Experts agree that the price of the commodity will remain around current levels and that Dipres’s estimate of its contribution to tax revenue is too conservative.
The sustained advance that the price of copper is showing has led some to dream of a new mining “super cycle”, like the one experienced between 2003 and 2014. A new boom in metal prices would be an almost magical solution to refill the sovereign wealth funds, reduce debt and solidify stressed fiscal coffers.
With their feet on the ground, experts call for caution about a new boom. “Probably not,” responds the executive vice president of the Chilean Copper Commission (Cochilco), Marco Riveros, to the query on whether the rise in copper could indicate the start of a new supercycle.
In his view, the price of the metal is being driven by a weaker supply, low inventories available in metal exchanges, the depreciation of the dollar and the expectation of an economic recovery in 2021 if the pandemic is overcome.
Although he does not rule out that in the short term the metal may continue to rise, the Manager of Studies of the National Mining Society (Sonami), Álvaro Merino, specifies that the rapid increase in the recent price “is mainly explained by the strong promotion of investment funds “. It also warns that a significant supply of copper will enter the market next year and that global economic and geopolitical risks remain that could affect its price.
It is not repeated
Plusmining CEO Juan Carlos Guajardo sees it likely that we are at the beginning of a new phase of high prices, although not of a “super cycle” as Goldman Sachs projects. “To speak of a supercycle, we would have to compare what happened between 2003 and 2011, which was an extraordinarily strong period for the price of copper, but under conditions that are very difficult to repeat,” he says. He explains that in those years, the takeoff of the Chinese economy triggered demand for copper, which raised the price when the industry failed to expand its production at the same rate.
“Today there is no vision of an equivalent expansion of said economy that will give permanent and growing boost to the demand for copper”, estimates Marco Riveros. It specifies that although the irruption of electromobility and green energy technologies, driven by the effects of climate change, generate more copper consumption, it would not be enough to make it equivalent to Chinese demand in the supercycle.
Guajardo adds other factors that could help sustain the price at high levels, including that it is difficult for the mining industry to respond quickly to higher prices.
“It is not so easy to expand production as there has been low investment in recent years and there are more difficulties in developing mining projects due to social and environmental demands,” he says. Furthermore, the global decarbonisation increases the demand for copper, while the stimulus plans adopted by the monetary authorities constitute a “tail wind” for copper, attracting new investors who seek it as a financial asset.
Outlook for 2021
Still, there is optimism. The vice president of Cochilco explains that in October they projected that in 2021 the average annual price would be US $ 2.9 per pound, although they warned that certain market conditions could raise that estimate. “We have seen that these conditions have been met, so probably in our January report the projection will be corrected upwards,” he said.
Álvaro Merino estimates that due to the expected increase in supply and a slight increase in demand, the price of copper should close 2021 with an average price of less than US $ 3.5 per pound. But he argues that there are risk elements that could push down the price of copper, such as the effects of a second wave of Covid and geopolitical tensions between China and the United States. “These tensions are likely to ease under the new president of the United States, Joe Biden, but they will not disappear,” he says.
Plusmining’s CEO estimates that the metal will likely be priced relatively high over the next two years. For 2021 it aims for an annual average of US $ 3.35 a pound, the highest price of the commodity since 2012.
Although a higher copper price is good news for the fiscal coffers, there is a discrepancy when estimating this impact.
In June 2019, the Budget Office updated the effect of copper price variations on tax revenues. “There was a time when a penny less in the price of copper was equivalent to US $ 60 million, but today our best estimate for 2019 is US $ 24 million,” the head of Studies at Dipres, Cristóbal, told PAUTA then. Gamboni. From the agency they specify that the estimate is still valid.
But in the world of copper, not everyone shares that estimate. “Our calculations indicate that above a certain level of copper prices, for each additional cent that the price of the metal increases, the fiscal coffers increase by US $ 60 million, which is explained by US $ 38 million from Codelco surpluses and US $ 24 million for private mining taxation “, affirms the Sonami Studies manager.
Juan Carlos Guajardo’s numbers also differ. In his case, he used Cochilco data on the price of copper, contribution from large private mining and Codelco to build an econometric model for different periods. “The most representative data, because it is for a long period of time, is that between 1999 and 2019 each additional penny that is maintained for the entire year translates into an extra US $ 40 million for the Treasury,” he says. For the last decade, he adds, the contribution would be around US $ 60 million.