Raw Materials Partner Chile: More Than Just a Supplier

Upstream linkages

Since the late 1990s, the Chilean development agency CORFO has been promoting the integration of the raw materials sector into upstream supply chains. Instead of focusing on local procurement requirements, Chile is using tax incentives and subsidies to support technology transfer and training within the supplier industry. This approach has led to the emergence of local suppliers offering specialised tech­nol­ogies and services tailored to the country’s unique mining conditions, which gives them a competitive advantage. At the same time, the Chilean government is increasingly investing in research and development. CORFO recently approved funding for sev­eral research projects on more efficient lithium production, the reuse of LIBs and the secondary use of those batteries as energy storage systems. In early 2025, a National Lithium and Salt Flats Institute was founded.

Downstream linkages

In downstream supply chains, Chile aims to put greater emphasis on the industrial processing of raw materials in future. In the copper industry, the share of processed products has declined significantly in recent years. While, in the early 2000s, most of the extracted copper was processed into cathodes, copper concentrate currently accounts for more than half of exports. By 2030, that figure could be as high as 70 per cent.

This development can be attributed to several factors. First, there is a lack of refin­ing capacity. The shortfall has been exacer­bated by the closure of outdated smelters that no longer meet environmental regu­lations. Second, exporting copper concen­trate has become more profitable as the production of copper cathodes is associated with high investment and operating costs. Above all, the massive expansion of pro­cessing capacity in China has led to market oversaturation, which means mining com­panies are paying less to smelters and refin­eries. And third, demand for copper con­cen­trate is growing – not only from China but also from other countries that are ex­panding their processing capacities in the copper supply chain.

In the lithium sector, the government intends to promote industrial processing inside the country alongside the expansion of extraction capacities. Albemarle and SQM are already processing lithium into car­bonate, while SQM also produces hydrox­ide. However, the government wants to go one step further. Under preferential pricing agreements, certain buyers are to receive lithium mined in Chile at reduced prices and, in return, must commit to in­vest­ing in local value creation. The idea is to lower the value of the raw material itself in order to increase the value along the supply chain – for example, by building a factory for cathode production. Cathodes are a central component of LIBs; their pro­duction is technically complex and globally concentrated among a handful of manufac­turers. China produces some 90 per cent of cathode active material, followed by South Korea and Japan.

The production of cathodes for LIBs is a key element of the Chilean government’s strategy to expand local value creation. Thus, expectations were high when, in 2023, the Chinese companies BYD and Tsingshan won a tender for reduced-price lithium and, in turn, promised to invest in battery-grade lithium processing and cathode production in Chile. However, in May 2025, both com­panies announced that they were backing out of the agreement, with some sources pointing to the steep drop in lithium prices and others blaming legal and bureaucratic hurdles. Two earlier agreements on prefer­ential prices similarly failed to lure signifi­cant investments into the country, while a fourth deal – with lithium producer Albe­marle – is still being negotiated.

On the face of it, there would appear to be a logic to strengthening linkages with the downstream lithium-ion battery supply chain in Chile, given the country’s large, high-quality lithium deposits and technical capacity for industrial processing. However, a yawning technical gap exists between the production of high-quality battery raw ma­terials and the manufacturing of cathode active materials or battery cells. Moreover, while the term “lithium-ion battery” sug­gests otherwise, lithium makes up only about 10 per cent of the total raw materials of a battery. Right now, other elements, such as cobalt or nickel, would have to be imported.

Another factor that could hinder the development of a downstream battery sup­ply chain is the lack of geographical prox­imity to the consumer market. Neither Chile nor any of its neighbouring countries currently has a large market for electric vehicles; in fact, Chile does not have its own automotive industry. This is a crucial difference between Chile and countries like Mexico or Brazil, which are not only home to some of the raw materials needed for LIBs but also have a well-developed auto­motive industry and geographical proximity to large markets. While the synergy poten­tial of closer regional integration along the LIB supply chain – for example between Chile, Argentina and Brazil – is significant, there is no political initiative for deeper regional cooperation, owing in part to ideo­logical differences between the governments in the region.

Horizontal linkages

In addition to linkages with upstream and downstream supply chains, Chile’s raw materials sector has the potential to estab­lish intersectoral linkages, especially in water and energy supply. Mining accounts for about one-third of the country’s elec­tricity consumption. The planned expansion of copper and lithium production will lead to a significant increase in demand for electricity. At the same time, Chile has set ambitious goals for the energy transition. By 2030, 80 per cent of the electricity mix is to come from renewable sources; in 2022, that share was already more than 50 per cent. Further, the extensive availability of renewable energy sources means that Chile is well equipped for the production of green hydrogen at comparatively low pro­duc­tion costs. The government has drawn up a strategy to develop the hydrogen indus­try, although, unlike in the raw materials sector, state intervention remains some­what limited. Currently, several hydro­gen projects are in the development phase in Chile, but it will take years for commercial production of green hydrogen to begin.

The supply of renewable electricity and green hydrogen is a key component for the decarbonisation of Chile’s mining sector, as copper production alone accounts for about 7 per cent of the country’s emissions. How­ever, the slow expansion of transmission grids and battery storage systems often leads to disruptions in the power supply, which also affect the mining sector.

Meanwhile, water supply presents significant challenges, especially for industry in the north of the country. Both the limited availability of freshwater and tighter en­viron­mental regulations are forcing mining companies to find other solutions. One alter­native technology is seawater desali­nation, which now accounts for a growing share of water supply in mining. However, this process is very energy-intensive, which, in turn, increases the demand for renew­able energy in the industry.

