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Lithium Market Set to Boom – A Risk Focus on the Lithium Triangle

Lithium Market Set to Boom – A Risk Focus on the Lithium Triangle

by | May 2, 2021 | Foreign Investment, Political Risk

As the global economy continues to put the Covid-19 slump behind it, the market for electronic devices and an anticipated surge in electric vehicle demand has re-sparked interest in lithium, a highly reactive and conductive metal vital to the global economy. Found in only a handful of countries, with a small number of companies dominating its production, demand and prices have the potential to boom. In such a scenario, the potentially conflicting demands of consumers, mining companies, and lithium-rich countries warrants a look at political risk, particularly in South America’s Lithium Triangle, the home of 58% of the world’s lithium reserves.

Why Lithium is in Demand

The critical component of lithium-ion batteries, lithium’s demand corresponds to global demand for manufacturing electronics such as smartphones and electric cars, which are expected to have a 70% increase in demand in 2021 and throughout the decade, driven by consumer interest and by growing efforts in many countries to phase out internal combustion engine vehicles. In Europe, lithium-ion battery production is projected to increase from 28 GWh (gigawatt hours) in 2020 to 368 GWh in 2025. United States’ production capacity of the batteries is projected to more than double from 42 GWh in 2020 to 91 GWh in 2025 according to S&P global market intelligence, though it also projects the U.S. share of the market to decrease from 9% in 2020 to 6% in 2025. According to Seeking Alpha, lithium demand will increase by 600% by 2040.

Low Prices and a Potential Boom

An oversupplied market in early 2020 saw a decline in lithium demand, mainly due to Covid-19. According to data from Trading Economics, (shown below), lithium prices declined 45% between July 2019 and July 2020.

Trading economics lithium Prices graph

Yet the chart above shows a recent spike in prices. Lithium prices jumped up 41% in the Chinese market in January 2021, causing a significant rebound in global price. Simon Moores, Managing Director of Benchmark Minerals (@sdmoores) noted the jump in early February.

Who is Buying Lithium?

China is by far the world’s biggest owner and buyer of lithium. China has gained a dominant position (called a “stranglehold” by one mining trade source) of the main precious metals in the electric vehicle supply chain: lithium, cobalt, and nickel. Additionally, China manufactures most electric vehicles made in the world. As countries move to transition away from internal combustion vehicles, a range of countries appear poised to increase domestic production of lithium-ion batteries and electric vehicles, with accompanying demand for lithium resources.

Simon Moores' tweet on global lithium prices

Where is Lithium Being Produced?

Lithium deposits and production are highly concentrated in a few countries, most notably Australia—the world’s largest producer of lithium—and the Lithium Triangle—Argentina, Bolivia, and Chile.  The Lithium Triangle has 58% of the world’s identified lithium resources, according to the January 2021 U.S. Geological Survey. S&P Global also projects a 199% in South American lithium supply as new lithium brines (saline groundwater enriched in dissolved lithium) begin production and existing salars (a lithium brine reservoir) increase production. Between 2008 and 2018, Australian lithium production jumped from 24.7% of the global lithium supply to 60%.[12] This is largely due to its ability to export lithium to China. According to a 2018 survey by Bacanora lithium, four companies produce 73% of the world’s lithium:

(Tianqi Lithium owns an additional 24% of SQM.)

Political Risk in the Lithium Triangle

The anticipated surge in lithium demand and prices has renewed focus on South America’s Lithium Triangle.

Bolivia

Bolivia, owing to its large reserves and a recent political history, garners the most attention regarding political risk.  The left-wing populism of former President Evo Morales has promoted state regulation of key resources for well over a decade. The Morales government nationalized the oil and gas sector in 2006 and power companies beginning in 2010.

Argentina

A painful economic recession in 2019 led to the electoral victory of current President Alberto Fernandez and Vice-President Christina Kirchner, a former president whose previous administration was noted for taking on heavy debt and state intervention into key sectors.  Under her administration in 2012, Argentina nationalized YPF, an oil company.  Just last year, the Fernandez administration expropriated its leading grain exporter, Vicentin, after it declared bankruptcy.  While Fernandez is enjoying a bump in popularity, with 56% of Argentinians expressing confidence in the overall direction of the government in 2020, (up from 24% 2019), the country’s economic struggles remain.  As with Bolivia, Argentina’s recent history of using expropriation and nationalization in economic policymaking makes it a political risk concern regarding how it plans to utilize its lithium reserves as demand grows. 

