Friday, August 26, 2016

Lithium: Chile’s buried treasure

July 8, 2016 12:41 am

Lithium: Chile’s buried treasure

The vast salt flats of the Atacama desert are one of the best places in the world to extract the metal. So why is Chile falling behind as the market booms?
SQM’s lithium plant in the Atacama desert, Chile©Cristóbal Olivares
SQM’s lithium plant in the Atacama desert, Chile
A 600-mile-long strip of land between the Pacific Ocean and the snow-capped Andes, northern Chile’s Atacama is the world’s driest non-polar desert. Much of it is hostile to human life, and rainfall has yet to be recorded in some areas. Yet these conditions also make it one of the best places in the world to extract lithium, a soft, volatile metal that is found in the Earth’s crust.
Every week about a thousand workers travel by bus to a site in the north of the desert to work seven-day shifts on the salar, thousands of miles of salt flats that shine white in the glare of the sun. Most come from the nearby regions of Tarapacá and Antofagasta. They sleep in corrugated huts, in a small compound that has its own football field and an outdoor stage for movie nights. Twenty-four hours a day, every day of the year, a salty solution rich in lithium is pumped from deep beneath the desert into evaporation pools.
The concentrated brine that is produced is then driven west in small trucks to processing plants on Chile’s coast. There, it is refined into a powder and placed in large white bags before being sent around the world. Much of it travels across the Pacific to China, where it is used to create rechargeable ­batteries that power hundreds of millions of smartphones, digital cameras and laptops. Increasingly, it is being used in electric cars, too.
Lithium has been described by some analysts as “white petroleum”, a resource that could help the world move away from its dependence on fossil fuels and into a new era of battery-powered energy. Global climate agreements, tightening fuel economy standards and China’s attempts to tackle its pollution crisis all point towards a future in which batteries — and their component parts — will play an increasingly important role. Lithium-based batteries are lighter, charge faster and are able to store more energy than traditional ones, making them a strong contender to “replace gasoline as the primary source of transportation fuel”, according to analysts at Goldman Sachs, which published a report in December 2015 predicting that the size of the global lithium market could triple by 2025. The market is still relatively small — worth about $1bn a year — and not everyone agrees on the scale of growth to come. The raw material is time-­consuming to extract and refine, and other battery technologies that could displace lithium in a decade or two are in development. But even sceptics admit the material will probably become increasingly important as electric vehicles move towards mass-market adoption. China, where the government has set an ownership target of five million battery-electric and hybrid-electric vehicles on the road by 2020, could alone reshape the demand curve.
One of the site’s many evaporation ponds©Cristóbal Olivares
One of the site’s many evaporation ponds
Under the salar, Chile has enough lithium to supply the world for decades, but government quotas have meant production has barely increased even as demand has risen. The country’s slowness in exploiting its natural bounty is the result of corruption, rivalry and an unresolved debate around its natural resources that stretches back to the 1970s and the rule of former dictator Augusto Pinochet.
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A silvery-white metal that reacts violently with water and is so volatile that it is only found in compounds in nature, lithium was discovered by Johan August Arfwedson, a Swedish chemist, in 1817. The lightest of all metals, it offered industrial promise, but its inherent volatility was problematic. Until the late 20th century it was used mainly in the production of ceramics and glass and in greases for lubricating machine parts. Then, in the early 1970s, a young English scientist, Michael Stanley Whittingham, began to investigate potential battery materials at Stanford University.
A battery consists of an electrolyte (a substance that allows an electrical current to flow) and two electrodes, one negatively charged, the other positively charged. When a battery is turned on, electrical energy is released through the movement of electrons from negative to positive. Whittingham experimented with new combinations of materials to help store and release that energy, enabling the battery to recharge itself, and discovered that he could store lithium ions within layers of titanium disulphide to make a new kind of electrode. On the back of that research, he was hired by ExxonMobil to work on alternative energy projects just before the 1973 oil crisis hit. His team produced a rechargeable lithium-ion battery that worked at room ­temperature. The Exxon battery cells were exhibited at the Chicago electric vehicle show in 1977.
