The “fragile” breath that copper gives to public finances

Experts do not know whether or not to sing victory yet, as global uncertainty still persists.

Copper has been one of the few good economic news that Chile has had in recent months. With 90 days of sustained price rises, economists are already evaluating whether the value of the red metal can translate into support for activity and public finances. For the answer there are divided opinions.

Exactly three months ago, on March 23, the price of copper bottomed out on the London Metal Exchange. At $ 2.1 a pound at the time, the low price of the metal was explained by the most intense days of the covid-19 pandemic in China, the world’s largest copper consumer. But, since then, it has risen 27% to reach US $ 2.7 a pound, a level that it has not registered since January, when the first cases of contagion of the virus began to be confirmed outside the borders of the Asian giant.

“Copper is rising mainly because China, which was the first country to be hit by the pandemic, is now emerging from it and reactivating. That revival came with strong demand, because it caught the Chinese with low copper inventories. They had to import immediately. The copper shipped in January and February, which we thought they were going to cancel, ended up receiving it completely in China, ”explains the director of companies and former CEO of Antofagasta Minerals, Marcelo Awad.

“China went from consuming 50% of the world’s copper, during its worst time with the virus, to 70% now. It is an important recovery. Financial investors also went from more safe-haven assets to taking positions in copper, ”says Plusmining CEO, Juan Carlos Guajardo, as another reason.

The doubts that persist

In its latest Monetary Policy Report, the Central Bank projected a contraction of between 5.5% and 7.5% for the Chilean economy in 2020. That calculation, however, was made with a copper value of US $ 2.5 , which was left behind on June 8. The recent increase may undoubtedly give a little respite to the national economy and may help public finances somewhat.

“Every 10 cents a year on average more in the value of copper, is US $ 240 million of additional tax revenue. Without a doubt, this is good news among many bad news, which will somewhat attenuate the negative effect. The question is how sustainable this recovery is. Until we have a vaccine, I think it is a rather fragile recovery, ”says Clapes-UC economist Hermann González.

One of González’s concerns is in the copper production figures. If it were affected by the pandemic in Chile, which is something that some experts in markets project: there would be a lower offer that would translate into higher prices in the world market, but also in lower income for our country. According to Cochilco, Chile’s copper production represented 28% of the world total in 2019.

Until now, production levels have not raised red flags according to Cochilco, which registered 1,873,500 tons as of April, which meant a 3.8% increase compared to the same period in 2019. The virus has not spread to mining companies, yet .

But the technical body predicts a decline of 200,000 tons of production by 2020, to 5.8 million tons.

“Chile has been able to maintain its production, but we are beginning to see problems in the mines,” says Guajardo.

On Monday, Codelco announced that the El Teniente Division agreed to an exceptional 14×14 day, to reduce the risks of contagion. On Saturday, the copper company announced the arrest of the Northern District projects and the operation in Chuquicamata only with Calama personnel.

“The supply factor is important. Companies will begin to take receipts, “adds González.

As for the medium and long term, the main questions are in China’s resilience. Despite its current state of reopening that has fueled demand for commodities, economists still don’t know how deep and persistent the effect of the pandemic will be on the Asian giant’s economy and on the global economy.

“The doubts are in China’s resilience. The tools available today are less in magnitude than they were in the crisis of 2008 and 2009. I believe that the recovery of copper in the short term is due more to expectations and containment of particular negative events, as yesterday, for example, when Donald Trump said the trade agreement with China was not touched. I think that being optimistic today about the price of copper could be difficult, ”says BCI economist Antonio Moncado.

From Cochilco, the calculation made by its executive vice president, Marco Riveros, is that for every penny of a dollar per pound increase in the price of copper, a higher tax collection of the order of US $ 60 million is generated. “Regarding whether the increase that has been observed in the last month is sustainable. The answer is affirmative, as long as some current conditions that explain the increase are verified, “says Riveros.

Source: La Segunda

Translated with Google Translator