not to <a href="https://en.wikipedia.org/wiki/The_Goose_that_Laid_the_Golden_Eggs">kill the goose that lays the golden eggs</a></span><span class="s4">.<span class="Apple-converted-space">  </span></span><span class="s1">A farmer owns a goose who lays one golden egg at a time. Possessed by greed and unable to wait, the farmer rips the goose open to discover no gold inside and killing the goose in the process. Argentina’s treatment of export industries in the short term can be likened to this fable, except imagine the farmer is dying of starvation and needs to eat the goose today to live until tomorrow. If the government needs dollars today to stave off an economic crisis, they’ll do what’s necessary even if it means butchering an industry’s long-term prospects. </span></p> <p class="p1"><span class="s1"><b>Testing the water</b></span></p> <p class="p1"><span class="s1">The Vicentin expropriation is of a company, not an entire sector. Argentina’s constitution clearly lays out that mineral resources belong directly to the provinces, meaning that it simply wouldn’t be feasible to start snapping up mineral properties out from under private owners or operators. Stirring up sovereignty-related conflicts with the provinces is the last thing government needs in today’s context. Finally, mining is the kind of capital intensive activity that is difficult to undertake without access to large US dollar investments. </span></p> <p class="p1"><span class="s1">If Vicentin is a golden goose taking a little nap, the mining sector is a nest full of hungry goslings that need capital and expertise to survive to adulthood. </span></p> <p class="p1"><span class="s1"><b>Tilting the Playing Field</b></span></p> <p class="p1"><span class="s1">In recent history, Argentina’s state intervention in a sector has not consisted of running roughshod over every actor. YPF is not the only oil and gas operator, and Aerolineas Argentinas by no means flies alone across the country’s skies. And yet, their existence as state-owned entities has been marked by government support from subsidies to rules that nudge out competitors. </span></p> <p class="p1"><span class="s1">Which brings us back to lithium. Whether YPF is ordained or not to act as a state-supported lithium player will do nothing to current projects, and very little to the industry in the short to medium term. Bending the law to expropriate current lithium producers would not translate into dollars for the government today. Bringing a new lithium project into production costs in the ballpark of US $500 million per project, and a government in a cash crunch can’t just legislate the lithium out of the ground and into a battery-ready chemical.</span></p> <p class="p1"><span class="s1">In the long run though, expropriations and rumblings of empowering a state actor in the mineral industry are related should not be dismissed. State-supported companies can be given preferential treatment in terms of access to imported reagents and machinery, energy, and properties.</span></p> <p class="p1"><span class="s1">Outright nationalization of mineral assets does not serve the purpose of giving the government access to dollars in the short term. But over time, a state-supported mining company would change the playing field for Argentina’s lithium industry. Writing the possibility off completely is an act of sheer folly akin to roasting the goose that lays the golden eggs.</span></p> <p>

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Emily Hersh

Emily Hersh is Managing Partner at DCDB Group and host of the Minerals Manhattan Project podcast.