Work in progress at one of the ponds©Cristóbal Olivares
Work in progress at one of the ponds
“I think there was surprise: one, that there was a large lithium-ion battery and, two, that Exxon was doing it,” Whittingham recalls. At the time, the US was still the biggest producer and exporter of lithium, from mines in North Carolina, but just as Exxon’s battery was exhibited in Chicago, a Philadelphia-based mining company, Foote Mineral, began exploring for lithium in Chile’s Atacama. Foote had the blessing of Pinochet, who wanted to encourage foreign investment. The world looked set for a lithium boom. “Lithium: Will Short Supply Constrain Energy Technologies?” asked a 1976 ­article published in Science magazine.
But as oil prices fell in the following years, the appeal of electric vehicles declined. Exxon sold off Whittingham’s technology, and research into lithium-ion batteries largely returned to the domain of academics. Then John Goodenough, an American physicist working in Oxford in the early 1980s, invented a new combination of materials that improved the voltage and amount of energy a lithium-ion battery could store. That research, along with work in Japan, culminated in Sony introducing the first commercial rechargeable lithium-ion battery in 1991.
Smaller than a conventional battery, yet with higher capacity, lithium-ion batteries revolutionised the consumer electronics market, allowing Sony and others to produce handheld video cameras, laptops and, later, phones and tablets. In 2007, worldwide ownership of mobile phones passed the one billion mark; lithium batteries had cemented their position at the centre of our digital lives. A report by the US Geological Survey noted earlier this year: “Lithium supply security has become a top priority for technology companies in the United States and Asia.”
As the lithium-ion battery has become almost ubiquitous in consumer devices, the average price of the commodity has risen. But the amount needed to power a handheld camera or phone is still small: about five to seven grams of lithium carbonate equivalent (LCE) per phone. A mass market in electric vehicles could, however, significantly lift global demand; Goldman Sachs estimates that the Model S sedan, made by the US electric carmaker Tesla, uses 63kg of LCE in its battery — the equivalent content of about 10,000 mobile phones. Although there is no standardised price for lithium, the London-based research group Benchmark Mineral Intelligence estimates that prices for the most commonly used variety of lithium, lithium carbonate, have risen more than 100 per cent since 2005, and will continue to rise until 2018, when new supply is expected to stabilise the market.
While early hybrid vehicles used nickel-metal hydride batteries, lithium-ion is now the dominant technology in electric cars. Whittingham says he expects the usefulness of lithium batteries to last “longer than our lifetimes”.
Although the price of lithium has risen in recent years, greater efficiencies in the manufacturing process have pulled down the cost of lithium-ion battery packs from $1,000 per kilowatt-hour in 2010, to about $350/kWh, according to Bloomberg New Energy Finance (BNEF). The prototype Model 3 that Tesla unveiled in March, which is due for delivery in 2017, has a battery cost of just $200/kWh according to estimates from Bernstein Research. BNEF predicts that the unsubsidised total cost of ownership of an electric vehicle will fall below that of its petrol-fuelled rivals by 2022.
Lithium-rich brine evaporating in the sun©Cristóbal Olivares
Lithium-rich brine evaporating in the sun
Since cars came into mass-market use at the beginning of the 20th century, they have relied on lead-acid batteries that have changed little in their basic make-up since they were invented in 1859. “It’s only recently that lithium-ion has started to cannibalise lead-acid,” says Mark Newman, an analyst at Bernstein. “It takes a long, long, time . . . many years, for any new technology to become commercial, and many more years to catch up on the cost curve.” While there are other battery models in development, such as sodium-ion and magnesium-based technologies, lithium has emerged as the dominant one for the foreseeable future owing to its relatively low cost. Any new technologies are likely to take time to come to market at the scale needed for the automotive industry; for now, lithium has a head start.
Peter Bruce, a professor in the department of materials at Oxford university, believes that China will play a crucial role in driving down the cost of lithium-ion batteries as it steps up production of large-scale batteries for electricity storage, in the same way that Chinese supply helped bring down solar photovoltaic cell prices.
