SQM's Lithium Woes: A Strategic Reassessment in a Downturn Market

The lithium market in 2025 is a study in contradictions. On one hand, prices have collapsed to multi-year lows, driven by oversupply and weak near-term demand in key markets like Europe and Asia. On the other, structural demand from electric vehicles (EVs), battery storage, and digital infrastructure remains robust, with global lithium consumption projected to grow at a 12% annual rate through 2030. For SQM, the Chilean lithium giant, this duality presents both opportunity and peril. As the world's second-largest lithium producer, SQM's long-term investment viability hinges on its ability to navigate a volatile market, leverage its cost advantages, and manage geopolitical risks tied to its high-stakes partnership with Codelco.

The Lithium Market: Oversupply and Structural Demand

The current lithium slump is a textbook case of supply outpacing demand. Chinese producers, in particular, have flooded the market with low-cost output, pushing prices below $5,000 per tonne of lithium carbonate in 2025. This has squeezed margins for higher-cost producers and forced buyers to adopt a wait-and-see approach. Yet, the fundamentals of demand remain intact. EV sales are surging—global sales hit 20 million units in 2025—and renewable energy integration is accelerating, with battery storage demand set to outpace EVs in the next decade.

For SQM, the challenge lies in aligning its production strategy with this dual reality. While the company's brine extraction operations in the Atacama Salt Flat give it a cost structure of around $5,000 per tonne—well below the $12,000–$15,000 range for hard-rock miners—this advantage is being tested by the current price environment. However, SQM's ability to maintain profitability even in a downturn, coupled with its strategic expansion plans, suggests a resilient business model.

SQM's Strategic Position: Cost Leadership and Diversification

SQM's core strength lies in its low-cost production and diversified portfolio. Beyond lithium, the company produces potassium and iodine, which provide a buffer against lithium market volatility. This diversification is critical in a sector prone to cyclical swings. Moreover, SQM's technological investments—such as direct lithium extraction (DLE) and water-efficient brine processing—position it to reduce environmental impacts while improving efficiency.

The company's 2025 expansion plans further underscore its long-term vision. By increasing output and securing long-term contracts with battery manufacturers, SQM aims to lock in demand during the recovery phase. Goldman Sachs has highlighted SQM's cost leadership as a key differentiator, noting that its ability to operate profitably at current prices gives it a structural edge over peers.

However, SQM's strategic calculus is complicated by its partnership with Codelco, Chile's state-owned copper miner. This joint venture, which grants Codelco a 50% plus one share in SQM's lithium operations by 2031, is a double-edged sword. While it aligns with Chile's National Lithium Strategy to assert state control over the resource, it also introduces significant geopolitical risks.

Geopolitical Risks: A Ticking Time Bomb?

The Codelco-SQM partnership has drawn scrutiny from multiple quarters. Domestically, opposition from Chile's political opposition and a congressional investigative commission has raised concerns about transparency and fairness. Internationally, Tianqi Lithium—a major SQM shareholder—has challenged the deal in court, fearing Chinese regulatory pushback. Meanwhile, the EU and U.S. are closely watching the partnership, as it could influence global supply chain dynamics.

The EU's strategic raw materials partnership with Chile, for instance, emphasizes sustainability and local value creation. While the Codelco-SQM deal includes environmental safeguards—such as designating 30% of salars as protected areas by 2030—it also risks over-reliance on Chinese processing capacity. This could clash with the EU's goal of reducing dependency on non-EU actors. Similarly, the U.S. has expressed concerns about Chinese influence in the lithium supply chain, potentially pressuring Chile to adjust the partnership's terms.

For SQM, the path forward requires balancing these geopolitical pressures with its operational goals. The company must navigate a complex web of approvals, including community consultations with indigenous groups and final regulatory clearance from China. Failure to address these risks could undermine the partnership's viability, particularly if a new Chilean administration reverses the deal after the November 2025 elections.

Investment Implications: Buy, Hold, or Exit?

SQM's long-term investment case rests on its cost advantages, diversification, and strategic positioning in the lithium value chain. However, the current market environment and geopolitical uncertainties demand a cautious approach.

Buy Case:
- Cost Leadership: SQM's $5,000/tonne cost structure is a moat in a market where many producers struggle to break even.
- Diversification: Potassium and iodine operations provide stability during lithium downturns.
- Expansion Plans: Strategic investments in DLE and long-term contracts position SQM for growth post-2026.

Sell Case:
- Geopolitical Risks: The Codelco partnership is vulnerable to political shifts and regulatory challenges.
- Market Volatility: Near-term demand softness in Europe and Asia could prolong the price slump.
- Environmental Pressures: Water usage in the Atacama remains a reputational and operational risk.

Investment Advice:
SQM remains a compelling long-term play for investors with a 5–10 year horizon, provided they can tolerate near-term volatility. However, the company's exposure to geopolitical risks and market cyclicality suggests a “conditional buy” stance. Investors should monitor three key triggers:
1. Regulatory Clearance: Final approval of the Codelco partnership by Q4 2025.
2. Price Recovery: A sustained rebound in lithium prices above $7,000/tonne by mid-2026.
3. Geopolitical Stability: Resolution of tensions with Tianqi Lithium and Chinese regulators.

In the absence of these triggers, a “hold” position is prudent. SQM's structural advantages are undeniable, but the path to realizing them is fraught with challenges. As the lithium market evolves, strategic agility—both in production and in navigating geopolitical currents—will determine whether SQM emerges as a winner or a casualty of the downturn.