The Lithium Triangle

 

Argentina

  • Lithium resources: 19.3 million tons
  • 2020 mine production: 6200 metric tons
  • Largest deposit: Sal de Vida, 1.1 million metric tons
  • Estimated percentage of GDP from mining: 5.3%

 

Bolivia

  • Lithium resources: 21 million tons
  • Annual mine production: about 400 metric tons
  • Largest deposit: Salar de Uyuni, 5.5million metric tons
  • Estimated percentage of GDP from mining:
  • 13.5% (2015)

 

Chile

  • Lithium resources: 9.6 million tons
  • 2020 Mine production: 18,000 metric tons
  • Largest deposit: Salar de Atacama 7.5 million tons
  • Estimated percentage of GDP from mining: 10%, mostly from copper.

 

Sources: US Geological Survey, Mineral Commodity Summaries 2020;  Statista.com, Major countries in worldwide lithium mine production from 2010 to 2020; TradingEconomics.com

Chile

Chile has been a major source of lithium in recent years, but has disappointed investors as other countries have outpaced its mining growth.

While Chile has generally rejected expropriation of lithium investment and has historically allowed private investment in the mining sector, the role of the state in taxing and regulating mining is tied up in current debates in Chile about constitutional change, environmental protection, and community rights.  Chile’s legislature has re-opened a charged debate over mining royalities, while Chile’s President Sebastian Piñera vowed to facilitate private and state partnership to double the country’s output of Lithium carbonate to 230,000 metric tons.

Analysis

Despite the recent slump, lithium’s long-term profit potential remains strong owing its importance to the global economy.  In many resource-rich countries, such as those in the Lithium Triangle, lithium mining’s economic potential will draw foreign investors who will face powerful political demands to see tangible community benefits from mining. This political mix raises risk concerns not just of increased taxation or regulation, but of expropriation and nationalization in countries with a history of state-intervention in key sectors such as mining.

For international investors, political risk insurance helps safeguard investments in the event of nationalization, expropriation, confiscation, currency inconvertibility, civil unrest and property damage.

Pie chart of world lithium resources

Since 2004, Securitas Global Risk Solutions (“Securitas”) has helped clients worldwide develop credit and political risk transfer solutions that provides value on numerous levels.  As an independent trade credit and political risk insurance brokerage, Securitas is focused on developing comprehensive solutions that meet the needs of clients, ensuring complete understanding of policy wording and delivering excellent responsive service.

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Vodafone Arbitration Victory a Reminder to Consider Political Risk

Vodafone Arbitration Victory a Reminder to Consider Political Risk

by | Jan 21, 2021 | Political Risk

In a recent, little-publicized international arbitration decision, an intergovernmental dispute resolution body ruled on September 20, 2020 that Netherlands-based Vodafone was not liable for an estimated $2.2 billion tax bill demanded by the Government of India and that India had violated the “fair and equitable” treatment provisions under a 1995 bilateral investment treaty between India and the Netherlands. The case, titled Vodafone International Holdings BV v. The Republic of India was initiated in 2014 before the Permanent Court of Arbitration (PCA), an international body based in The Hague.

The long story of the case underscores the importance of understanding political risk for those doing business overseas.  Country-specific efforts to balance investment promotion with the need to generate tax revenue can lead to legal changes that can either unlock opportunities or increase risks for investors.  Additionally, the case shows how bilateral trade and investment treaties (BITs) create legal mechanisms that can be utilized to adjudicate disputes such as the one between Vodafone and India.

In this instance, India’s attempts to capture revenue from international investment transactions led it to pass legislation allowing transactions to be taxed retroactively, leading to drawn-out legal disputes with Vodafone and other companies.  Beginning in 2007, Indian tax authorities had unsuccessfully sound to levy taxes on Vodafone after its roughly $11 billion purchase of the Indian mobile phone company Hutchison Essar Limited (HEL).  After legal appeals by Vodafone, India’s Supreme Court held in January 2012 that Vodafone’s acquisition of HEL was not liable for taxes under India’s Income Tax Act of 1961.

Retrospective Legislation

In response to the Supreme Court decision, the Indian parliament passed the Finance Act of 2012, which amended the Tax Act of 1961 and gave its government authority to retroactively tax past transactions.  With a new law in force, India again sought to levy the tax fee against Vodafone plus interest and penalties totaling roughly $3.79 billion.