“For electric vehicles there isn’t really an obvious alternative in the medium-term — lithium-ion batteries will be the dominant technology,” Bruce says. “You will see improvements in driving range [the distance an electric car can travel without needing to recharge] and in charging times. We’re almost at a tipping point in the public’s acceptance of EVs [electric vehicles] — and if the costs can be brought down a bit more I think we’ll see quite a development.”
The accommodation built by SQM for its workers©Cristóbal Olivares
The accommodation built by SQM for its workers
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About 30 minutes drive from the city of Reno, Nevada, Tesla Motors is building the world’s biggest battery plant. The so-called “Gigafactory”, with a footprint of 5.8 million sq ft, or about 100 football fields, is set to cost $5bn. For Tesla’s chief executive Elon Musk, the investment is a bet on the mainstream potential of electric cars, as well as the likelihood of rising demand for household and commercial batteries that can store renewable energy, from solar to wind. When Musk unveiled the Model 3, the company’s first car priced for the top end of the mass market at $35,000, he said that to meet his target of producing 500,000 electric vehicles a year by 2018, “we would basically need to absorb the entire world’s lithium-ion production”.
For Chile, this should be good news. It contains half of the world’s most “economically extractable” reserves of the metal, according to the US Geographical Survey (USGS), and is the world’s lowest-cost producer, thanks to an efficient process that makes the most of the country’s climate. For lithium production, “Chile is like the gold standard”, says Brian Jaskula, a commodity specialist at the USGS. Yet, although it is perfectly positioned, with ports across the Pacific from the world’s largest car market, China, Chile is losing ground.
FREMONT, CA JANUARY 23, 2015. Scenes at the Tesla car factory include welders assembling various components. Photo by David Butow (Photo by David Butow/Corbis via Getty Images)©Getty
Electric-car manufacturer Tesla’s factory in Fremont, California
Almost all of the world’s lithium comes from just four countries — Chile, Australia, Argentina and China — while just four companies control most of the world’s supply: Sociedad Química y Minera de Chile (SQM), a fertiliser producer that began mining lithium in the 1990s; two US producers, Albemarle and FMC Lithium; and the Chinese producer Tianqi Lithium Industries. In Australia and parts of China, lithium is extracted from rock using traditional mining techniques, but in the so-called “lithium triangle” that extends through Chile, Argentina and Bolivia, the process relies mainly on the region’s relentless sunshine: brine is pumped out of wells beneath the desert and evaporated in large man-made pools. Dotted clear blue and green across the Atacama, they look like the scheme of some outlandish billionaire to build swimming pools in the desert. While the brine-extraction process is slow, it is generally a cheaper process than hard-rock operations, since the lithium is already isolated within the brine, and the sun does much of the work.
SQM, or Soquimich as it’s known in Chile, has built over 44 sq km of evaporation ponds. The company supplies almost all the major battery-material companies, which in turn produce parts for batteries that end up in electric cars.

Lithium: from desert to smartphone
1. Lithium-rich brine is extracted from natural underground wells in the salar, and pumped into a succession of solar evaporation ponds
2. Over a number of months, the sun concentrates the brine into lithium chloride, which is taken by truck to processing plants near Antofagasta
3. There it is processed into lithium carbonate and lithium hydroxide
4. More than 60 per cent of SQM’s lithium products are sold to battery customers in Asia, who use them in chemical mixes that form the cathode part of batteries
“Lithium you can find anywhere — the difference is how costly it is to take out,” says the site’s technical manager, Alejandro Bucher. He lists the facilities the company has to provide for workers in such a remote location, from a specially built hospital to sunscreen. The company also takes care of the flamingos who roam the outer fringes of the salar; staff know each bird by name, says Bucher.
Flamingos aside, Chile has long wrestled with how best to control its abundant natural resources. In the early 1970s, under President Salvador Allende, the country’s copper mines were nationalised, with US companies such as Kennecott, Anaconda and Cerro denounced for seeking quick profits. Copper miners were urged to “defend the revolution through more production”. SQM, which was founded in 1968 from a joint venture between a nitrate miner and a Chilean government agency, Corfo, with the aim of exploiting the Atacama’s rich nitrate deposits, was taken over by the state. But when Pinochet came to power in a coup in 1973, a plethora of state-owned companies were privatised under the influence of a group of Chilean economists nicknamed “the Chicago boys”, after the Chicago school of free market economics where many of them had studied.
