FEATURE: Argentina election raises stakes for energy, mining and agriculture outlook

Argentina's next president faces the challenge of boosting commodity exports while trying to tame the country's economic crisis, but the pro-business policies proposed by front-runner Javier Milei may be too radical to gain approval.

All major presidential candidates in the Oct. 22 election have shown support for key commodities, including oil and gas, lithium, soybeans and wheat. Developing more energy and mineral resources would bring in just what the next government desperately needs: dollars.

Argentina, the third-largest economy in Latin America, has struggled to pull itself out of a crisis that began in 2018 and worsened this year as a severe drought slashed agriculture production, on which the country depends on. This has depleted international reserves and pushed the economy into recession, with inflation surging past 100% in February.

During the primary election in August, Argentine voters surprised outside observers by rallying behind Milei, a far-right libertarian economist, who led with 30% of the primary votes after promising to shutter the central bank and dollarize the economy.

"Milei, with his radical economic proposals and his likely congressional minority, combined with his less-than-collaborative persona, would likely [alarm] investors who are looking for a more stable and predictable economic path forward," said Arianna Kohan, Buenos Aires-based analyst at political risk consulting firm Hxagon.

Industry participants and investors want someone to bring stability and support growth through measures such as removing import and export taxes, loosening currency controls and unifying the county's multiple exchange rates.

"Argentina is on the verge of a new political and economic era," S&P Global Commodity Insights analysts Ford Tanner and Pedro Martinez said in a Sept. 26 report. "Amid soaring inflation and rising poverty, the results of presidential primary elections in August indicate a historic shift in favor of market-oriented policies."

Boosting energy exports

Milei wants to shift as much of the industry as possible to the private sector, including by selling the state's 51% stake in oil and gas company YPF Sociedad Anónima. He also wants to spur the development of liquefaction capacity for LNG exports, allow producers to export oil and gas under long-term contracts and remove export taxes -- a key for realigning the local prices of crude and products with international references.

Milei also said he would leave the development of the green hydrogen and renewable energy sectors to private investment, said Marina Pera, associate analyst at political risk consultancy Control Risks.

"Milei supports a free market ideology with little to no government intervention in natural resources," said Kohan, warning that Milei's lack of political and business contacts makes it "unclear" how he would respond to opposition from environmental groups and local communities.

All three candidates -- Milei, former Security Minister Patricia Bullrich and current Economy Minister Sergio Massa -- had vowed to adopt energy policies that boost production and put the country on track to becoming a larger exporter of oil and gas.

To achieve that, the eventual winner will have to focus on accelerating development of the Vaca Muerta shale play, increasing takeaway capacity, building export terminals for oil and gas, and developing other plays, according to Daniel Dreizzen, an energy consultant at Ecolatina and former Secretary of Energy Planning for Argentina.

S&P Global sees upstream investment reaching a record $11 billion in 2023, "underscoring the resilience" of the exploration and production sector, said Tanner and Martinez. They forecast Argentina's oil exports will triple to 300,000 b/d by 2030.

"If export restrictions, capital controls, energy price controls and infrastructure bottlenecks are fully removed, Vaca Muerta -- Argentina's largest unconventional hydrocarbon deposit -- could produce an additional 40% in crude volumes and an additional 30% in natural gas volumes by 2030," the analysts said.

The oil and gas sector could become a second major export industry for Argentina, as the ongoing drought exposes the risks of its long dependence on agriculture exports for economic growth.

"This is the big opportunity that we have for export dollars to come from something else," said Horacio Turri, executive director of exploration and production at Pampa Energía, the country's fifth-biggest gas producer.

The goal of the next government should be to rapidly increase exports, given that the local resources far outweigh local demand, said Emilio Apud, a former national energy secretary and Bullrich's adviser on energy issues. "In less than 10 years, exports via LNG and crude oil should triple local demand," Apud said.

To do this, the next administration will have to rebuild the economy, expand the energy sector and improve international relations "as soon as possible" to rebuild investors' confidence in the country so foreign financing can be accessed for projects, Apud added.

Massa has managed energy affairs as economy minister over the past year and has taken steps to build gas pipelines, but he has not improved investment conditions enough to unleash larger amounts of investment, Dreizzen said. A Massa administration would likely continue using the state to finance key gas pipeline projects but would lag in making deeper changes needed to bring fresh investment, the consultant said.

Racing to supply the battery market

Argentina's mining sector is a growing force in the economy as energy transition increases demand for its vast lithium reserves. But the recent economic turmoil has hurt the sector's global competitiveness.

"In recent months, [mining activity] has shown a significant increase in production costs and has also been affected by restrictions on access to the foreign exchange market for the acquisition of critical inputs," said Mario Belardinelli, lead partner for mining at KPMG Argentina.