Citing the 1995 bilateral trade and investment treaty between India and the Netherlands, Vodafone invoked the treaty’s arbitration provisions in April 2014, bringing the case before the PCA.  Some six years later, under the authority granted to it by the India-Netherlands BIT,  the PCA ruled in favor of Vodafone, ordering India to stop seeking tax payments from Vodafone and pay Vodafone over $4 million in legal fees.  The Vodafone case is one of three cases before the PCA in the wake of India’s retroactive attempts to collect tax under the Finance Act of 2012.

Arbitration Case Definition

Arbitration – the hearing and determining of a dispute or the settling of differences between parties by a person or persons chosen or agreed to by them.

Political Risk and Remedies

It remains to be seen how the PCA’s decision will be enforced.  Just before the PCA ruling, India’s Supreme Court had ruled against Vodafone, upholding the India’s efforts to collect revenue under the 2012 Finance Act.  These extensive and costly proceedings highlight just some of the potential difficulties that companies face when doing business overseas in countries where shifting political priorities can put investments or agreements at risk.  Solid political risk analysis, trusted legal counsel, and political risk insurance are all tools companies need to navigate global trade and investment.

Bilateral trade and investment treaties (called BITs), such as that between the Netherlands and India in 1995, are important legal instruments to understand and utilize.  BITs include agreed upon language to protect investments and encourage fair and transparent legal treatment of transactions and contracts.

In addition, BITs often create procedures, such as international arbitration, for disputes that cannot be settled in domestic courts.

U.S. Department of Commerce’s International Trade Administration (ITA) maintains a list of BITs between the U.S. and other countries.

Since 2004, Securitas Global Risk Solutions (“Securitas”) has helped clients across the United States develop credit and political risk transfer solutions that provides value on several levels.  As a specialty independent trade credit and political risk insurance broker, Securitas is focused on developing comprehensive solutions that meet the needs of their clients, ensures complete understanding of policy wording and delivers responsive excellent customer service.

Telephone: 484-595-0100

Fax: 484-582-0111

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Upcoming LVMH, Tiffany & Co. Legal Battle Shines a Light on Political Risk

Upcoming LVMH, Tiffany & Co. Legal Battle Shines a Light on Political Risk

by | Oct 2, 2020 | COVID-19, Political Risk

LVMH Legal Case

A dispute between luxury goods brands Moët Hennessy Louis Vuitton (LVMH) and Tiffany & Co. (Tiffany) highlights the continued political volatility of the global economy as companies and their home countries try to recover from the coronavirus downturn.  In November 2019, LVMH reached an agreement to buy US-based Tiffany in a deal said to be worth $16.6 billion.  The acquisition is set to be the biggest ever in the luxury goods market and would have added yet another iconic brand name to the LVMH conglomerate, which includes Christian Dior, Givenchy, and Dom Perignon champagne, along with dozens of brands across various sub-sectors of luxury goods.

Yet on September 9, nine months into the deal and two months before an agreed-upon November 24, 2020 deadline to complete the sale, Paris-based LVMH announced that it was backing out of the deal, asserting that Tiffany had been mismanaged during the pandemic and its poor performance in 2020 constituted a material adverse event.  LVMH then added a political wrinkle to the story, noting that it had received a letter from French Foreign Minister Jean-Yves Le Drian requesting that it back out of the deal.  The letter is said to have referenced anticipated trade tension between France and the United States in response to French efforts to tax technology companies, including industry giants like Google and Amazon.  According to LVMH, the French minister’s letter constitutes a “valid, legally-binding order.”

Tiffany quickly contested LVMH’s moves, filing suit against LVMH in the Chancery Court of Delaware, which has jurisdiction over the international deal, and demanding that the deal be completed at its agreed upon price of $135 per share.  The case has been fast-tracked for a January 2021 trial.  Some industry watchers note that LVMH CEO Bernard Arnault, the wealthiest man in France, is simply unwilling to pay a pre-pandemic price for a company that has seen major losses due to the pandemic and only has only recently reported improved numbers.  While the entire luxury goods sector has seen tremendous losses in 2020, larger companies like LVMH, with a more diverse range of products and capacity to shift to e-commerce, have been better able to adapt to the pandemic than have firms with greater dependence on retail outlets, tourism, or Chinese demand.

It remains to be seen whether LVMH’s attempts to scrap the deal will hold up under legal scrutiny, particularly its attempt to claim legally binding pressure from the French government.  The brewing legal fight shows how the coronavirus pandemic has rattled economic relationships and highlights a trade environment that can be easily strained, even among long-time allies with considerable two-way trade like France and the United States.  As the global economy works its way out of the pandemic and companies consider new operating models and markets, the need for an adequate political risk assessment is evident

Understanding Political Risk

Political risk insurance protects cross boarder investments, trade, permanent/mobile assets and contracts against various perils such as political violence, currency inconvertibility, foreign government intervention, expropriation, confiscation, nationalization, forced abandonment.

