Investors are starting to notice that Latin America has the commodities to become this century’s super producer

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White crystals cover the ground near the Atacama salt flats in Chile. Below the surface are vast lithium salts deposits, the ore used to produce the light, soft metal needed for high-capacity battery production. Pumps operated by sqm, the world’s largest lithium salt producer, vibrate as they draw up mineral-rich brine. The liquid in evaporation pools is a patchwork of blue and emerald on the bright crust.

This operation begins a chain that ends with the lithium batteries used to power electric vehicles. According to the International Energy Agency (IEA), a forecaster, the global EV fleet is expected to grow by at least tenfold to 250m units by 2030. The annual lithium output by sqm has tripled since 2018, reaching 180,000 tonnes. This is a quarter of global production, and it will likely reach 210,000 tonnes in 2025.

Latin America has long been a source of raw materials for the world but could be about to experience a boom. Three factors are driving the region to become the commodity superpower of this century. The green transformation is increasing the demand for metals, minerals and renewable energy that Latin America can provide. More than a third (of the world’s) copper is produced in Latin America, used for wind turbines and wiring, and more than half of its silver, used to make solar panels. The region’s fertile land produces enough coffee, sugar, grain and animals to feed an increasing global population. The geopolitical tensions between China and the United States make countries look favourably upon investing in a relatively neutral region.

Latin America has a long and chequered history with raw materials. The Latin name of Argentina comes from the silver shipped out from its ports by the conquistadors who had extracted it in Bolivia and Peru. Brazil gets its name from Brazilwood, which Europeans exploited in the 16th Century. These countries’ immense wealth sparked coups, populist takeovers, crimes and corruption. The region’s economies are still undeveloped, with a GDP of only a quarter that of the United States and a high level of inequality. Can Latin America benefit this time?

Material prospects are looking good.

All 12 countries of South America, including 21 out of 33 Latin American countries, get over 60% of their export revenues from commodities (see Chart 1). Minerals and food are the main exports, while energy is dominated by Venezuela and Colombia. Overdependence on items can be a problem but could also present an opportunity.

The demand generated by the green shift is more likely to last than the oil and coal booms of the 2000s. This was fueled by China’s industrialisation, which stopped in the mid-2010s after it ran out of factories to build. The energy transition, on the other hand, is global and will require decades of investment. Minerals are more critical for low-carbon technologies than for their dirty counterparts. Electric cars contain three to four more copper than petrol-fueled ones. Six times as much metal is needed to install one megawatt in an offshore wind farm than in a conventional gas-fired power plant. Cru, a London-based data firm, estimates that there will be an unmet demand of 7m-8m tons of copper per year by 2035.

Latin America is a leader in the race to fill these gaps. The region is rich in metals and minerals (see Chart 2). Despite decades of mining, Chile and Peru still hold 30% of the world’s copper reserves. Latin America contains almost 60% of the known lithium. Bolivia is home to tin which is used in electrical components as solder. Brazil also has graphite – another metal used in batteries. According to Brazil’s mining Minister, Alexandre Silveira, there is still room for more discoveries, as only 30% of Brazil’s subsoil was studied.

Latin America is often easier to mine metals than anywhere else. As in Australia or China, lithium can be extracted more cheaply by evaporation rather than drilling it out of rocks. Brazil’s rare earth magnets are close to the surface. Latin America’s infrastructure needs to be improved, but it is still better than many other mining regions of Africa and Asia.

Mineral processing and mining are energy intensive. Many countries in Latin America have access to cheap, clean electricity. Brazil uses 45% renewable energy, among the highest levels in the world. The infrastructure for transmitting this clean energy continues to grow. Chile wants to be the world’s cheapest producer of green hydrogen by 2030. This is due to its 6500km (4000 miles) coastline, sunny northern and windy southern regions.

Even though it is not a significant player globally, Latin America can still benefit from oil. In the decade following the discovery of 60 billion barrels, another 10 billion have been found. Rystad Energy estimates that Argentina, Brazil, Guyana, and Mexico could produce 11m barrels daily by 2030. That’s as much as Saudi Arabia had in 2022. Most of these fields are profitable when oil is around $45 per barrel. Today, the price of oil is $83, and it’s worth extracting, even as the demand for oil drops.

Latin America’s rising food demand will likely continue for a long time. By 2050, the world’s population will grow by 1.5bn (to 9.7bn), and its middle class will double to 6bn. Thanks to its vast farmland and relatively small population, Latin America has the most significant food exports in the world (see Chart 3). China imports 60% of all soybeans traded in the world from Latin America to feed its 450 million pigs. More than 30% of global supplies of beef, maize, poultry, and sugar are supplied by the region. In the next decade, net exports will rise by 17% to $100bn.

The port of Santos in Brazil’s state of Sao Paulo is undergoing a massive expansion. Cofco International is building a new terminal among rusty buildings. This will increase the export capacity of China’s State Foodmaker from 3m to 14m tonnes by 2026. Brazil is the source of 40% of Cofco’s total global investment.

