(Bloomberg) -- Chile delivered its long-awaited lithium policy late Thursday, giving the state a majority stake in all new contracts and sending shares in the two current producers in the South American nation — SQM and Albemarle Corp. — tumbling.

While the government will respect existing arrangements with the two companies, both would move to the state-controlled model once contracts expire in 2030 and 2043, respectively. Alternatively, they could opt to give up a majority stake in their operations before then. SQM shares were down a record 20% at 3:35pm in New York, while Albemarle lost 10%. 

President Gabriel Boric’s left-leaning administration is seeking a bigger role for the state in a metal that’s critical to the clean-energy transition. Chile is currently the world’s No. 2 supplier of the battery metal. The new framework is an attempt to attract more private capital, defend the environment and move further down the value chain, all at the same time.

It’s a big ask and an important balance to strike for the Chilean economy, the global lithium market and the transition away from fossil fuels. The Latin American nation holds the biggest reserves of the key ingredient in electric-vehicle batteries.

“Lithium presents us with a tremendous opportunity that we cannot miss and we have to do it differently than we have done before,” Boric said Friday. “The lithium industry has to be at the service of people. For this, it is essential that the state be present throughout the lithium production cycle.”

Losing Share

Under Chile’s current model, companies sign contracts and are assigned quotas, rather than holding indefinite concessions. Royalties are by far the highest globally with a marginal 40% rate. Chile has been losing market share to countries with more investor friendly rules such as Argentina. 

In the new model, copper giant Codelco will be the state’s lithium representative, signing up partners for new joint ventures. A dedicated state company would take on that role at a later date. As such, Codelco will be in charge of any negotiations with SQM and Albemarle over a stake for the state in their Atacama salt flat operations. 

The state’s role in investments or sharing of risks in the new public-private partnerships wasn’t discussed.

Read More: SQM Weighs Chile Contract Options as Shares Plunge by Record 18%

While the “scary headlines” are likely to pressure both companies’ shares, they are protected by current contracts and any early talks would probably be voluntary, BMO Capital Markets Joel Jackson wrote in a note to clients. 

Having the state as a partner could be beneficial for small exploration companies, although it would remove incentives for more established players by relegating them to minority status, said BTG Pactual analyst Cesar Perez-Novoa.  

“While it is too early to tell, should the Chilean state overreach here, there is a risk of that foreign development capital moving to other jurisdictions,” said Chris Berry, president of House Mountain Partners, an industry consultancy.

Chinese Investment

The government also plans to set up a lithium institute and is promoting downstream investments to capture more of the EV boom rather than just sending semi-processed material to Chinese and Korean plants. This week, China’s BYD Co. was granted access to preferential prices to make battery-grade lithium carbonate at a plant that would start up by end-2025. 

As a free-trade partner with the US, Chile stands to benefit from President Joe Biden’s green stimulus program. Still, China is Chile’s top trading partner based on raw material exports. 

With Chilean lithium currently produced in the world’s driest desert, the government has said it plans to require all new projects to employ a production technique that’s barely used commercially in a bid to reduce water losses.

Turning from the current solar evaporation method to direct lithium extraction would speed up output and avoid vaporizing billions of liters of salty water. But DLE is relatively untested at scale and initially may mean less output and profit. 

“This technology is not commercialized at scale, so there is a risk here,” consultant Berry said. “What happens if the technology doesn't deliver optimal results?”


--With assistance from Yvonne Yue Li and Valentina Fuentes.

(Updates shares, adds comment from president in fifth paragraph)

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