By Dave Sherwood
SANTIAGO (Reuters) - As automakers race to a clean-energy future, Chile looked to be in the catbird seat.
The South American nation possesses the world's largest reserves of lithium, a lightweight metal crucial to manufacturing batteries for electric vehicles. Chile's lithium is high quality and cheap to produce.
But the nation's output has barely budged in recent years. Chile's two lone producers, SQM and Albemarle Corp, have struggled to boost production to capitalize on strong global demand, which is widely expected to triple by 2025.
Chile's government, meanwhile, has been slow to allow new players to enter the market. And indigenous groups and activists are opposing new projects, worried about environmental impacts.
The upshot: Chile is losing ground to competitors.
Australia in 2017 surpassed Chile to become the world's top lithium supplier. Neighboring Argentina is positioned to gain fast, with at least a dozen projects in the pipeline.
While Chile remains an important producer, the market is anxious and investors are looking elsewhere to boost supply, analysts said.
Chile "is disappointing the industry" and if expansion projects there continue to stumble, it could cause "uncertainty and complexity in supply chains," U.S.-based independent lithium industry consultant Joe Lowry said.
(For a graphic on global lithium production, see: https://tmsnrt.rs/2HLefGh)
Chile´s Mining Ministry did not respond to multiple requests for comment. Mining Minister Baldo Prokurica earlier this year told reporters the government is doing everything possible to "ensure lithium and other battery metals are being exploited."
Santiago-based SQM saw its stock dive more than 6% on May 23 when it announced it would delay a planned expansion in Chile's Atacama salt flat until the end of 2021. That project would allow the company to produce as much as 120,000 tonnes of lithium carbonate, more than double its current production.
Chief Financial Officer Gerardo Illanes told Reuters in an email that the project, albeit delayed, would give the company the "flexibility we need in a fast-growing market like lithium."
Rival Albemarle, the world's No. 1 lithium producer, earlier this month said its 2019 production would be roughly flat from last year's levels. Eric Norris, Albemarle's lithium division president, said the Charlotte, North Carolina-based company was pushing forward with Atacama expansion projects and said "we maintain a very strong, positive and active relationship with Chilean regulators."
NO PLACE BETTER
Some 1,150 kilometers (700 miles) north of Santiago, at SQM and Albemarle´s operations in the Atacama, rows of giant, rectangular holding ponds filled with metal-rich brine bake in the scorching sun. Chile's lithium is found in underground reservoirs of salty water. Miners have only to pump this valuable liquid to the surface. Mother Nature does the heavy lifting.
The area's intense sunlight, low humidity and steady, hot winds evaporate most of the water, leaving behind a slurry of "white gold." Chile's perch on the Pacific Ocean makes it easy to export.
These advantages have given Chile a roughly 20% share of global mine production for lithium, according to U.S. Geological Survey figures. That is down from a 36% share just 4 years ago.
The erosion stems in part from laws passed decades ago under then-dictator Augusto Pinochet. His government declared lithium to be a "strategic" resource because of its use in nuclear fission. Chile requires private miners to either partner with the state, as SQM and Albemarle have done, or obtain a special permit known as a CEOL to mine lithium on their own.
The problem, would-be miners say, is that the government has yet to provide guidelines for obtaining a CEOL. Nor has it announced a uniform royalty or tax scheme that would help investors gauge the risks.
That lack of clarity has spooked a number of foreign investors, according to Marcelo Awad, a Chilean executive with Wealth Minerals Ltd of Canada.
"They say 'We still don't understand the rules of the game,'" Awad said.
No new players have secured the permits needed to begin production since lithium prices took off in 2014. Wealth Minerals, which has obtained concessions in the Atacama and other Chilean salt flats, has opted to partner with Chilean state mining company Enami in a last-ditch effort to push forward, Awad said.
Another major challenge is water. To remain viable for mining, Chile's underground lithium reservoirs must be recharged by snow and rainfall from the Andes mountains. No one is certain how much can be safely pumped from under the sprawling Atacama, home to as much as 80% of Chile's lithium reserves.
A government study last year found that more water and brine were leaving the system than coming back, prompting the government to announce new restrictions. That has led to increased scrutiny of water use by SQM and Albemarle on the flat.
Albemarle recently ditched plans for the final and most ambitious stage of its expansion, from 80,000 tonnes to 145,000 of lithium carbonate, after Chilean regulators questioned its use of water-saving technology and took issue with its environmental studies.
The company said the decision was prompted by falling market demand for lithium carbonate, its top Chile product, versus the lithium hydroxide it produces elsewhere.
SQM has also wrangled with regulators over allegations it had overdrawn water from the salt flat. That spat ended with SQM agreeing to a compliance plan that requires the world's No. 2 lithium miner to reduce its pumping and subject its operations to increased scrutiny.
In addition, Chile's DGA water authority has acknowledged it does not know whether lithium mining could impact separate freshwater reservoirs beneath the Atacama salt pan that provide drinking water to local communities.
A state water study, which was expected to be completed last year, has been delayed for technical reasons until late 2019, government officials told Reuters.
Uncertainty has hardened the resolve of indigenous communities whose adobe homes dot the volcanic foothills around Atacama.
Sergio Cubillos, president of the Atacama Indigenous Council (CPA), which represents 18 communities, told Reuters it will move to block any new mines on the salt flat amid a lack of understanding of their impact.
Resistance may have already brought down at least one potential lithium project.
Earlier this year, Canada-based LiCo Energy Metals Inc scrapped its Purickuta project in the Atacama, citing "immense and widespread" opposition from the local indigenous community.
In all, setbacks in Chile could require battery makers and the electric vehicle industry to prepare a Plan B, said Howard Klein, a lithium analyst and partner with New York-based RK Equity.
"The best brines in the world are in Chile. But production is flat when it should be growing," Klein said. "If it’s not coming from Chile, then it has to come from more expensive or riskier areas, which, from an economic perspective, is less than ideal."
(Reporting by Dave Sherwood; Editing by Marla Dickerson)