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CHILE: End of the Copper Boom

Daniela Estrada

SANTIAGO, Jan 9 2009 (IPS) - Chile’s anti-crisis plan, announced this week, is based on windfall copper earnings saved up over the last few years. But soaring copper prices are a thing of the past, due to the global economic meltdown that originated in the United States, say analysts.

In its annual report on the state of the international copper market and prospects for 2009-2010, Chile’s state copper commission Cochilco said copper prices will average 1.60 dollars a pound in 2009 and 1.50 dollars a pound in 2010, a far cry from the 3.15 a pound average for 2008 on the London Metal Exchange.

Copper is the main export product of Chile, which is the world’s largest producer of the metal.

On Wednesday, when the report was released, copper closed at 1.50 dollars a pound.

Although the crisis is expected to worsen over the coming year, which will have an impact on projected demand, so far supplies – especially from small and medium-sized mining projects – have responded quickly to the drop in demand, with announcements of reduced production, the report says.

Despite the economic crisis, copper output will reach 5.5 million metric tons in 2009, 3.7 percent higher than in 2008, and will be six percent higher in 2010 than in 2009, Cochilco projects, while forecasting 0.1 percent growth in global demand this year.

In 2008, the average annual price of copper fell for the first time since 2002, when it stood at 70.6 cents of a dollar per pound.

The price began to drop in the second half of 2008, when the U.S. financial crisis broke out, said Cochilco vice president Eduardo Titelman.

All base metals are down, he said, including copper, aluminium, lead, zinc, tin, nickel and molybdenum, he added.

The situation will have a great impact on fiscal revenue, due to reduced direct contributions by the Corporación Nacional del Cobre (Codelco), the state-run copper company, and lower tax payments by private mining companies that experience a drop in earnings.

In 2008, Codelco’s earnings amounted to nearly five billion dollars, according to Mining Minister Santiago González, who is chair of the company’s board of directors. This year, by contrast, they will plummet to around 600 million dollars, he estimated.

The director of the Catholic University’s Mining Centre, Gustavo Lagos, told IPS that Cochilco’s projected price of 1.60 dollars a pound is “optimistic.”

It is too early to make realistic forecasts, he said, because of the prevailing uncertainty with respect to the magnitude of the crisis, and particularly the future growth of the economy of China, which consumes one-quarter of the world’s total copper output.

“There is enormous variation in projections for the future, which range from 1.10 to 2.50 dollars per pound,” said Lagos, who added that the outlook for 2009 will only start to become clear in March.

In any case, said Titelman, copper production in Chile is still profitable at the current price, since costs per pound are below one dollar, and because the prices of the inputs used by the industry continue to drop.

“In the scenario of export prices of over one dollar, Chile’s copper industry can rest easy because in general, costs will be below one dollar. Only those who cut output may have costs above a dollar,” said Lagos.

“Big copper companies are on a sound footing. They won’t lose money in 2009. In the most pessimistic scenario, things will be tight. If the price hangs around 1.60 dollars a pound, they will earn money, and quite a lot of it,” he said.

But the outlook for small and medium companies is different. Minister González has already warned that “job loss in this sector is absolutely inevitable,” because many informal sector workers got involved in mining as a result of the copper boom, and were only able to make a living thanks to the high prices.

The centre-left government of Michelle Bachelet has already announced support measures for the industry.

The four billion dollar economic stimulus plan announced by Bachelet on Monday, to be funded by copper windfall revenues saved in sovereign wealth funds over the last few years, includes a one billion dollar capitalisation of Codelco, to finance investment – a move that Lagos praised.

However, the capitalisation plan, which forms part of a draft law to upgrade the state mining company, is still pending approval by Congress.

Titelman said the lower prices should be seen as an opportunity for mining companies to become more efficient and innovative.

The government is also worried about the situation of molybdenum, a subproduct of copper production, of which Chile is also a major producer. The price of molybdenum plummeted in 2008, from 34 to nine dollars a pound. This year’s price is expected to average 11 dollars a pound, according to Cochilco.