Geopolitics is the third factor that favours Latin America. In the face of escalating rivalry between China and the United States, many countries diversify their sources for imports and investments. Latin America is neutral, open to acquisitions, and close to the manufacturing sites north of the border. The United States Inflation Reduction Act requires that by 2027, 80% of the market value for critical minerals needed to manufacture EV batteries be extracted or processed within the United States or in one of its free-trade agreements with countries like Chile, Peru, and Mexico.

Investors and individual Counties Should Act Now.

Latin America is presented with an enormous opportunity. But to make these prospects a reality, the region must act.

Cash is a crucial ingredient. Wood Mackenzie estimates that, between now and 2040, $575bn in investment will be needed to meet the global demand for copper. Lithium will require nearly $40bn by 2030. In the last year, more money was spent on exploration for eight green metals in Latin America than in any other region. Appian Capital is a private equity investor in mining based in London, and it plans to invest 70% of its capital into Latin America over the next 10 to 15 years.

Despite this, the region continues to underperform. Even though its pipeline looks good – on paper, it amounts to about $100bn of capital expenditures on copper by 2030 – traders complain that mines never get started. Africa has fewer projects on paper but the same number of new mines that are “committed”. They have all the permits and financing.

There are many other obstacles. Chile’s copper ore has been reduced to low-grade deposits, which forces miners to dig further to produce the same quantity. Investors are becoming increasingly concerned about climate change. In Chile and Peru, floods caused copper mines to be closed earlier this year.

Activism and regulation are prompted to take action by mining projects that can harm the environment. Protests in February halted operations at a Peruvian mine that produced 2% of the global copper supply. Sonia Ramos of Ayllus sin Fronteras in San Pedro de Atacama is concerned about the impact of lithium mining on water supplies. Her community has struggled with supply since large-scale mining began 50 years ago. In Chile, approving new mines took 311 days between 2017 and 2021. This compares with 139 days from 2002 to 2006. The regulator in Chile temporarily stopped a $3bn expansion at a mine run by Anglo American last year because it might affect nearby glaciers. The government removed the blockage. Politicians are increasingly getting in the way.

Investors require legal certainty, as capital invested in a new mine or well is not recouped for many years. This is not the case. Not just the fiery rhetoric from the leftists and the nationalists of Latin America is creating jitters. Latin American governments want to increase the value of their resources by imposing new rules. Chile raised the top copper tax rate from 41-44 % to almost 47 % in May, making it one of the highest rates in the world. In 2022, sqm will pay the entire 60% of its profit to the government. Gabriel Boric, Croatia’s president, said he would like to see a majority state involvement in lithium mining concessions once current contracts expire. Mexico’s president Andres Manuel Lopez Obrador, nationalised the lithium deposits in his country.

If Latin America can capitalize on the boom, the region may struggle to manage all the risks of a sudden infusion of wealth. Boosted by surpluses in the current account, local currencies increase, making non-commodity exports less competitive. Capital and labour flow into extractive industries, denying others of limited resources. Both increase the dependence of the domestic economy on a volatile industry. After the last commodities boom ended, regional economies only grew by an average of 1% per year compared to 4.1% the decade prior. Commodity prices are likely to fluctuate as the green transition is likely to be slow, and geopolitical tensions can halt exports overnight.

There are tools to reduce such risks. Central banks can intervene in foreign exchange markets to keep the currency under control. Exporters can protect themselves against price changes by purchasing futures and options in derivatives markets. Smart fiscal rules may dictate that some proceeds are saved at high prices. But governments in the area are more concerned with grabbing a piece of the profits than planning for risks. Few governments have the technical know-how to implement fixes. Often, fiscal rules are ignored. Six countries only have independent public finance watchdogs. Except for Chile, the 24 sovereign funds in Latin America lack serious safeguards against government raids. Diego Lopez of Global SWF in New York says that during the pandemic, the governments of Colombia, Mexico, and Peru exhausted their national cats.

Latin American governments are also looking to capitalize on the opportunity by developing local manufacturing and processing that utilizes the materials. Argentina’s lithium-battery factory is expected to begin operations in September. Chile offers 25% off lithium to companies that use it to develop local supply chains. It makes sense, but it’s not easy to create new industries.

The cost of energy and materials is increasing. In December, Brazil’s biggest copper processor filed for bankruptcy. Latin America has too few engineers to support high-value industries. The region invests only 0.6% of its gross domestic product in research and innovation, less than one-quarter of the average for the OECD club, which includes primarily wealthy countries. Analysts predict that most batteries will be produced in the United States, China, and Europe, where ev markets have developed. Demand for electric vehicles is low in Latin America.

History teaches caution. Latin America must be savvy to both exploit resources and manage income. The best prospects are for the tried-and-tested trio of Chile, Peru and Brazil. It won’t be easy. The commodities rush offers a unique opportunity to change the Atacama Desert and the fortunes of the entire region.

Contact the Gateway to South America team to learn about the best investment opportunities in the region. The company is a benchmark for foreign investors wishing to invest in Argentina, Brazil, Chile, Paraguay, Peru and Uruguay, providing expert advice on property acquisition and investment tours.

The Gateway Team – When You are Serious About Property

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