With the measure proposed by the Government, companies in the sector would go from recovering 100% of the specific diesel tax to only 31%, leading to an increase in their costs.
The largest mining companies operating in Chile, grouped under the Mining Council—which includes firms such as BHP, Anglo American, Codelco, Glencore, and Freeport McMoRan—have taken a stance against the proposed change to the diesel tax put forward by the Government to address rising fuel prices, warning of a disproportionate impact on the industry.
Through a public statement, even titled “Position of the Mining Council regarding the bill on fuel prices,” the association’s president, Joaquín Villarino, stated that the initiative “distorts” the design of the diesel tax and that “it is not equitable to alter a tax to selectively burden strategic sectors, affecting their competitiveness.”
To contain the rise in gasoline prices resulting from the war in Iran, the Government seeks to “temporarily suspend the differentiated tax credit regime between transport and non- transport companies,” applying to all the scheme currently in place for transport companies.
Thus, in medium and large-scale mining—where the largest non-transport diesel-consuming companies operate—firms would go from recovering 100% of the specific diesel tax to only 31% under the new regime.
Viewed another way, as Villarino explains, this would imply “a payment of 69% on the rate of 1.5 UTM,” meaning that “the industry would contribute around US$100 million in just six months, which implies that mining would bear 74% of the total cost of the measure.”
According to the financial report of the project submitted to Congress, this particular measure would generate fiscal revenues of CLP 124.463 billion (US$137 million) during its validity, which would last half a year or until the market disruption ends.
“This surprising measure adds to the one implemented by the previous Government to finance electricity bills for regulated customers, in which mining also assumed, without justification, a significant portion of the amount involved,” aid the head of the Mining Council.
Although the association emphasized that it values efforts to mitigate fuel prices, it expressed opposition to being the industry that predominantly finances the measure. “Therefore, we trust that the search for additional public resources can be oriented toward mechanisms that safeguard the economic signals necessary to promote investment and the country’s growth,” they stated.
For its part, the National Mining Society (Sonami) declined to comment on the measure.
Current regime
Today, mining is treated as a non-transport company “because diesel is used in equipment operating on-site and not on public roads. Under this regime, it recovers 100% of the specific diesel tax used in its operations,” explained Plusmining senior analyst Juan Cristóbal Ciudad.
In this regard, Villarino also emphasized that “it is necessary to clarify that fuel consumption in productive activities does not enjoy an exemption; rather, by technical design, this tax seeks to compensate for the use of public roads, which mining machinery does not use.”
In fact, he added, “all land transportation used by our sector pays the corresponding specific tax.
Thus, the Government’s proposal temporarily suspends the industry’s current treatment and aligns it with the regime for freight transport companies. “For medium and large-scale mining, this would mean that only 31% of the tax would be recoverable and the remaining 69% would become a cost,” explains Ciudad.
Cost impact
According to Plusmining estimates, the impact on Chile’s copper mining sector would be around US$190 million if applied for a full year.
“On a unit cost basis, the estimated increase is 1.6 cents per pound of copper, or about a 1% increase in C1 cash cost,” Ciudad told DF, reducing the industry’s competitiveness.
According to Cochilco figures, within fuel consumption in copper mining, diesel accounts for 92%, showing that it is by far the dominant fuel in operations.
In terms of its importance within operating costs, fuels represent around 6% of operational costs in Chile’s copper mining.
In light of this, Ciudad explained that, from an economic perspective, the measure worsens cash costs, hitting more heavily operations intensive in material movement, especially deep open pits and lower-grade operations, where diesel weighs more per ton produced.
On the other hand, he warned that “if this measure ceases to be temporary, the higher cost could push some marginal operations to raise cut-off grades, with potential impacts on exploitable reserves and mine life.”
Finally, the expert stated that “a scenario of higher diesel prices would improve the relative profitability of electrification projects or substitution with other fuels, accelerating the decarbonization agenda.”
Source: Diario Financiero