Both Bullrich and Milei have proposed loosening capital controls and unifying the multiple exchange rates used to slow the devaluation of the peso. They have also both promised to remove the 8% export tax on mining products, which is "often in the eye of the storm" in discussions over government revenue, Belardinelli said.

"A context of high inflation generates uncertainty and reduces competitiveness with respect to other countries with mining resources," Belardinelli added.

Strict import controls limit a miner's ability to bring in equipment and machinery, and slow approval times can also impact production, Control Risks' Pera said.

Historically, the country's mining activities have been based around gold, silver and copper, but rising demand for lithium-ion batteries is spurring new investment in lithium. Argentina holds 108.1 million mt of lithium in reserves and resources, more than any other country in the world, yet production was only 35,046 mt in 2022, third behind Australia and Chile, data from S&P Global Market Intelligence shows.

With lithium prices at historical highs and the government welcoming foreign investment, there are currently more than 30 lithium projects in development in the South American country, based on the government's project portfolio. Argentina's lithium production will gradually increase year on year and could surpass Chile in 2027, according toS&P Global's research databook released Sept. 25.

None of the presidential candidates has suggested centralizing and nationalizing any part of the mining sector as neighboring Chile has done with its lithium industry. In Argentina, government control is divided between the federal government and the provinces: The provinces grant permits, set royalties and monitor environmental compliance within their territories, while the federal government sets a mining code that provides a general regulatory framework.

"All three candidates agree on the need to develop the country's mining industries, they just differ as to how," Hxagon's Kohan said. "Bullrich and Massa have an existing track record with provincial leaders and relevant private sector actors. Milei, on the other hand, would offer investors the possibility of taking a leap of faith."

Recovering from drought

An agricultural powerhouse in South America, Argentina was the world's top soybean oil exporter and ranked second in soybean meal exports in the October 2022–September 2023 marketing year, according to the US Department of Agriculture. The country was also the fourth-largest corn exporter in the 12 months to February, as well as a key supplier of wheat and biodiesel.

"Agriculture is the sector that candidates have been focusing on the most since the beginning of the campaign due to its importance to the national economy," Pera said.

Historic crop losses and the economic crisis have shrunk Argentina's footprint in the global chain for grains and oilseeds this year. The soybean harvest missed expectations by about half at 21 million mt in the marketing year ended March 2023, according to the Buenos Aires Grain Exchange.

The possibility of lower taxes on exports if Milei or Bullrich win has forced many farmers out of the market until the election. Argentina currently taxes exports of soybeans and soybean products at 33% and corn and wheat at 12%.

Local farmers are using grains and oilseeds as a hedge tool against the country's hyperinflation. "If you are a farmer, you wait," a Buenos Aires-based broker said.

Argentina's central bank devalued the peso to 350 to the US dollar on Aug. 14, from 286.20 a day earlier, as markets reacted to the primary results. This directly hit biofuel producers, "as basically all of them sell in the Argentinian market at peso, but with a price ceiling," an industry source said.

"That raised their costs once they could not translate it [devaluation] into prices. Many biodiesel producers halted operations," the source said, adding that the government-fixed price has already been revised up, allowing the industry to resume activities.

A government plan to offer farmers a preferential foreign exchange rate for exporters did boost soybean sales in late 2022 and early 2023. A similar program was announced for September 2023 but without a fixed foreign exchange rate.

A Milei victory promises the elimination of provincial, gross income and value added taxes but its implementation is "unlikely" due to a lack of political support on the provincial and congressional level, Pera said.

Agriculture market participants expect more status quo from Milei's two leading opponents.

"The agriculture sector will be exposed to policy volatility in the first few months of the new administration with low predictability," Pera said.

Platts assessed the Argentinian soybean oil FOB Up River price at $891.77/mt on Oct. 6, down 29.1% year on year. Edible oil is the main feedstock for the Argentine biodiesel industry, which has a minimum mandatory blend into diesel of 7.5%.

Change is the only certainty

The presidential race will come down to two right-leaning candidates, Bullrich and Milei, against the current ruling party under Massa. A candidate needs 45% of the vote or 40% plus a 10-point difference over the runner-up to win on Oct. 22, otherwise a runoff will be held Nov. 19. The new president will take office Dec. 10.

Expectations are rising that the election will bring some economic relief, said Schreiner Parker, managing director for Latin America at Rystad Energy.

"There is a general acknowledgement that something is about to change dramatically because the status quo is no longer sustainable," Parker said. "The electorate is desperate to find something different."

S&P Global Commodity Insights reporter Eri Silva produces content for distribution on S&P Capital IQ Pro.