'China’s economic slowdown could dampen demand for copper and lithium'

Chinese investments are essential for developing mining businesses in Chile and Argentina, but there is concern in both countries about the Asian giant's economy, which is expected to contract in the first quarter after three years of government restrictions to curb the spread of Covid. 

China buys a significant proportion of copper produced by Chile's state-owned company Codelco and has invested in lithium projects such as Tianqi Lithium Corporation's 22% stake in SQM and could put billions more into a venture by Chinese electromobility company BYD to use the white metal to build a battery materials supply chain.

In Argentina, its role is even greater. Chinese-backed initiatives there include an agreement between battery maker Gotion High Tech and state-run company Jemse to build two lithium carbonate production plants for batteries, and the 49.9% stake owned by Tsingshan Holdings in the Centenario Ratones project in Salta province. The company announced in late 2022 that it will double its initial planned investment with the goal of exporting US$4bn of lithium annually from 2024.

Deborah Tan, Singapore-based assistant vice president and analyst of Credit Strategy & Research at Moody's Investors Service, talks to BNamericas about what to expect from China.

BNamericas: How do you see Chinese investments in mining projects in Chile and Argentina, respectively? Will there be more Chinese investments in 2023 and from now to 2030?

Tan: Given that BRI [Belt and Road Initiative] remains a long-term economic and geopolitical strategy for the Chinese government, we do expect a resumption in outbound investments over the next few years despite some fluctuations due to changing global conditions. In fact, the value of Chinese direct investment and Chinese-led construction contracts has generally held steady in Latin America since inception of the BRI until 2022.

BNamericas: How could China's economic slowdown affect its dominance in importing critical minerals for the energy transition, such as lithium and copper, from Argentina and Chile?

Tan: China’s economic slowdown could dampen its demand for copper and lithium. However, this will be counterbalanced by continued strong global demand for metals used in renewable energy technology, where China processes a significant share of clean energy metals used globally, leading to robust external demand for Chinese products.

As for how this could affect Argentina and Chile, the overall strong global demand for lithium-ion batteries, a main component of electric vehicles, will continue to support prices and demand for lithium coming from Latin America. IEA estimates that lithium battery demand will grow at least 30 times the current levels by 2040. 

Weaker global economic growth, coming from China, the US and the EU, would weigh on copper prices. However, supply, in turn, will remain constrained, challenged by social unrest at some mines in Peru and uncertainties in Chile, with the new constitution and proposal for higher mining taxes affecting investment decisions in the latter country. 

At the same time, declining ore grades are limiting copper production growth in Chile. Therefore, supply constraints and incremental demand growth related to the energy transition will support copper prices above historical averages. 

BNamericas: Which Chinese companies have the greatest presence in Chile and Argentina?

Tan: In Argentina, companies with significant presence include CNOOC [China National Offshore Oil Corporation], Sinopec and China Energy Engineering. In Chile, these companies include State Grid and China Minmetals (investments) and China Railway Construction.  

BNamericas: Will the Inflation Reduction Act in the US reduce China's dominance as Chile's top trade partner?

Tan: Increased incentives to encourage adoption of clean-energy technology at both the consumer and corporate level will lead to higher US demand for clean energy metals. But it is too early to tell whether the Act would reduce China’s current position as Chile’s largest trade partner, and it seems unlikely at this time. 

China processes a significant share of these mined metals, it has by far the largest concentration of copper smelters and the top copper refineries are also located there. These factors support demand for Chinese-mined copper and leads to China continuing to import minerals from Chile, even if China’s production for its own consumption is lower than before.

BNamericas: Is the agreement signed between the EU and Chile a risk to Chinese participation in the country?

Tan: The removal of tariffs on almost all EU exports and improved access to European markets for Chilean companies will certainly help Chile diversify its trade partnerships.