Copper price almost doubles in one year and risk rating agencies see better prospects for GDP in 2021

Copper price touched US $ 4 yesterday on the London Metal Exchange.

Experts point to better prospects for the fiscal coffers this year, in addition to faster progress in reducing the effective fiscal deficit. However, the agencies avoid referring to an eventual improvement in the risk score.

Copper has been showing a significant advance in its price for many months now. This situation led to – for the first time in seven years – more than 50% of what our country exported in 2020 came from the red metal. These sustained increases in the value of the pound of copper have been transferred steadily towards the beginning of this 2021, hand in hand with the reactivation of economic activity at a global level, with China being the main protagonist.

Yesterday, the value of the pound of copper closed on the London Metal Exchange at US $ 3.99, with a daily increase of 1.81%. This level represents an increase of 91% compared to the lower price registered in March last year, when it closed at US $ 2.1. In other words, in less than a year, copper almost doubled in value.

The last time copper was priced that high was in September 2011, when it rose to $ 4.04 a pound. The new push that the country’s main export had was the massive purchase of the mineral by investment funds from China.

At a time when the Chilean economy aims to recover the impact that the pandemic has generated, the rise in the price of copper is highly relevant.

In the opinion of the main sovereign risk rating agencies that evaluate the country, the sustained rise of the red metal could lead to an increase in income for this year, but also to a higher growth than projected for GDP in 2021.

In the middle of this week, the sovereign risk rating agency Moody’s updated its growth prospects for this year, going to 5.8%. The agency’s analyst for Chile, Ariane Ortiz-Bollin, explains that a slightly higher range in copper prices will have a positive impact on ChiLe’s growth prospects given the importance of this metal as a growth engine in the country. “This is one of the reasons why we improved Chile’s growth outlook in 2021,” says the analyst.

A similar view is held by Fitch Ratings analyst Richard Francis, who observes that the higher price of copper could lead to higher prospects for economic growth by 2021 and will also help government finances on the margin. This, since according to the analyst explains, copper revenues only represent around 6% of total government revenues.

In the latest Public Finance Report (IFP), the Budget Office estimated a value of US $ 3.35 per pound of the average metal for this year. However, so far in 2021, copper averages US $ 3.66. Thus, with the price level estimated by Dipres, it would represent contributions – adding Codelco and the taxation of private mining – for US $ to the income of the Treasury.

For this year, one of the goals is to reduce the country’s fiscal deficit. 2020 closed with a reduction to 7.4% of GDP and this year is expected to decline, achieving a decline to 3.3% of GDP.

Along these lines, in its report, Moody’s expects the fiscal deficit to be lower in 2021 than they had previously anticipated, although it remains higher than what the Government currently expects, “We expect the fiscal deficit to be 4.6% of GDP compared to the government’s forecast of 3.3% of GDP ”, the entity projects.

Possible impacts on the rating

Arianne Ortiz-Bollin comments that the sovereign rating takes many factors into account at the same time and has a medium-term horizon, so it is difficult for a change in a single indicator to affect the perspective of the rating or the rating itself. Moody’s currently has an “A1” rating with a negative outlook.

During 2020, Fitch was the first of the three major agencies to evaluate the country that lowered the risk score from “A” to with a stable outlook. For Patricio Rojas, partner of Rojas y Asociados, the better economic prospects that are generated on copper, lead the risk rating agencies to see the country with a somewhat more favorable outlook. “This may lead to a possible downgrade that Fitch already made, and that could be done by Moody’s or Moody’s, causing this issue to be reviewed and those agencies keeping the current rating constant,” he says.

For his part, the studies manager of Gemines Consultores, Alejandro Fernández, points out that, although the short-term outlook improves, it is essential to avoid a new reduction in the risk classification that there is a process of fiscal consolidation in the medium term. “This means that, as of 2022, a credible program to reduce the deficit (structural and effective) in the medium term should be established, which will limit the growth of the debt,” the economist analyzes. The rise that copper has been accumulating led to updating the projections for the price of the red metal for the next few years. A report by Banchile Inversiones pointed out that Citi Bank estimates that the price of copper would average a value of US $ 4 per pound this year and next, from the US $ 3.4 it estimated for 2021 and US $ 3.6 for 2022 “The strong increase in the price of the commodity in the last 11 months is mainly explained by the recovery of economic activity in the main copper consuming economies, after the sharp falls observed between the first and second quarters of 2020,” they say. from the entity.

Chinese momentum and supply disruption concerns put price pressure

Economic recovery

The main reason behind the untimely rise in the price of copper is related to the accelerated recovery, after the impact of the pandemic, which is having the Chinese industry, the first global consumer of the mineral.

The latest push came from the return of Chinese workers to factories after the Lunar New Year break, a holiday that unlike in previous years and as a consequence of the pandemic and travel restrictions imposed by the government, they impacted to a lesser extent the productivity of the industry.

The executive director of Plusmining, Juan Carlos Guajardo, points out that the rise this Friday was caused by the interest of Asian investment funds in betting on copper, “which is a very optimistic sign, because if the funds are seeing this it is because they have a very good expectation of future demand ”, explains the expert.

XTB Latam’s head of investment analysis, José Raúl Godoy, adds that copper is expected to continue rising over the next few weeks. “This rise in the price responds to two factors, mainly, the best growth projections globally, especially in China and the United States, and, in turn, a shortage of the mineral is expected for the next few months. This is why we estimate that demand will remain strong. ”

Projects shortage

Another reason that has underpinned the price of the mineral is concern about how tight the market is. This is because the entry of new projects is not expected in the short term – with the exception of Spence, from BHP – that could considerably increase the offer.

According to Cochilco’s projections, this year Chile, the main global producer, is expected to register a growth of 3.6%, with a production slightly below 6 million tons.

Concern about the risk of stoppages

In the political environment seen in Chile and with antecedents such as the strike at the end of 2020 at Minera Candelaria, there is some concern about possible strikes, in a year full of collective bargaining, with more than 30 processes that will involve more than 20 thousand workers Within these processes are mining companies as representative as Escondida, from BHP, almost all Codelco divisions, and Minera Los Pelambres, from Antofagasta Minerals.

Source: El Mercurio

Translated with Google Translator