The lithium industry is bracing for a crushing blow. Chile is one of the world’s largest producers of lithium, second only to Australia. Now, though, the country may be gearing up to nationalize the industry.
Chilean President Gabriel Boric plans on moving forward with an initiative to nationalize the country’s lithium industry. Under this new policy, international lithium mining companies would be forced to negotiate any new contracts with Chile. As this would likely cut into their profit margins, it isn’t good news for the industry.
Does this mean that investors should be avoiding lithium stocks right now? Let’s take a closer look at this recent development and examine what the future of the industry looks like.
What’s Happening With Lithium Stocks?
As noted, lithium stocks are reacting poorly to the news out of Chile today. Many of the sector’s most prominent names have been falling since pre-market trading. For starters, Albemarle (NYSE:ALB) is down about 7% as of this writing. Meanwhile, Livent (NYSE:LTHM) is having an even worse day, down more than 10%. Chile’s own Sociedad Química y Minera de Chile (NYSE:SQM) is also in the red by about 10%. Finally, Lithium Americas (NYSE:LAC) has also been volatile, currently down by less than 1%.
The new lithium initiative is part of Boric’s plan for boosting Chile’s economy while also protecting its natural resources. Under the plan, no new lithium mining contracts would be granted without state approval. Future contracts would be “issued as public-private partnerships with state control.”
This would not mean the termination of all existing contracts. However, the government is hoping companies will be open to state participation before existing contracts expire. According to Reuters, “SQM’s contract is set to expire in 2030 and Albemarle’s in 2043.”
“Chile is the latest in a series of countries seeking greater control over key mineral resources, after Mexico nationalised its lithium industry last year and Zimbabwe banned unprocessed lithium exports. Indonesia is curbing exports of commodities including nickel, which is used in batteries.”
If this trend continues, it could complicate operations for lithium producers. This comes as lithium prices fall after an iconic two-year surge, casting further doubt over the industry.
What Comes Next?
It’s hard to speculate exactly how much this news will impact lithium stocks in the long run. However, investors can take some comfort in the fact that Albemarle says it’s not too concerned with Boric’s plan.
Because lithium is a key ingredient in electric vehicle (EV) batteries, though, this development could complicate production for EV makers and other companies heavily invested in battery production. While the news doesn’t mean that Chile’s lithium supply is closed to the world, it does mean that extracting lithium may become harder and more costly for outside lithium companies.
On the date of publication, Samuel O’Brient did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.