Creating financial incentives for raw materials partners

The EU pursues a two-pronged approach in its raw materials strategy: on the one hand, it focuses on establishing strategic partnerships with resource-rich countries; and, on the other, it is expanding its own capacities along the entire value chain. The bench­marks for 2030 defined in the Critical Raw Materials Act require a significant increase in the extraction, processing and recycling of raw materials within the EU. The indus­try’s interest in developing new raw ma­terials projects on EU territory is evident from the 47 strategic projects recently selected by the Commission, nearly half of which are to do with lithium production. Whether projects in partner countries such as Chile will be selected in a second selec­tion round remains to be seen.

There is also the question of whether investments in Chilean lithium mining and copper processing can be attractive for Euro­pean companies as long as the focus remains on expansion within the EU. For its part, the EU argues that growing demand means that both European and external sources of raw materials will be needed in the long term. But the decisive issue is whether European actors will have been successfully integrated into global raw materials supply chains by then or whether they will once again have become depend­ent on China or new players such as Saudi Arabia, India and South Korea, which are also seeking access to Chile’s raw materials. Indeed, geographical diversification does not automatically mean supplier diversification if the EU ultimately imports raw ma­terials or cathodes from Chile that origi­nate from Chinese-controlled mines, smelt­ers or cathode factories.

For raw material partnerships to make a genuine contribution to diversification, there must be stronger incentives for Euro­pean companies to invest in partner coun­tries. The added value for these countries remains limited if the only incentive is to be able to apply for strategic projects. While the designation as a strategic project helps facilitate access to financing opportunities, projects in Europe have far more possibili­ties to secure funding from the EU.

The EU needs to adjust by providing more effective fiscal stimuli in the short term and more emphatically stressing both the urgent need for, and long-term benefits of, partnerships with countries like Chile. The financial instrument developed for renew­able hydrogen projects in Chile could be adapted for the raw materials sector by combining low-interest EU loans with grants that specifically promote sustainable and low-emission raw materials projects in part­ner countries. This would encourage Euro­pean companies to invest in environmen­tally friendly raw materials extraction and processing and at the same time help part­ner countries make their raw materials industry greener. In the long term, both Chilean and European stakeholders would benefit: if CO₂ levy mechanisms like the European Carbon Border Adjustment Mechanism also covered battery raw ma­terials such as lithium, it could be that pro­duction in Chile would be as cost-efficient as, or even cheaper than, in China – depending on the processing method.

Thinking local value creation along the entire chain

The discourse on local value creation – especially in the case of lithium – often focuses on industrial raw materials pro­cessing up to the production of battery cells and complete battery systems. But the eco­nomic and technological viability of devel­op­ing a downstream (battery) supply chain depends largely on what conditions are like in the country in question, as illustrated by the example of Chile. Therefore, the possi­bilities for local value creation in the raw materials sector must be considered more broadly and there must be more emphasis on upstream and horizontal linkages.

Focusing on driving technological innovation would open a new window of oppor­tunity: by expanding capacities in efficient, environmentally friendly raw materials extrac­tion and processing, Chile would not only advance the sustainable development of its own mining industry; it would also position itself on the regional and inter­national market as a technology hub and partner for sustainable mining. This could prove especially valuable amid the growing interest in more environmentally friendly resource extraction in other countries. Through programmes for technology trans­fer, research cooperation and skills develop­ment, the EU could offer targeted support for the development of Chilean supplier industries – for example, in mechanical engineering, automation or recycling tech­nologies. It would thereby strengthen local value creation while promoting the inte­gra­tion of European companies into strategic supply chains.

To achieve this, the EU must better integrate its various partnerships, in line with horizontal (sectoral) linkages, in order to create more synergies. In the case of Chile, this means closer interconnections between the raw materials, energy and hydrogen sectors. If the EU’s partnerships are to achieve their full potential, they must be coherently coordinated and func­tion as a single, strategically interconnected package rather than individual initiatives.

Leveraging geopolitical dynamics

In the implementation of its raw materials partnerships, the EU must take current geo­political developments more into account. Chile’s interest in a closer partnership with the EU aims, among other things, at coun­terbalancing China’s dominant role in Chile’s industry and trade relations. At the same time, Chile is consciously adopting a neutral position in matters related to raw materials and, in the long term, will align itself with those actors offering concrete and sound proposals that are advantageous for the country. Thus, in order to strengthen its partnership with Chile and assert its own economic and security interests, the EU must invest more actively and strategically leverage the geopolitical room to manoeuvre.

This is all the more important against the backdrop of the new US administra­tion’s industrial and trade policies. Because of its free trade agreement with the US, Chile’s battery raw materials should have qualified for tax credits for electric cars and LIBs under the Inflation Reduction Act. How­ever, the Trump administration has ordered a funding pause for such credits and floated the idea of tariffs on copper imports. With US industrial policy currently focused on domestic processing capacities, Chile is now confronted with a dual chal­lenge: reducing its growing dependence on China while preparing for what is likely to be an increasingly unpredictable relation­ship with the US.

The EU should use this geopolitical shift to position itself as a reliable, long- term part­ner. It is not enough to differentiate itself rhetorically through a partnership approach; rather, it must make substantial offers in the areas of industrial development and sustainable technology cooperation before China exploits the emerging gap any further. Only in this way can it prove itself as a credible alternative and realise its declared intention to forge a raw materials partnership on an equal footing.