After the Asian giant retaliated against the U.S. tariffs on Wednesday, the price of red metal recorded a sharp 6% drop, reaching levels that could pull the annual average below the value used to estimate Chile’s fiscal revenues for the year.
By Víctor Guillou
Copper prices suffered their steepest drop in more than five years this Friday, nearing the US$4 per pound mark, which could complicate Chile’s fiscal accounts.
This was reflected in a report from the Chilean Copper Commission (Cochilco), which placed the spot price per pound on the London Metal Exchange at US$4.005 — its lowest level since January 3. This marked a 6.06% drop, the sharpest decline since March 18, 2020, when markets plunged due to the Covid-19 pandemic.
The deepening of the trade war has set the tone. Two days before the so-called “Liberation Day,” the red metal had already fallen 9%, and after the sharp downward move, the annual average stood at US$4.237 per pound. This level raises questions about how lasting this downward trend may be, as well as possible fiscal effects, given that the commodity is Chile’s top export product.
Impact on Global Economy
According to experts, the sharp drop in copper is “mainly due to the domino effect of trade tensions on the global economy. Markets are reacting to the risk of a broader economic slowdown, which could reduce demand for industrial metals,” said Juan Carlos Guajardo, executive director of consultancy Plusmining.
He added that “China’s retaliation against U.S. tariffs significantly increases the risk of a prolonged trade escalation, which could affect copper demand on multiple fronts.” Since China is the world’s largest copper consumer, “any measure that harms its industrial activity or economic confidence will have a direct impact on prices.”
Looking ahead, Guajardo said copper prices “will depend critically on how trade tensions evolve,” where a continued escalation would maintain downward pressure “due to expected lower demand and increased risk aversion in the markets.”
“Factors such as global inventories, mining production in Chile and Peru, and central bank monetary policies will also play a key role,” Guajardo concluded.
Meanwhile, Juan Ignacio Guzmán, CEO of GEM Mining Consulting, noted that the drop seen in London was within “the levels we had anticipated,” but that US$4 per pound is seen “as the steady-state price if there were no tariffs or only minor ones.”
“As tariffs on China are significant, and China is responding with equivalent tariffs, I think current expectations point toward a potential inflationary spiral, followed by a recessionary phase that could sharply lower international prices — not just for copper,” he added, recalling that copper is dubbed “Dr. Copper” in markets “because it’s a very good barometer of the economy.”
Looking ahead, Guzmán is hopeful that China’s response may lead to negotiations for “more reasonable tariffs with the United States that won’t affect both markets,” though he also acknowledges that a greater escalation is possible.
Fiscal Impact
If the downward trend in copper prices continues, it could impact fiscal revenues. This is because the 2025 budget was based on an average price of US$4.26 per pound — close to current levels.
Despite this, economists see some relief from strong prices during the first quarter. “During the first three months of the year, actual revenues from copper activity have exceeded estimates,” said former Budget Director Matías Acevedo, who nonetheless warned that “a lower level of activity during the rest of the year could affect copper demand and have a negative impact on effective revenues for the remainder of the year.”
Asked about it, he dismissed the idea that current copper prices would create a need for greater fiscal adjustment beyond the US$1.5 billion already identified by the Autonomous Fiscal Council. However, structurally speaking, Acevedo reminded that the price assigned by the expert committee for the 2025–2034 period was US$4.09 per pound.
“The level of public spending is determined by structural revenues, which assume a copper price of US$4.09 per pound over the medium term. In the short term, a price drop shouldn’t force a spending cut due to this situation. But it will pressure public debt, since the government will have fewer copper revenues to finance the deficit, and the higher exchange rate will affect the portion of public debt denominated in U.S. dollars,” Acevedo said.
Meanwhile, Juan Ortiz, Senior Economist at OCEC-UDP, emphasized that the annual average price is still close to the forecast in the latest Public Finance Report from the Finance Ministry. “The price hasn’t significantly deviated from the expected annual average, so the impact we’ll see is more about expectations,” he said, adding that the situation “doesn’t necessarily imply an additional fiscal adjustment.”
Along those lines, Ortiz also agreed that “the structural balance is determined by structural revenues,” highlighting that “the abrupt change we’ve seen today won’t necessarily alter the baseline scenario for 2025.”
That said, he acknowledged that “the real risk isn’t so much today’s drop, but the possibility that it deepens in the coming days.”
Source: La Tercera