A Vote on the Future of Chilean Copper and Lithium
By: Analysis | Stratfor.comDecember 5, 2017
Highlights
  • The rise of leftist political coalition Broad Front may force center-left candidate Alejandro Guillier to include some of its proposals in his platform as the deciding ballot in the presidential election nears. 
  • If Guillier wins, the coalition's economic proposals may define the future of Chile's lithium and copper industries over the next four years.
  • Argentina and Bolivia are best positioned to benefit if the Broad Front's ideas are incorporated.

In less than two weeks, Chilean voters will make a decision that could affect the country's crucial copper and lithium extraction industries, buttresses of Chile's economy and a key area for future growth. In a Dec. 17 election, voters will choose between center-right candidate Sebastian Pinera and center-left candidate Alejandro Guillier, the top two finishers in the first round of balloting, to become the country's next president. The first-round results also included an unexpectedly strong showing by Beatriz Sanchez, the candidate representing the left-wing Broad Front coalition, elevating the group's political stature during the contest's deciding round. While capturing Broad Front's support could boost Guillier's chances of victory, to win the coalition's backing, he would have to incorporate its economic proposals, which could have a major effect on the country's energy and mining industries.

In the initial round of the presidential election on Nov. 19, Pinera won 36.6 percent of the vote, well short of the majority he would have needed to capture the presidency on the first ballot. Guillier, meanwhile, secured a spot in the second round with 22.7 percent. Sanchez fell just shy of moving on with 20.2 percent. No other candidate received more than 10 percent of the vote. The fact that Sanchez came so close to a spot in the second round, demonstrating Broad Front's growing political clout, did not sit well with Chilean investors. The day after election results were announced, Chile's stock market dropped almost 6 percent, while the peso fell almost 1 percent against the dollar. Investors prefer Pinera, who served as president from 2010-2014 and has proposed cutting corporate taxes as well as public spending. Guillier, on the other hand, has called for increasing public spending, additional state intervention in Chile's lithium extraction industry and retaining the corporate tax increase put in place by outgoing President Michelle Bachelet. However, as Guillier moves left in an attempt to secure the Broad Front's support, his proposals on state intervention and public spending may go beyond what he already has articulated. 

For Guillier to enact the Broad Front's goals on education and health care ... he would have to find new sources of tax revenue. The country's copper and lithium industries could offer that. 

The Broad Front, a coalition of leftist political parties and social movements that was created early this year, has actively pushed for free universal education and health care in Chile. The student movements that are active in the coalition are the same ones that drove public protest during Pinera's previous term as president with demands for free education at all levels for all citizens. For Guillier to enact the Broad Front's goals on education and health care, which would necessitate an increase in public spending, he would have to find new sources of tax revenue. The country's copper and lithium industries could offer that. Copper production provides about 25 percent of Chile's national revenue, and its lithium industry is growing increasingly more important as the element's use in battery production expands worldwide.

An Agreement on Copper

Both Pinera and Guillier agree that the government should end a law passed in 1958 that hands 10 percent of the revenue from Chile's copper exports directly to the country's armed forces. A lack of transparency surrounding the use of those funds has built momentum for rescinding the measure. A look at its spending in 2016 showed mismanagement in the military's use of the money to build new offices and accommodations instead of increasing the country's military power, as the law had intended. Over the past 12 years, figures show, the country's state-owned mining company Codelco alone has transferred around $13 billion in copper revenues to the armed forces.

Where Pinera and Guillier differ is in deciding what to do with the revenue made available by ending the military allocation. Pinera would like to allow Codelco to use the money to increase its investment capacity. That idea falls in line with his economic agenda of cutting corporate taxes as a way to resume economic growth. The continued weakness in prices for copper has relegated growth in Chile's gross domestic product to less than 2 percent over the past four years, and Pinera argues that the tax on copper exports coupled with the price decline have limited Codelco's capacity to start new mining projects. The company's mining investments, for example, dropped over 40 percent in 2016. It is less clear, however, what Guillier would propose to do with the extra money. While he agrees that the copper export tax hurts Codelco's finances, he would likely divert the funds freed by ending the law into the country's general coffers rather than allowing it to be used to increase Codelco's investment capacity.

The Future of Lithium

Chile's lithium production is another issue that the presidential election will decide. Chile is the world's second-largest producer of the metal behind Australia, according to U.S. Geological Survey data. The Chilean government already restricts how much lithium each producer can exploit, but Guillier has proposed to tighten those restrictions even further by creating a state-owned company to control lithium production. Basically, the government would limit the amount of raw lithium that could be exported while the new state-owned company would focus on industrializing its production. That process could take years to develop and put Chile behind other lithium-rich nations in the race to increase capacity as demand for lithium continues to grow.

A decision to limit exports of raw lithium from Chile could only help increase investment in other lithium producers elsewhere, such as Argentina. The Argentinian government, for one, has been trying to develop its own lithium industry. Earlier this year, Argentinian mining company Exar announced planned investments of more than $700 million in lithium exploration in the next two years. This sort of investment could help the country reach its goal of increasing its annual lithium production from 50,000 tons to almost 200,000 tons by 2021.

Bolivia's lithium industry could also benefit from political changes in Chile. The country is still far from becoming a major lithium producer despite its vast reserves. Bolivian law limits extraction of lithium to state-owned firms, which lack technical expertise in the field. Additionally, the country is landlocked, which increases the costs of exporting the lithium it produces. This is where the political influence of the Broad Front, in the event of a Guillier victory, could make a difference by easing negotiations over granting Bolivia sovereign access to a Chilean port. The coalition's agenda for this presidential election included a negotiated solution with Bolivia over the long-standing dispute in exchange for removing restrictions on Bolivian natural gas exports to Chile.

The final margin of the Chilean presidential race is expected to be narrow, and the two candidates will be looking for every edge to ensure victory. For Guillier, that might mean adopting, at least partially, the economic proposals put forth by the Broad Front. If they are enacted, those policies, in turn, could have far-reaching effects on the country's mineral extraction and energy sectors and determine the amount of foreign investment that flows into Chile.

This article originally appeared on Stratfor.com
TagsInternationalPolitics
© 2018 BillOReilly.com
Watch Listen Read Shop