The COVID-19 pandemic has accelerated a tendency toward economic nationalism and protectionism in the current trade and investment environment.  The LVMH/Tiffany case shows an example of how governments may seek to influence trade and investment deals to benefit domestic companies, or as part of a broader political strategy

As the LVHM/Tiffany gets litigated in the Chancery Court of Delaware watch to see if the demise of the transaction meets the following definition of an insured peril on a political risk policy:

“an act or a decision on the part of the government of the Buyer’s country, the Insured’s

Country or any other country specifically named in the Declarations, which prevents the

performance of the Commercial Contract.”

Political risks can drastically impact a company’s investment in a host country.  Foreign government intervention or political violence can render a company unable to operate or withdraw their capital from a host country. Yet, as the global economy slowly recovers from the depths of the pandemic downturn, exporters will need to be aware that as new opportunities are created overseas, a proper assessment of both credit risk and political risk, and consideration of political risk insurance is prudent.

See Securitas’ Guide to Political Risk Insurance or contact Securitas to learn more.

Since 2004, Securitas Global Risk Solutions (“Securitas”) has helped clients across the United States develop credit and political risk transfer solutions that provides value on several levels.  As a specialty independent trade credit and political risk insurance broker, Securitas is focused on developing comprehensive solutions that meet the needs of their clients, ensures complete understanding of policy wording and delivers responsive excellent customer service.

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Pandemic Invokes Force Majeure

Pandemic Invokes Force Majeure

by | Apr 16, 2020 | Foreign Investment, Political Risk

In mid-February, during the height of the Coronavirus crisis in China, the China Council for the Promotion of International Trade (CCPIT), a state-run organization, reported that it had issued over 1,600 “force majeure” certificates, in an effort to protect Chinese companies from legal issues related to non-compliance with their contractual obligations.  These certificates at the time covered a value of about $15.7 billion. By the first week of March, the number of Chinese force majeure declarations had risen to over 4,800 companies covering contracts worth $53.8 billon.

What is a “Force Majeure” Declaration?

When a company declares “force majeure,” it is invoking a clause, typically noted in its contract with its clients, that states that due to circumstances beyond its control, it is unable to fulfill the terms of the contract.

Invoking the clause is an effort to typically delay or possibly be released from contractual obligations without legal or financial liability.  According to one legal definition: “Generally, force majeure refers to the occurrence of an extraordinary event beyond the reasonable control of a party and prevents that party from performing its obligations under a contract.”

Force majeure clauses are common, but vary from industry to industry.  On a personal level, property owners may be familiar with mortgage contract language stating various natural disasters or “Acts of God” that can relieve the owner of contractual obligations.

The oil and gas sector and other industries that utilize long-term supply contracts often have extensive force majeure clauses that also include human interventions such as government action, terrorism, war, and strikes that can cause a break in operations beyond the control of one of the parties to a contract.

From industry to industry, and company to company, the details and specificity of force majeure clauses vary widely, and are being tested by the economic disruption wrought by the Coronavirus pandemic.  According to one source, “if you’ve seen one force majeure clause, you’ve seen one force majeure clause.”

According to the World Bank, there is no template or standard wording for force majeure clauses or for the events that may or may not cause a force majeure declaration.

While no template exists, global organizations are attempting to introduce some basic standards. For example, the International Chamber of Commerce (ICC) updated its model force majeure contract language only recently (it includes terms like “plague” and “epidemic”).

While these efforts are useful in moving international business toward common terms and language, declarations of force majeure still remain subject to often dueling legal opinions and the decisions of specific courts and arbitrators.

A Legal Burden

According to one analysis, China’s above-noted attempt to offer companies blanket force majeure certificates are likely to be contested legally.  One reason noted is that the standard for a force majeure declaration may be different domestically in China than it is internationally – where many trade contracts are based on English common law, in which force majeure events are extensively enumerated and specific.

Some contracts may not contain reference to public health events such as epidemics or pandemics.  Additionally, if challenged legally, the burden is on the company making the declaration to prove that the events were unforeseen, unavoidable, and left the company in an impossible situation with no alternatives to meet its contractual obligations.  Already, some companies have taken their Chinese counterparts to task, rejecting their force majeure claims and setting up legal battles.

