|
Far-right, libertarian economist Javier Milei's victory in Argentina's presidential election could be a major boon for the nation's oil and mining sectors if the new president is successful in getting his deregulation agenda approved.
After defeating the more moderate Sergio Massa in the Nov. 19 runoff election, Milei will now have a chance to implement his platform that involves severely reducing the size of the government and backtracking regulation, claiming these will control Argentina's neverending economic crisis.
Inflation reached 142.7% at the end of October, data from the country's central bank shows.
Industry participants in key commodities segments — such as oil and gas and battery minerals — are hopeful that they would benefit from Milei's plan to remove export taxes, free up access to the foreign exchange market and unify the country's multiple exchange rates.
"Even though businesses will continue to struggle with adverse macroeconomic conditions, at least in the first couple of years of the new administration, opportunities will offset risks in resource-rich sectors, like mining, which are key to bring in [much-needed] export dollars," Marina Pera, an analyst at global risk consultancy Control Risks, told S&P Global Commodity Insights in an email.
Tackling foreign exchange rates, import restrictions
Miners and oil and gas companies have struggled with Argentina's complex foreign currency exchanges. Argentina's currency exchange controls, imposed by previous administrations to slow foreign currency reserve outflows, have resulted in a thriving black market for US dollars and a baffling web of legal exchanges that industry participants say hampers foreign investment.
Milei has promised to eliminate capital controls and create a more transparent and liquid foreign exchange market, something business participants say they have longed for.
"The foreign exchange was an enormous pain," Carlos Vicens, CEO of Full Circle Lithium Corp. and former CFO of Neo Lithium Corp., told Commodity Insights at Benchmark Week 2023, held Nov. 14–16 in Los Angeles. Neo Lithium operates in Argentina and was bought by Zijin Mining Group Co. Ltd. in May 2022.
Volatility from the chaotic exchange system meant "all of a sudden, your $100 million is worth $50 million. ... You can't do business in a country like that," Vicens said.
The mining sector's development has also been hindered by strict controls on bringing in capital equipment. Argentina has an 8% export tax on mining products and a tough import tax on capital goods, both of which Milei has promised to remove.
Argentina holds the world's largest lithium reserves and resources, yet it produced only 35,046 metric tons in 2022, ranking fourth globally behind Australia, Chile and China, data from S&P Global Market Intelligence shows.
"The elimination of export taxes in particular would make Argentine products more competitive on the international market," Hxagon research analyst Arianna Kohan said. "Additionally, if Milei is able to implement his dollarization policy, commodity producers would likely seek to increase exports immediately and begin earning in dollars instead of the weaker [Argentine] peso," the analyst said.
Reality setting in
Milei has already eased off some of his most radical proposals: At a Nov.12 presidential debate, he appeared to recognize that his push to privatize oil and gas production in the Vaca Muerta shale play would need to be approved by the provinces, as stated under the law.
"Obviously, the topic of Vaca Muerte is a provincial question. I don't have to get involved," Milei said at the debate. Vaca Muerta is in a
Milei's backpedaling echoes analyst sentiments that his commodity policies could be difficult to implement due to his lack of support at the federal and provincial levels. Milei's right-wing La Libertad Avanza party is in the minority in both chambers of Argentina's legislature.
"I compare Milei's agenda to Google's old slogan, 'move fast, break things,' but the president cannot necessary break things that aren't his to break," Christopher Ecclestone, mining strategist at Hallgarten & Co., told Commodity Insights.
Further, the political divide has deepened, and protests by Peronist supporters and local communities in mining regions will likely only increase. Social unrest would be "disruptive to all businesses, including in the strategic energy, mining and agriculture sectors," Benjamin Gedan, director of the Latin America Program at the Wilson Center, a nonpartisan think tank, told Commodity Insights.
But Gedan is optimistic that Milei's policies will benefit commodities producers in the country.
"The [lithium] industry could attract even more capital should Argentina's new authorities eliminate capital controls," Gedan said. "A more stable economic climate would make it easier for energy companies to operate, including by lowering the cost of borrowing for projects in Vaca Muerta."
S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.