Tianqi's SQM Exit: A Signal of Lithium's Shifting Supply and Demand Balance

The move is now a fait accompli. Tianqi Lithium's board has authorized the sale of up to nearly 3.566 million Class A shares in SQM, representing no more than 1.25% of SQM's total. This follows the company's disposal of over 748,000 Class B shares earlier in December. The action is a direct, practical response to a legal and strategic defeat that fundamentally alters the investment case.

The immediate trigger was Chile's Supreme Court rejecting Tianqi's final appeal last week. This ruling paves the way for the nationalization of the world's second-largest lithium producer. The court's decision upholds a lower court order that endorses a state-backed joint venture between SQM and Chile's copper giant, Codelco. The legal battle, which Tianqi had contested since May 2024, has now reached its conclusion.

For Tianqi, the strategic pressure on its remaining stake is now acute. The company holds a 21.9% stake in SQM, but the creation of the new joint venture, NovaAndino Litio, shifts control and long-term economics. While SQM retains operational control until 2031, the state-backed partnership secures a 300,000-tonne increase in SQM's lithium quota by 2030. More critically, it sets a path for Chile to capture a larger share of profits starting in 2031. This new structure directly threatens the financial returns Tianqi had anticipated from its significant investment.

Viewed through a commodity balance lens, Tianqi's exit is a symptom of a larger, structural shift. The company is divesting a portion of its position not because lithium demand is faltering, but because the supply side is being reconfigured under state control. The Chilean government's move to tighten its grip on the Atacama salt flats, the world's most concentrated lithium resource, is a clear signal that future supply growth will be more regulated and less responsive to private market signals. This is the catalyst that Tianqi is choosing to walk away from.

The Structural Shift: Chile's Nationalization and Supply Constraints

The creation of NovaAndino Litio is more than a corporate merger; it is a deliberate reconfiguration of Chile's lithium supply chain. The 50:50 joint venture, formally established last month, brings together SQM's operational expertise with Codelco's state backing. Its core purpose is to centralize control of the Atacama salt flats, the world's most concentrated lithium resource, under a new entity designed to advance Chile's national lithium strategy.

The mechanism of this shift is clear and phased. Until 2031, SQM retains operational control. But a "golden share" gives Codelco the decisive vote on major decisions, effectively ceding operational control to the state-owned miner starting in January 2031. This transition is the structural pivot. It replaces private, market-driven management with a politically accountable entity, introducing a new variable into long-term supply forecasts.

The impact on future supply is twofold. First, the joint venture secures a significant quota increase, boosting SQM's extraction allowance by 300,000 metric tonnes (t) of lithium carbonate equivalent (LCE) by the end of 2030. This provides a near-term supply buffer. Second, and more importantly, it sets a path for Chile to capture the lion's share of returns. The government will capture 85pc of the project's operating profit margins starting in 2031, a 15 percentage point jump from the 70% it collects through 2030. This profit shift directly links the state's fiscal health to lithium production, potentially incentivizing output but also tying it to political and budgetary cycles.

The broader impact is a fundamental centralization of a key supply source. By creating a state-backed entity with a 30-year production horizon, Chile is moving lithium from a commodity traded on global markets to a resource managed for national strategic and economic goals. This limits the ability of private investors, like Tianqi, to influence or capture the full value of the resource. It also introduces a new layer of regulatory and political risk, as expansion and investment decisions will now be subject to state priorities. For the global lithium balance, this means future supply growth from this critical basin is likely to be more constrained, slower to respond to price signals, and less predictable than under a purely private ownership model.

The Demand Counterweight: Energy Storage's Accelerating Pull

While supply from Chile faces a structural reconfiguration, the demand side is not standing still. In fact, a powerful new driver is accelerating, potentially offsetting or even exceeding the constraints from state-controlled production. Battery energy storage systems (ESS) are emerging as the fastest-growing segment of battery demand, with growth projected at about 44 percent in 2025. This rapid expansion is set to account for roughly a quarter of total global battery demand this year, a share that is rising quickly.

The drivers behind this surge are clear and cost-driven. The dominance of lithium iron phosphate (LFP) chemistry in stationary storage applications has been key, with LFP now described as the best chemistry for most storage applications due to innovation and lower costs. This technology is increasingly deployed in modular, containerized systems that can be installed at substations or paired with solar farms. This design bypasses lengthy grid upgrades, allowing projects to come online in as little as 81 days. The economics have become compelling, with fully integrated storage systems in China now approaching, and in some cases falling below, $100 per kilowatt-hour. This cost decline has fundamentally changed the viability of deployments even as policy support tightens.

Recent price action provides a tangible signal that this new demand is already exerting upward pressure. After a period of oversupply, lithium prices have stabilized and begun to climb. Upstream refineries have actively restricted spot sales to defend margins, effectively tightening immediate availability. Futures on the Guangzhou exchange have climbed towards 100,000 yuan per ton, a level not seen since early 2024. This move often leads physical prices when buyers anticipate structural demand growth. The data supports this shift: global ESS additions are forecast to rise from an estimated 273GWh in 2025 to 359GWh in 2026.

The bottom line is that demand is not monolithic. While electric vehicles remain the largest lithium consumer, the acceleration in energy storage creates a new, robust counterweight. This segment is growing at more than double the rate of the broader battery market and is being fueled by technology that is cheaper, faster to deploy, and increasingly essential for grid stability. For the lithium balance, this means the market is being pulled in two directions: supply from a key basin is being centralized and potentially constrained, while demand from a new, high-growth sector is gaining significant momentum. The net effect will depend on the relative pace of these opposing forces.

The Investment Implications: Balancing Risk and Catalysts

The market now faces a clear tension. On one side, a major supply source is being restructured under state control, potentially constraining future growth. On the other, a powerful new demand driver is accelerating at a pace that could outstrip available supply. The net outcome for lithium prices and investment returns will hinge on which force gains the upper hand.

The core pressure point is the narrowing surplus. For years, the lithium market operated with ample inventory, keeping prices subdued. The surge in energy storage demand is a direct counterweight. With ESS growth projected at about 44 percent in 2025, it is rapidly becoming a dominant consumer. This segment's reliance on lithium iron phosphate (LFP) chemistry and its ability to deploy at unprecedented speed-as short as 81 days-means it can absorb material quickly. This new demand is already showing signs of tightening the market, as upstream refineries have actively restricted spot sales to defend margins. The result is a market where the structural oversupply is being eroded by a powerful, cost-driven pull.

Investors must watch three key metrics to gauge the balance. First, the pace of energy storage deployment is the primary demand catalyst. Any acceleration beyond current forecasts would further tighten the supply-demand equation. Second, the implementation of Chile's joint venture is a critical supply-side watchpoint. While the 300,000-tonne quota increase provides near-term capacity, the real test is whether the state-backed entity can efficiently manage the Atacama resource and meet its ambitious production targets. Delays or inefficiencies here could create bottlenecks that amplify price strength. Third, the trajectory of lithium prices relative to production costs will signal the market's health. Prices have climbed, with futures on the Guangzhou exchange approaching 100,000 yuan per ton. If this trend holds and moves above the cash cost of production for major miners, it would validate the demand thesis and incentivize new, potentially higher-cost supply.

Tianqi's sale is a clear signal to monitor this balance. The company is exiting a position not because of weak demand, but because of a fundamental shift in supply control. This move highlights the growing importance of geopolitical risk in lithium. The investment case is no longer just about battery demand growth; it is about which producers can navigate a landscape where key resources are being nationalized and where new, high-growth demand sectors are emerging. For now, the market appears to be tilting toward tighter conditions, but the path will be shaped by the interplay of these competing forces.