Chile does not face a threat to its position as the world’s leading copper producer, but low prices are taking a toll and increased output from competitors in the region could sustain the downturn.
Copper accounts for around 50% of Chile’s exports. Earnings have dropped as the price has sagged and production costs risen. The price of copper stood at $2.34/pound at the start of October, down from $3 a year ago and a high of $4.5 in 2011.
The low price/high cost combination has led big companies operating in Chile, such as Anglo American and Glencore, to announce big cutbacks.
Glencore started talks in September to sell part of the future production of Chilean mines in streaming deals to raise cash. It would receive cash up front in exchange for a fixed amount of the future production at a discounted price per unit.
“Four or five companies have already announced cutbacks in the past few weeks, and that is part of the effect of the shock,” said Rodrigo Valdés, Chile’s finance minister. “It is bad news, but we cannot jump to conclusions. I worked in government in the early 2000s when the price of copper was $0.60 and we still had revenue. The challenge is to adapt to this in the least painful way possible.”
While companies in Chile sort through the problems, in Peru new projects will nearly double output from the present 1.3m tons by the end of 2018.
Freeport McMoRan is finishing a $4.6bn expansion at its Cerro Verde mine, which will bring production close to 500,000 tonnes/year, while the nearly $10bn Las Bambas, in the works by China’s MMG, will add another 400,000.
Two other greenfield projects that have ramped up this year will add similar numbers. Output has increased by an average of 30% in the past two months.
The Peruvian government expects mining to add at least one percentage point to GDP expansion next year. The additional 1m tons a year will eventually help the country reverse the trade deficit that has widened in recent years as revenue from copper – as well as gold, the country’s second export – has declined.
Panama, not known for mining, will soon debut as an extractive nation with the completion of its first large copper mine. Canada’s First Quantum is investing $6.4bn on the 320,000 tonne/year mine that will open in 2017.
Finance minister Dulcidio De La Guardia said mining would add a new revenue stream that should keep the country’s economy chugging along at above 7% a year, picking up some of the slack from the end of work on the expansion of the Panama Canal. The expansion will conclude in April 2016.
“Mining is going to become another component for our growth, which will include, among others, infrastructure and new services related to the expansion of the canal,” said De La Guardia.
Joydeep Mukherji, Standard and Poor’s managing director for Latin America, said the impact of mining in Panama should not be overlooked. “Investment in the copper mine is above $6n. That is even more than the canal. It is going to have a substantial impact for Panama in the decades to come,” he said.
Chile’s Valdés said that while the new conditions were tough, it was important to keep in mind the economy was cyclical.
“The bottom line is that external conditions are much more complicated than in the past, and I would say that they rotated from being clearly positive to slightly negative and are becoming more and more negative,” said Valdés. “But the prices will not be low forever and companies will adapt and become profitable again.”