Seek Legal Advice

To avoid costly legal conflict, companies will often seek out a workable solution to avoid a force majeure declaration. The need to work out the details of myriad contractual obligations is said to be one of the main reasons that the International Olympic Committee and organizers of the 2020 Tokyo Summer Olympics took a longer time than most other sports leagues and planners of sporting events to declare a postponement due to Coronavirus.

The input of a trained legal advisor is invaluable when seeking to understand force majeure clauses and tailor contract language that is either specific or broad enough to account for a range of potential events – including public health crisis.

Legal counsel can also help draft language that conforms with both the details of doing business in a specific industry and existing legal precedents concerning force majeure declarations.

Get Proper Coverage

In the current environment, there is considerable likelihood that companies will face a force majeure declaration from either a supplier or buyer, or may even have to contemplate making a such a declaration due to unforeseen and unavoidable circumstances of Covid-19.

In addition to sound legal advice, companies need to have insurance coverage that meets a range of contingencies including force majeure.  The team at Securitas Global Risk Solutions has the necessary experience to discuss and advise clients on force majeure and trade credit insurance.  If you would like to discuss further, please contact Peter Seneca at 484-595-0100 or email him at pseneca@securitasglobal.com.

Disclaimer: The text above is for informational purposes only, and does not constitute legal advice.  Seek the input of a legal practitioner for more detailed information and advice on contract language and force majeure declarations.

 

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Reshaping Global Trade

Reshaping Global Trade

by | Mar 18, 2020 | Export Credit Insurance, Foreign Investment, Political Risk

The rapid and continuing spread of novel coronavirus (Covid-19) continues to have a significant social impact as well as a profound hit to the global economy.  At the time of the World Health Organization’s (WHO) declaration of a global pandemic on March 11, 2020, the human toll of the disease stood at over 121,000 reported cases and 4,373 deaths spanning 110 countries.

These numbers are increasing, and the social and economic fallout continues.  Stock market declines in major economies reflect growing difficulty doing business and investor uncertainty about the near future.  Stock markets in the US fell nearly 10% on average on March 12 alone, with European stock markets falling well over 10% on the same day.

It is now obvious that no industry or economic sector will be spared by the impact of the virus.  Notable declines in tourism and airline industries are reverberating across supply chains.  Airline losses are estimated to be near $113 billion with governments mulling an economic stimulus for that industry.

Accordingly, trade flows are down, initially owing to the heavy toll of the virus on Chinese and other Asian manufacturing hubs, but also due to slowing consumer confidence and store closures worldwide.  Initial layoffs in the Port of Los Angeles, the first in the US directly owing to the crisis, have begun while both manufacturing and construction industries are trying to postpone difficult measures.

As businesses close, events are cancelled, and employees are told to stay at home in impacted countries, not only has the now pandemic cause a global downturn, but it’s unclear how long it will last and if it will lead to a recession.  Only recently, Goldman Sachs predicted that the US economy would grow only 0.9% in the first quarter and would not grow at all in the second quarter of 2020.

While the length and severity of the pandemic remains unknown, a fair follow-on consideration is how the global economy will prepare itself for the next crisis, and what the long-term impact will be on global trade flows.

The pandemic has shed a light on rising pre-crisis corporate debt.  Concerns for vulnerably indebted companies and sectors and helped to spur central banks around the world to drop interest rates recently.  Additionally, companies with too much supply chain exposure in China are likely to pursue efforts to diversify their supply chains, likely to other Asian locations or to North America.

As of March 3, 2020, Chinese companies had issued over 4,800 force majeure certificates, stating their inability to meet their contractual obligations with clients.

The need for companies to diversify their supply chain exposure and conduct systematic risk analysis is becoming more and more apparent.  Will there be a shift, and will it help US manufacturers and exporters? As always, the interconnectedness of the global economy makes it difficult to gauge.

While US importers may look to diversify away from China, US exporters to China will no doubt suffer.  Already, some analysts think that China will not be able to meet its obligations to increase purchases of US exports.  It’s possible that North American manufacturers, with a new free trade agreement in place, could present a viable competitor to overseas supply chains that look increasingly risky, post-coronavirus.

Risk is the operative word and what this unfolding pandemic has shown is that preparation and risk assessment are crucial for companies in today’s economy.  A major part of this effort should include proper insurance coverage for a wide range of contingencies.

Securitas Global Risk Solutions (“Securitas”) is an expert in helping companies develop trade credit and political risk transfer solutions that protect businesses from buyer non-payment and geo-political risks.  As a specialty independent brokerage, Securitas is focused on developing comprehensive solutions that meet the needs of their client.

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