Pinochet named his then son-in-law, a forestry engineer called Julio Ponce Lerou, as president of the agency supervising the privatisations. Ponce, who was already the regime’s representative on SQM’s board, led a group of investors in buying up the newly released shares in the company at prices far below market rates, according to Chilean investigators. Today, despite a series of controversies, Ponce still owns much of the business through a cascading series of holding companies, and is listed on the Forbes rich list with an estimated net worth of $1.4bn. In late 2014 he was fined almost $70m by the Chilean securities regulator for illegal share trading, with the regulator accusing him and three other executives of abusing their position of power over SQM. He is contesting those charges, but stepped down as chairman of the company in April 2015. In response to requests for comment, representatives of two of Ponce’s holding companies, Oro Blanco and Pampa Calichera, said they did not know how to reach him. Pampa Calichera also said he was no longer a director at the company.
The site’s technical manager, Alejandro Bucher©Cristóbal Olivares
The site’s technical manager, Alejandro Bucher
Ponce’s resignation came a month after SQM had fired its then chief executive, Patricio Contesse. The company said it found roughly $11m in payments of invoices from Contesse’s offices that “may not have been properly supported by services rendered or that may not qualify as tax expenses under the Chilean tax code”. The payments form part of a broader scandal that has engulfed Chile’s political scene over the past two years — the revelation of secret financing of political parties by a number of large companies using fake invoices. Directors from Canada’s Potash Corporation, the world’s largest fertiliser company and a significant shareholder in SQM, resigned in March last year over the company’s handling of the issue. Then, last month, a former presidential candidate named Pablo Longueira was put under house arrest, charged with receiving almost $1m from SQM. He has denied wrongdoing.
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The illicit payments scandal, and the involvement of major Chilean companies including SQM, has damaged the credibility of the country’s political system and set back its 20-year transition to democracy. “The country’s political institutions are at their lowest level of approval,” says Kenneth Bunker, a Chilean political scientist at the London School of Economics. It has also held up the development of the country’s lithium resources, with the relationship between SQM and the government becoming increasingly strained. The state has even threatened to revoke SQM’s lease to the lithium and potassium deposits in the Atacama, alleging that the company has underpaid the royalties due to the state under the terms of its contract. SQM believes that is has calculated and made the appropriate rental payments since it began selling lithium in 1997, and maintains that it has not committed any errors.
Julio Ponce Lerou facing the media in Santiago in March 2015, shortly before resigning as chairman of SMQ©Cristobal Escobar
Julio Ponce Lerou facing the media in Santiago in March 2015, shortly before resigning as chairman of SMQ
SQM also argues that it is being unfairly held back from producing more lithium by an outdated government regulation. In 1979, lithium was labelled a “strategic mineral” in Chile, in recognition of the fact that an isotope of the metal is used in nuclear fusion. The label stands to this day, despite the fact that the nuclear industry now uses an inconsequential amount of lithium. That means the government retains the rights to the lithium in the salar, which it leases out, in contrast to copper, where companies can obtain concessions that give them direct rights over the minerals in the ground. The nuclear commission also restricts the total amount of lithium that companies can produce through a quota; SQM can’t extract more lithium from the salar than it agreed in the terms of its lease with the government in 1993. This has led to the bizarre result of SQM pumping lithium back into the desert to avoid overshooting its quota, even as the price of the commodity has been rising.
Patricio de Solminihac, who was appointed as SQM’s new chief executive in March, says that without the government’s limits, the company could easily double its lithium production. “We are producing more this year, but our main constraint is the limits that we have from the government in our rent agreement,” he says. “I think that Chile has to decide what they think is best for the country. I personally think there is no reason in the lithium market or in the lithium industry to define it as a strategic material.”
