Arthur Deakin
Energy Practice Director
AMI
Alejandro Álvarez
Former Mining Practice
Co-Director
AMI
On August 16, 2022, the Inflation Reduction Act was signed into law. The legislation will implement core components of U.S. President Biden’s agenda on healthcare, tax reform, and climate change. The Act includes an estimated $369 billion in investments, including tax and other incentives to promote domestic production of electric vehicles, renewable energy technologies, and critical minerals.
Here’s a look at how Latin America may benefit from the passage of the Inflation Reduction Act.
The Inflation Reduction Act’s Impact on the Latin American Energy Sector
The impact on Latin America’s energy sector is not as clear as the mining sector (discussed below), so first, let’s take a look at the main takeaways from the legislation:
- Production tax credit that subsidizes the production and use of clean hydrogen
- Standalone investment tax credit (ITC) specifically for energy-storage projects
- Production tax credits to accelerate U.S manufacturing of solar panels, wind turbines, batteries, and critical minerals processing
- Tax credits for consumers who add renewable energy to their homes, including heat pumps, rooftop solar, electric HVAC, and water heaters
- $9 billion for home energy rebate programs for low-income consumers to make homes more energy efficient
- EV tax credits for lower- and middle-income buyers ($4k for a used EV and $7.5k for a new one at the point of sale)
- New onshore and offshore renewable projects on federal land will be contingent on holding comparable oil and gas auctions within 4 (for onshore) and 12 months (for offshore)
- New fee on excess methane emissions, which could reach up to $1500/ton by 2026
- Higher fees for oil and gas developments on public land/water, as well as royalties on oil & gas produced
Although each credit has unique peculiarities that will impact their reach, this is undoubtedly a monumental piece of legislation for U.S. climate goals. Indirectly, the more successful this climate bill is, the more likely governments in Latin America will adopt similar legislation as they accelerate the adoption of emerging clean energy technologies. And even though the bill is intended to encourage domestic U.S. manufacturing, local capacity (especially in the beginning) will be insufficient to match the trillions of public-private investments that will arrive within the next decade.
FREE REPORT
The Road to Net Zero in Latin America
How investors, energy companies and suppliers can maximize opportunities while avoiding pitfalls in the region's top 6 markets
To bridge that gap, and satisfy local demand for clean energy projects, the U.S. will need to increase its importation of raw materials from other nations (e.g., Mexico, Brazil, China, etc.). In 2021, 85% of all solar power capacity imported in the U.S. came from Cambodia, Malaysia, Thailand, and Vietnam (most of which are from companies that are controlled or affiliates of Chinese manufacturers). Mexico accounted for roughly 3% of imported solar panels in 2019.[1] Flex and Solarever, solar manufacturers with factories in Ciudad Juárez and Tecomán, are already providing goods to U.S. companies and other regional neighbors. Other key PV module manufacturers include Groupo IUSA, Solartec, Solarvatio and Solarsol.[2] Driven by American companies’ desire to overcome supply chain challenges, avoid growing tensions with China, and find lower costs of labor (and raw materials) near home, nearshoring will accelerate the U.S. search for Mexican suppliers.
Mexico and Brazil, along with India, Spain, and China, are also the largest exporters of wind turbine components to the United States. 50 to 70% of blades and hubs used in America are produced outside the U.S. Given Brazil’s advanced wind development, with over 20 GW of onshore installed capacity and another 170 GW of offshore capacity being evaluated,[3] Brazilian manufacturers are well positioned to satisfy the U.S. boom.
Aeris Energy, a leading provider of blades, is strategically located in Northeastern Brazil where it can supply the domestic Brazilian market while simultaneously having direct routes to the U.S. east coast, Western Europe, and Africa. Other key wind suppliers in Brazil, that could increase their presence in both the U.S. and Latin America, include General Electric Renewable Energy, WEG, Nordex, Vestas and Siemens Gamesa.
In July 2022, however, GE said they were shutting down their wind turbine manufacturing in Brazil. Although GE did not provide an explanation, it creates a natural supply gap in the local market. If GE decides to also stop the manufacturing of its wind blades in Pernambuco, Aeris Energy will become the only wind blade producer in the country. [4]
As energy suppliers, operators and investors seek to understand the implications of the climate bill on both Latin America and the U.S., AMI will continue to monitor and track the surging opportunities and risks. Contact us directly to explore in detail how our market intelligence of the energy sector could help with your strategic decisions in Latin America.
The Inflation Reduction Act’s Impact on the Latin American Mining Sector
The bill continues the existing $7,500 tax credit for EVs but makes a number of changes regarding which vehicles can qualify for it. Notably, half of the credit would only be available if a percentage of the critical minerals contained in the car’s battery were extracted or processed in a country with which the United States has a free trade agreement. By 2028, all minerals in the battery must have a domestic origin to qualify for the tax credit, but in the meantime, there are several Latin American countries that will likely benefit from the U.S-led surge in demand.
Currently, the US has trade agreements with 20 countries, 11 of them located in Latin America.
Mexico is the oldest signatory, with an agreement dating back to the early 1990s. Panama and Colombia are the most recent signatories, with their agreements turning a decade of existence this year. The bulk of the countries had their agreements come into effect between 2004 and 2009.
FREE REPORT
The 2022 Latin America Mining Risk Index
A qualitative and quantitative analysis of the risks facing both miners and investors in the region’s 16 leading jurisdictions
Opportunities for Copper
All types of EVs require a substantial amount of copper. It is used in batteries, windings and copper rotors used in electric motors, as well as in wiring, busbars and charging infrastructure. This is good news for Chile and Peru, the world’s largest and second largest, respectively, producers of the mineral.
