‘Lithium Triangle’: Latin America Is The Middle East Of Rare Earth Mining

Gabriel Boric’s recent win in Chile’s presidential election should be a wake-up call for the United States and its allies.

Chile and several of its neighbors make Latin America the new Middle East, given their substantial share of the mining reserves needed for electrification in a decarbonized world.

With Russia and China supporting leftish regimes in Venezuela, Bolivia, Ecuador and now likely Chile, heated competition with the West will grow for these increasingly valuable raw materials.

Mining products needed for electrification include lithium, copper, graphite, and manganese. The “Lithium Triangle” — Argentina, Bolivia, and Chile — controls 58 percent of the world’s 78 million metric tons of lithium reserves.

The International Energy Agency predicts that If the world successfully moves to net-zero emissions by 2050, the demand for lithium will balloon 42 times by 2040 (from about 200,000 to 8.4 million metric tons).

That will rapidly eat up existing reserves. More lithium likely will be found but the Lithium Triangle will be in a strong position to control the market.

President-elect Boric’s campaign promise to create a state-owned lithium company in Chile suggests he understands the value of such control.

Latin America also has a large share of other key mining products needed for electrification. Chile and Peru are the largest copper producers in the world, holding, along with Mexico, 40 percent of global reserves.

Graphite is another key product for battery development and Brazil has over a fifth of the global supply. It also has over a fifth of global manganese reserves, half of what dominant producer South Africa has.

Finally, Brazil also has 18 percent of rare earth reserves, compared with China (37 percent) and Russia (10 percent), which gives the three a combined share of 65 percent.

Given the importance of Latin American mining, China has taken a strong interest in securing access to raw materials to bolster its global dominance in manufacturing.

Goods trade between China and the Latin American and Caribbean region has soared from US$19 billion in 2002 to US$295 billion in 2020.

In mining alone, China invested about US$12 billion in the region from 2016 to 2020 and now controls 59 percent of the world’s lithium production.

Economics is not the only factor underlying China’s relationship with Latin America. According to a December U.S.-China Economic and Security Commission report submitted to the U.S. Congress, China is using diplomacy to pursue its security and political objectives.

It has pressured Panama, the Dominican Republic, and El Salvador to sever relations with Taiwan. It has created Confucius Institutes in the Lithium Triangle and President Xi Jinping has visited Argentina, Brazil, and Chile.

Nineteen of 24 Latin American and Caribbean countries have signed onto the Chinese Belt and Road Initiative, seeking investment support.

Debt-ridden Argentina, a recipient of US$15.3 billion in loans from China, has agreed to the construction of a space observation center on its territory.

Compared to China, Russia has only a small, targeted economic footprint in Latin America and the Caribbean.

Its involvement stalled after 2014 as it faced its own economic problems with declining oil prices but now its engagement with Latin America is starting to deepen again.

Russian trade with Latin America increased from US$5.6 billion in 2000 to US$14.1 billion in 2019, about half of it with Brazil and Mexico.

Russia has military and economic interests, not only in Venezuela and Cuba but also in mining countries like Bolivia, Peru, and Argentina. Its relationship with the new Chilean government will likely be expanded.

The analogy with the Middle East and control over oil markets is obvious. Historically, oil has been critical in spurring industrial development and supporting military activities with cheap, reliable energy.

After large Middle Eastern petroleum discoveries over a century ago, Saudi Arabia and its neighbors became a focus of U.S. and European economic and foreign policy.

To assert greater control over their resources, Middle Eastern countries like Saudi Arabia and Qatar nationalized oil and gas production. Later, four Middle East countries and Venezuela spearheaded the OPEC cartel in 1960, which later expanded to give them market power over oil prices.

When OPEC was formed, many economists predicted competition would eventually kill it. That did almost happen, thanks to the fracking revolution in North America, but OPEC held its ground by colluding with Russia. Today, OPEC-plus controls 45 percent of world production.

Latin America’s market share of lithium and copper reserves is OPEC-like in size. If the countries ever tried to create a cartel, they would benefit from cooperation with China and Russia to strengthen their control of market prices.

Together, Latin America, Russia, and China control almost two-thirds of world lithium reserves, 50 percent of copper, 46 percent of graphite, and 65 percent of rare earth.

Of course, a mining cartel is tough to run. Members have to agree to market shares — and once they do there is a strong incentive to cheat: i.e., to produce more output to increase market share and revenue.

If the cartel succeeds in raising prices, that encourages new supply to come on board from non-cartel members like Australia, Canada, and United States.

And if prices remain high, other metals may become substitutes. For instance, lithium could be replaced by calcium, magnesium, and zinc in battery anodes.

Maybe a cartel won’t happen but Chinese and Russian economic and political interests in Latin America won’t go away.

In its push for electrification of energy, the U.S. will discover it has opened a new opportunity for its rivals to exploit their market power in mining.

That’s the risk when the energy supply is put in one basket.

Read more at Financial Post