Mexico Lithium Nationalization: What Now?

Four experts on impact of nationalizing lithium in Mexico.

BY ENERGY ADVISOR
Inter-American Dialogue

Mexico’s Senate on April 19 approved mining reform legislation that gives the state full control over lithium reserves. The lower chamber passed the legislation a day earlier, a move that happened just after lawmakers rejected President Andrés Manuel López Obrador’s electricity market reforms. What effects will the nationalization of the sector have on its development, and how much investment would be needed to get the sector up and running? Is Mexico likely to partner with private-sector players to help commercialize lithium? How big is the potential for Mexico’s lithium sector, and what are the best strategies for making the most of it for the benefit of Mexico’s citizens?

William Tahil, research director at Meridian International Research: Mexico has nationalized its nascent lithium industry just four years after a Canadian-Chinese mining company first broke ground. It is estimated that Mexico’s Sonora mine contains reserves of 4.5 million tons of lithium carbonate equivalent (LCE). Mining firm Bacanora Lithium estimates that the mine has a 19-year lifespan, with an average annual production of 240,000 tons of LCE.

The initial production target of 17,500 tons for the year 2023 is projected to require an investment of $420 million. Globally, lithium carbonate prices have skyrocketed from a low of less than $6,000 per ton in 2020 to nearly $80,000 per ton today—and the price is expected to go even higher. Such a price is unsustainable and is likely to come down in the future.It will nonetheless stimulate faster uptake of sodium ion batteries and other alternatives.

Bacanora Lithium is now wholly owned by the largest lithium producer in the world—the Chinese company Ganfeng. China has been determined to acquire control of every part of its lithium supply chain— from extraction to finished batteries. The Asian giant is unlikely to sit back and watch control of the Sonora mine be taken away, so Chinese diplomatic pressure on Mexico may be brought to bear. Lithium profits cannot replace Mexico’s declining oil revenues. At a more sustainable long-term price of $10,000 per ton, annual lithium revenues (once production reaches full capacity) would bring in around $2.4 billion per year, but it will take some years and several billion more dollars of investment to reach full capacity—and assuming there are no unforeseen obstacles in the extraction process. Lithium nationalization is unlikely to bring the current mining project to a halt, as Mexico doesn’t have the equipment, infrastructure or know-how to extract the metal on its own. Any attempt to interrupt extraction at the Sonora mine will be met with resistance from China.

Antonio Ortiz-Mena, senior vice president at Albright Stonebridge Group: In 1938, Mexican President Lázaro Cárdenas nationalized the oil industry. In 1960, President Adolfo López Mateos nationalized the electricity industry. And in 2022, President Andrés Manuel López Obrador nationalized lithium. While Cárdenas and López Mateos enacted nationalization as a pragmatic and nonideological solution to specific problems, López Obrador’s policy is ostensibly to prevent private investors, especially foreigners, from ‘taking advantage’ of Mexico by controlling a strategic asset. Prior to the lithium nationalization, the state already had control of that and all other minerals by virtue of the fact that it could simply decide not to award any concessions if it didn’t want to. The result of López Obrador’s decision, where only a state-controlled company that is yet to be established will participate in the lithium production chain, will likely result in no significant investment or development of a robust lithium industry in Mexico. Capital expenditure requirements are high, and development times are long. The only major investment in lithium mining in Mexico is from Bacanora Lithium, in Sonora. Bacanora started feasibility studies in 2016, early site work started in 2021, and production was slated to commence in approximately 2024.

The nationalization, with new investment restrictions, is potentially a violation of Mexico’s commitments under the USMCA, CPTPP and the E.U.-Mexico Trade Agreement. In addition, it will be a lost opportunity to boost a key component of the e-vehicle industry in Mexico. The best way forward is with strong and predictable state regulation allowing private investment. Mexico will have to wait several years to see if this is possible.

Aleida Azamar Alonso, professor in the economic production department at the Metropolitan Autonomous University of Mexico: Mexico’s recently ratified nationalization of lithium reserves is part of President Andrés Manuel López Obrador’s agenda of exerting greater state control over all things related to energy. The nationalization threatens to bring to a halt all extraction activities and investment from private companies, generating uncertainty about the fate of projects currently underway. Foreign companies Bacanora Lithium and Elektra Claystone are both extracting lithium from the Sonora mine. Should López Obrador decide to bring lithium extraction to a halt, there wouldn’t be much of a political price to pay—at least not domestically. But there is a lack of clarity surrounding how much lithium Mexico actually has, and in what form. In terms of composition, the country’s lithium reserves are likely to be mostly of the clay type, meaning the extraction process is more complex. Bringing the Sonora mine to full capacity will require an investment of at least $800 million, and it will take about eight to 10 years to reach this level. This casts doubt on whether the Mexican government can go it alone in the lithium industry. It is unlikely that Mexico has the funds needed to make such an investment, and there is no certainty about whether the government can acquire the infrastructure and expertise needed to extract lithium in quantities that can be brought to market in any meaningful way. The level of doubt grows when one considers that due to the wording of lithium nationalization legislation, it would be unfeasible for the Mexican government to seek the support of foreign companies.

Augusto Rodríguez, academic technician in the Geophysics Institute at the National Autonomous University of Mexico: The mining reform legislation that effectively nationalized lithium in Mexico is written in a way that gives the state full control over every aspect of the resource’s value chain.

This has generated questions and uncertainty from foreign and domestic investors, specialists, academics and society in general about what Mexican President Andrés Manuel López Obrador plans to do with the reserves he now controls. The scope, functions and finances needed to form a public company to manage lithium reserves are unclear. It is also unclear whether such an entity would actually be responsible for its extraction. The Sonora mine is abundant in lithium-rich clay. Producing lithium of this kind is labor- and process-intensive, which makes it costly and complex to produce.

But the benefits from lithium production would measure in the hundreds of millions of dollars. But it’s important to involve the private sector in Mexican lithium production, as well as geological and environmental experts and academics. The potential of lithium in Mexico is considerable, since exploration continues to advance and new lithium deposits are being found—in Sonora, Chihuahua, Coahuila, San Luis Potosí, Zacatecas, Oaxaca and Puebla. But before those new deposits can be exploited, soil and environmental research must be carried out to determine the composition of the clay-type deposits—and to consider whether there are other natural resources in the area, such as geothermal fluids or oil deposits.

Mexico would also do well to develop greater strategic partnerships with countries that are further along in their exploitation of lithium, like those in the so-called Lithium Triangle—Argentina, Bolivia and Chile—to learn from them what works and how best to bring the resources to the global market.

Republished with permission from the Inter-American Dialogue's weekly Energy Advisor