An employee loading a one-ton bag of lithium at SQM’s processing plant near Antofagasta©Cristóbal Olivares
An employee loading a one-ton bag of lithium at SQM’s processing plant near Antofagasta
In 2014, Chile’s leftwing President Michelle Bachelet signed a decree ordering the establishment of a National Lithium Commission, raising hopes among investors that the country would open up its lithium business or perhaps relax the quota. But the commission said lithium’s status as a strategic mineral should be maintained, and recommended that the state develop the resource together with private companies. The government has since asked the state-owned copper miner Codelco to look into developing its two lithium deposits, although executives at the company say they have little interest in doing so.
“The commission recommended continuing to treat lithium as strategic as it’s sensitive. The salar is a whole system, not just lithium. So it recommended that the state have a more active role,” says Daniela Desormeaux, of consultancy SignumBox, who served on the commission. “Chile’s government is seeking to diversify away from its reliance on SQM to produce lithium,” says Ben Isaacson, an analyst at Scotiabank. “In our view, many of SQM’s issues will likely fade away when Julio Ponce cedes control.”
Eduardo Bitran, the head of the government’s economic development agency Corfo, is in charge of the lease agreements for Chile’s salar. He mourns the country’s loss of global market share, which he says has fallen from over half to 33 per cent, and is likely to drop further to 24 per cent in 2020. “Our leadership that we used to have, we lost very quickly,” he says. But he sees no chance of an agreement over the terms of SQM’s lease without Ponce exiting his ownership of the company, and calls its appointment of a new CEO “cosmetic”.
An overview of the Atacama lithium plant©Cristóbal Olivares
An overview of the Atacama lithium plant
“I think the most difficult problem now . . . is the big problem with SQM, in terms of the fact that they have been playing complex games in the Chilean political system,” Bitran says. “We, as the owner of the salar, want to make an alliance for the exploitation [of the Atacama] with companies that behave according to the rules and according to international standards in terms of corporate governance, in terms of compliance.”
Corfo seems to be doing just that. This year the agency signed a memorandum of understanding with the US producer Albemarle, the largest lithium producer in the world, to increase its right to extract lithium from a neighbouring but much smaller area of the salar. The memorandum also proposes an option for a separate quota to produce the form of lithium that Tesla uses, lithium hydroxide, directly from the desert’s brine.
Meanwhile, SQM has thrown a counterpunch. In early April it paid $25m for a stake in a lithium project in neighbouring Argentina. The country is emerging as a formidable competitor to Chile since the business-friendly President Mauricio Macri came to power six months ago. The message from SQM seemed clear: if the government would not increase its quota, it would produce more lithium by working with Chile’s rival instead.
Tesla’s 'Gigafactory', the world’s largest battery plant, under construction in Reno, Nevada, May 2015©Reuters
Tesla’s 'Gigafactory', the world’s largest battery plant, under construction in Reno, Nevada, May 2015
The Atacama, and the precious resources below it, are understandably politically sensitive. The historic role of Ponce and the recent scandals around SQM have cast a shadow over negotiations about the salar, even as the market for lithium products has boomed. As the world’s lowest-cost producer of lithium carbonate, Chile could play a role akin to Saudi Arabia in the oil market, a comparison that Corfo’s Bitran says he agrees with. He says the market should understand Chile is willing to produce more, although he doesn’t want to see a collapse in the price of lithium. Chile’s best strategy, he says, “is to keep prices in a reasonable range, keep the market happy with supply . . . give a signal to the automotive industry that we have enough supply and they can count on lithium batteries.”
As the world moves towards an electric future, raw materials are likely to play as important a part as oil did in the 20th century. The Atacama’s buried treasure highlights some of the unpredictable politics that continue to shape the broader market for lithium — as well as the potential for an emerging new order as the race to replace oil accelerates. If Chile cannot find a way to take advantage of the shift to a new set of resources, others will.
Henry Sanderson is the FT’s commodities correspondent
Photographs: Cristóbal Olivares; Reuters; Getty Images; Cristóbal Escobar/Agencia Uno
This article has been amended to correct the name of the US Geological Survey