Record of copper whets the appetite: More spending? Sell Codelco?

Value of the state company is equivalent to the first two withdrawals of the AFPs

The historical price of the metal brings new (and old) political discussions about how to harness resources. The royalty approved yesterday in the Chamber is the first.

Today copper reached its highest price in history, reaching US $ 4.7 a pound on the London Metal Exchange. And the idea that it would be entering a new super cycle, as in the past decade, is gaining more and more force. “Copper is the new oil,” Goldman Sachs Bank said just over a month ago.

But in Chile, the largest exporter of this “new oil,” a new super cycle not only represents higher revenues for the treasury (just at a time when it needs them). It also revives the political discussion on how to take advantage of it. The new mining royalty -project entered in 2018 but whose discussion was resumed just with the price hike and that the Chamber of Deputies approved yesterday- is just one example.

Added to the new tax are other pressures that have already been felt, such as increasing fiscal spending. And another, which timidly arises from time to time: an eventual privatization of Codelco.

Save or spend?

The injection of resources that the treasury could receive with a super cycle leads to a key question at the political level: should they be saved? Or should they be used to increase spending? This question, however, seems to have an answer shared by experts of different tendencies: the existing mechanisms have still worked well and there is not much room to innovate.

“We must maintain the instruments we have for the use of copper resources, they have been very effective,” says economist Álvaro García, advisor to the PPD presidential candidate Heraldo Muñoz and executive president of the public-private organization Alianza Valor Minero. He warns that the deficit presented by the treasury is so high that it will not be able to be covered only by a higher price of copper. “I don’t think it is convenient to plan anything new based on this higher transitory price. The decision on how and how much to support families to cope with the economic effects of the pandemic is different. Giving agile and sufficient support is an imperative, with or without a rise in the price of copper ”, he adds.

Thus, the fiscal rule and the savings instruments that have been used would be enough to take advantage of a new super cycle. “We have a fiscal rule that incorporates copper: all fiscal resources are saved when the price exceeds its long-term value,” explains Manuel Agosin, an academic at the University of Chile. These resources go to Chile’s sovereign wealth funds abroad and, when the price is below its long-term level, the Government can use them.

“In Chile there is a fiscal framework that clearly indicates the way copper resources are managed,” agrees Hermann González, macroeconomic coordinator at Clapes UC and who worked at the Ministry of Finance in the current administration. He explains that this is helping to finance public spending and that it reduces dependence on other forms of financing, such as public debt. And, if there is an increase in the long-term price estimate, there will be more space to spend starting next year.

González also highlights that there are already funds to which copper resources are destined and that they would be working. The asset accumulation rule states that copper resources must first go to the Pension Reserve Fund, with a maximum of 0.5% of GDP, and the difference, if any, goes to the Economic Stabilization Fund and Social. “The funds exist and they were precisely where savings were made in the previous super cycle and that is where we are getting the resources to face this crisis,” he adds.

Where they do believe there must be changes is in the details. And, specifically, in the way in which the long-term price of copper is calculated. Agosin notes that the calculation has a bias towards recent values. “It means that not enough is saved in bonanzas or enough is dissaved in periods of downturn,” he warns. The problem, he adds, is because it is consulted but there is no more objective way of calculating. “It should be explored in a less subjective way,” he says.

Codelco’s value compensates the first two withdrawals

A new super cycle would lead to high surpluses for Codelco. Just a week ago its results for the first quarter were released and they set a record in a decade for the state company. Something that whets an appetite for Codelco to stop being exclusively of the State. This idea is not new, but it has reappeared in columns and interviews due to the urgency of resources to face the economic crisis caused by the pandemic.

And it is that the valuation of the company overshadows any aid package that the State can deliver and is only compared with the magnitude of the withdrawals of funds from the AFPs.

The consulting firm Plusmining estimates that Codelco is valued today at about US $ 35 billion, more than twice the US $ 16 billion fund with which the Government has financed the measures to face the pandemic, and practically equals US $ 37 billion. that at the end of April the Superintendency of Pensions reported as withdrawals after the two laws that allowed pension savings to be drawn from the AFPs. As a comparison, the world’s largest mining company, BHP, is worth US $ 234 billion on the stock market and the Chilean Antofagasta, from the Luksic group, US $ 18.690 million.

On the occasion of the first withdrawal of the funds, last July, the UDI bench of deputies presented a document in which they argued that the sale of Codelco “would allow a very relevant income for the State, and that it could be used for social benefits. Likewise, privatization could continue to generate surpluses for the State, through the collection of taxes ”.

Others on the right, such as the presidential candidate for Evopoli, Ignacio Briones, have been in favor of studying a partial privatization of Codelco, as he explained to a local media in Antofagasta in early April.

But the idea has not only hovered in the ruling party. In 2005, Codelco’s executive president at the time, Juan Villarzú (DC), was in favor of privatization. “When I say private investment, I am talking about Chilean and foreign pension funds that can participate in the growth (of Codelco) through capital increases,” he told El Mercurio. The same year and shortly before he took the reins of the state company, the also DC José Pablo Arellano pointed in the same direction in a column in the same newspaper: “Codelco, without losing its public character, would receive healthy pressure from the eye daily life of the markets. I am sure that this would provide an injection of improvements in efficiency and therefore in profits for all Chileans ”, said the current Cieplan researcher about the benefits of issuing company shares.

To the political challenge that privatization would imply – within the same union bench there was criticism of last year’s proposal – are added the complexities of a turn of that magnitude.

Marcos Lima, former Codelco chief executive in the Frei Ruiz-Tagle administration, has been in favor of the copper company going public, but not now: “Changing Codelco’s institutional framework means a giant effort. I don’t think this is the moment ”.

Privatization could also create imbalances in the industry, warns Juan Carlos Guajardo, executive director of Plusmining. “Chile has a successful state company, significant private mining and a good number of SMEs. Eliminating one of these three elements would produce a lot of tension in discussions such as the royalty or political pressure that would make the development of copper mining in the country very difficult ”, he adds.

Source: La Segunda

Translated with Google Translator