Copper bonanza challenges Chile, the largest producer mired in political turmoil

Infrastructure plans in industrialized countries and strong Chinese demand are driving the price of copper, which this week reached its highest in a decade, amid unrest in the market due to the impact of political tensions on the supply of Chile, the world’s top producer .

The commitment that is announced for renewable energies and electromobility, very intensive in the use of the red metal, together with the strong rebound in activity in China, contributed to copper trading above $ 10,000 per ton, at levels not seen since 2011.

Thus, the market is looking closely at Chile, which provides more than 25% of the world supply of the red metal.

The recent bid between the government of Sebastián Piñera and Congress for the law that allows a third withdrawal of pension funds has revived social protests. The proposal for a new mining royalty and the prospects for regulatory changes that open the process to draft a new Constitution, arouse concern among investors.

“In recent days there has been more awareness at the international level and more concern” about what is happening in Chile, Juan Carlos Guajardo, director of the consulting firm specializing in mining Plusmining, told AFP.

“Elements are coming together that make investors adopt a more cautious position,” he added.

However, for Elijah Oliveros-Rosen, senior economist at Latin America S&P Global Ratings, there should be no concerns on the supply side, since although there have been strikes in recent years and they have affected copper prices, they tend to be short-term conflicts.

This analyst believes, however, that the transition to less polluting forms of energy “could lead to a rise in copper prices for some time.”

At the same time, a project promoted by left-wing legislators is advancing in the Chilean Congress that aims to increase taxes on mining to finance social plans, which further set off alarms in the market.

The industry ensures that it operates at the limit of the tax burden and asks to respect legal stability.

In Chile there is already a specific tax on mining activity “therefore, there would be two specific taxes, which would be a non-negligible burden. From then on, we would be entering difficult terrain for the mining industry,” warns Guajardo.

Increase in production

Despite the pandemic and an estimated 10% drop, last year Chile’s copper production reached 5.7 million tons, stable over 2019. For 2021 the projection is 5.9 million tons. As for 2022, the expectation is 6 million tons, estimated the Minister of Mining and Energy, Juan Carlos Jobet.

The projected investment supports production expectations. In the next two years, 19 private and public mining projects will be in execution or will begin construction for 14,000 million dollars.

The complete investment portfolio 2020-2029 includes 74,000 million dollars, according to the official cadastre.

Copper represents for Chile about 10% of its GDP, half of its exports and employs 8% of the workforce.

The rise in the price of the metal led the government to increase the GDP growth forecast for this year from 5 to 6%, as well as the projection of tax collection.

“In a normal year, we would have saved the greatest effective income, but this year we are using them quite intensively” in the fight against the pandemic, explained Finance Minister Rodrigo Cerda.

Future horizon

Beyond the rise in prices, analysts doubt that it is a new “super cycle” like the one in 2004 and 2014.

“I don’t think it is a rising cycle. There are supply problems and growing demand and a supply that due to the pandemic has not been able to grow. I think this is not going to last that long,” Claudio Loser, of the Centennial Group consultant and former head of the IMF’s Americas Department.

Regarding the impact of the constituent process, which managed to channel the social protests of October 2019, Loser believes that it is still “very difficult to know what will happen.”

But for Guajardo it is a “relevant change process that will have a significant duration, and that will generate uncertainty and will probably have an impact on investment” in Chile.

Source: France 24

Translated with Google Translator