Mexico's new policy on the lithium industry

In 2018, the Canadian company Bacanora Lithium PLC discovered a lithium deposit located in Bacadéhuachi, Sonora, in northern Mexico with declared reserves of 243.8 million tonnes, making it the world's largest lithium mine. In the years since, lithium has become crucially important given its essential role in the production of batteries for mobile phones, computers, electric cars and energy storage systems. By way of illustration, demand for lithium is expected to grow by 25-35% per year over the next decade and production will have to increase 30-fold by 2040 to meet the zero-emission demands that countries are seeking with the energy transition from fossil fuels to clean energy.

The Initiative and ongoing criticisms

Faced with this opportunity, Mexican President Andrés Manuel López Obrador ("AMLO") has put nationalisation of lithium on the table, opening a national debate. On 1 October 2021, AMLO submitted to Congress a decree initiative (the "Initiative") to reform various articles of the Constitution of the United Mexican States aiming to have lithium considered a strategic natural resource. This would give the State exclusive powers over the Mexican lithium. The ultimate goal seems to be avoiding the granting of concessions for its exploitation and for the government to take direct control of it through a State-owned company. In fact, the creation of a State-owned company for exactly this purpose has been recently confirmed by the government.

The Initiative has not been exempt from criticism. In particular, there are doubts about the Mexican State's ability to finance the costs of taking direct control of the whole lithium production process. In particular, the Mexican Chamber of Mines has expressed its concerns that mining projects are capital intensive and that Mexico may not be able to muster the required funds to handle the entirety of lithium production in the country. Specifically, the Mexican Chamber of Mines has stated that Mexico does not have the necessary technology, knowledge or infrastructure to develop a lithium industry and will therefore have to collaborate with foreign companies to be able to effectively exploit the mineral. Similarly, the president of the Metropolitan Energy Cluster has explained that the exploitation of lithium by the State could be detrimental to the country, because it will be an obstacle for its exploration and certification, which requires technologies distinct from those used for conventional mining.

Others have criticized the Initiative by arguing that the creation of a State-owned company to take control of lithium production is an afterthought by AMLO, as this was not included in the National Development Plan for 2019-2024. Further, the Initiative could entail a violation of (i) the constitutional provision that prohibits monopolies and any type of monopolistic practice; (ii) the principles of non-retroactivity of laws, legal security, proportionality and freedom of trade; and (iii) certain international treaties.

With respect to (iii) above, it is important to note that, according to the Initiative, the concessions already granted by the State to foreign investors will not be affected, so long as the companies had started the lithium exploration process by the date the Initiative was submitted to Congress. Apparently, there are more than thirty concessions for lithium granted in Mexico to companies that are at least partially owned by foreign investors, and many of them seem to have reached at least the exploration stage at this point. In any case, the Initiative could ultimately result in claims against the State brought by some of those companies on the basis of breaches of international treaties, especially in view of AMLO's recent statement that the companies may exploit other minerals, but not lithium.

The approval of the Initiative could also contravene Chapter 22 on "State-Owned Enterprises and Designated Monopolies" of the new Free Trade Agreement ("UMSCA") entered into by Mexico, the United States and Canada.  The lithium market was not subject to a government monopoly before UMSCA and its monopolization by the Mexican State could thus amount to a breach of Article 22.4.2.d), which prevents a State from using its monopoly position to engage in anticompetitive practices in non-monopolized markets that negatively affect trade or investment between the States. This could also give rise to treaty claims between the signatory States.

Conclusion

If approved, the Initiative is expected to alter the lithium industry in Mexico and affect the stakeholders in that market. It may also result in the loss of a unique opportunity to further integrate Mexico into global supply chains with the United States and Canada, particularly in relation to the regional automotive industry. This is because, in three years, cars manufactured in these countries will be required to have at least 75% of their components produced in the region in order to be marketed duty-free. This includes lithium batteries, which could become a profitable business for Mexico as a major producer of electric vehicles. Of course, the specific impact of the Initiative can only be properly assessed once there is clarity on the final provisions approved by the Mexican Congress.

We will keep tracking the progress of the Initiative at the legislative level.