There are already several large copper developments in both jurisdictions. In Chile, Antofagasta’s Los Pelambres is undertaking a $2.2 billion expansion. Glencore looks to do the same with its Lomas Bayas project, although it must first address concerns by Chile’s Environmental Superintendent that it has not appropriately monitored its impact in nearby water, flora, and fauna. Miners operating in Chile are facing increasing scrutiny by regulators over their water usage, a scarce resource in desertic regions where the country’s largest mines are located and that has been proposed to have Constitutional-level protection.
In Peru, opposition from local communities, security, and regulatory uncertainty might hamper growth for copper producers. Miners watched with disconcert as MMG Ltd’s Las Bambas operation and Southern Copper’s Los Chancas project suffered violent community protests in recent months, with communities leading roadblocks, shutting water supplies, and sometimes attacking infrastructure. The country has a large pipeline of projects, led by Rio Tinto’s $5 billion La Granja and Lumina Copper’s $3.5 billion Galeno, both in pre-feasibility stage, and miners will be closely monitoring how President Pedro Castillo appeases protesters amid pledges to better redistribute mining profits.
A noteworthy mention must be made of Panama, where First Quantum operates the world’s largest open-pit copper development, Cobre Panamá. The mine is Panama’s biggest source of export and accounted for 3.5% of the GDP in 2021, which will only increase as a $450-million expansion gets started that will, among other upgrades, add between 60-80 megawatts of hydroelectric power from the Panamanian grid. The government is well aware of the economic significance of the mine, and earlier this year it led a suspenseful renegotiation of the royalty agreement that ultimately increased the yearly taxes and royalties paid by the company to a minimum of $375 million. The funds will be primarily used to support the public pensions program, a move that highlights the ever-present practice of political interference in mining across the region that is set to remain strong as governments search for sources of tax revenue to overcome pandemic-induced budget deficits.
Opportunities for Graphite and Zinc
Although Mexico is amongst the world’s ten largest producers of copper, its graphite and zinc industries might benefit more from the incentives the U.S. just introduced. The automotive industry has traditionally utilized graphite for brake linings, gaskets and clutch materials, but now it has become an anode material in EV batteries that has no substitutes. Meanwhile, zinc has been presented as an alternative to lithium-ion batteries to reduce fire risk and possibly match or surpass them in terms of energy density. While this technology develops, zinc will continue to play an important role in the automotive industry as it is used for die casting in critical vehicle elements (traditional and electric): from the rollers of the seat belt or belt pretensioners, to the wiper motor, spark plug heads, the cylinders of modern door locks and even door handles.
Mexico already stands strong as the United States’ second largest source of graphite, trailing China. The country is also the world’s sixth largest producer of zinc and is poised to strengthen its position even further as key projects come online. Teck Resources is advancing the San Nicolás project with investments in excess of $800 million, and Southern Copper is doing the same with Buenavista Zinc and a $413 million investment. But zinc is typically found in the northern and western regions of the country, a Sinaloa Cartel stronghold.
Cartels see mining projects as either a problem (because they interfere with smuggling routes) or as an extortion opportunity. Cartels do not elicit bribes directly from miners. Instead, they extort mining suppliers or take them over. The result is increased supplier costs to miners, reducing their competitiveness in a global scale.
FREE REPORT
The 2022 Latin America Mining Risk Index
A qualitative and quantitative analysis of the risks facing both miners and investors in the region’s 16 leading jurisdictions
The Dominican Republic and Honduras may also benefit from U.S.-led demand for zinc. Although the mineral’s importance in both countries is overshadowed by gold and silver, they are amongst the few U.S. trade agreement signatories with mature zinc operations. The DR’s mining economy is already ramping up as mineral exports amounted to $2.15 billion in 2021, up from $2 billion the previous year, promoted by a heavily concentrated central government.
In Honduras, however, the current administration decided to no longer grant open-pit mining permits and decreed that existing open-pit mines would be shut down in coming years. El Mochito, an underground zinc and silver operation and the country’s largest mine, might come into President Xiomara Castro’s crosshairs as she regulates an industry she believes has caused failed economic policies and corruption. Contrary to the DR, it is unclear if Honduras will be able to fully make use of the surge in demand for its minerals.
A Note on Lithium
Perhaps the best-known mineral demanded by the EV industry is lithium, a key component in vehicle batteries. Chile, Argentina, and Bolivia—together referred to as the “Lithium Triangle”—hold more than 75 percent of the world’s supply beneath their salt flats, but only Chile has a free trade agreement with the US. Chile is also the region’s most developed producer, competing with Australia to become the world’s largest source of the mineral.
Mexico has a nascent lithium industry that was recently nationalized, a decision met with trepidation by investors who doubt the government has the technical resources to bring it to global standards. In recent months, the Mexican government has been actively looking to partner with Bolivia and Argentina to leverage their own experience with lithium mining, yet it remains unclear if Mexico will be able to fully make use of the surge in demand for lithium.
For two decades Americas Market Intelligence (AMI) has conducted studies to evaluate and mitigate risks for mining companies and mining investors. Our analysis of political risk, reputational risk and local community risk give companies a clear picture of what they’re facing, along with recommendations on how to avoid or best manage the challenges for optimum success with projects.
Contact us to learn how we can help you manage risks within the mining and energy sectors while also uncovering new opportunities with both traditional energy sources and renewable energy sources.
Sources
[1] 2020, “Sustainable Energy in America,” BNEF.
[2] 2015, “Ciudad Juarez dominates solar panel manufacturing in Mexico,” TECMA.
[3] 2022, “Brazil’s wind energy production hits a record in 2021,” GovBr.
[4] July 2022, “GE anuncia interrupção das vendas de turbinas para geração eólica no Brasil,” Epoca Negocios.
