Chile benefits from a copper boom which might ease its political problems, but it must take care to not over-invest prematurely

The price of copper has hit a 9 year high on the London Metals Exchange at $9000 a tonne. The rapid increase is based upon resurgent demand for the metal in China as the state's economy begins to shake off its Covid enforced slowdown, growing 6.5% in the previous quarter compared to the 6.1% most economists predicted. 

The biggest winner of the increase in copper prices will be Chile. Copper mining accounts for between 10 – 15 per cent of Chile’s national GDP and the country is by far the largest copper producer globally. Its state-owned company Codelco, is the world’s largest copper producing enterprise, responsible for 11 per cent of the global supply. Chile’s treasury will thus benefit quite directly from the windfall, which will greatly aid in alleviating stretched state revenues due to Covid-19’s economic damage that saw Chile’s GDP fall by 6 per cent, and which has exacerbated existing social unrest over inequality. The windfall will also help cover Chile’s costly, though comparatively rapid vaccination program. It may in this way provide a much-needed political boost for President Sebastian Piñera in the looming November election. His approval rating rapidly tanked in 2020 to only 13 per cent due to his handling of Covid-19 on top of previous controversy surrounding the Chilean economy and inequality.   

Chile’s Mining and Energy Minister, Juan Carlos Jobet, alongside Finance Minister Rodrigo Cerda, have ventured an idea to use the increase in coppers price to further invest in expanding Chile’s copper mining industry, creating greater employment and capitalizing on the increased demand and pricing. This approach is aided by the likes of Citigroup Inc predicting that the price of copper will continue to rise as part of a “super cycle” as demand increases to its 2011 high of $10,000 a ton and copper prices are expected to rise consistently until then for the next three years. Indeed, the President of Chile’s National Mining Society notes there are “expectations” of seeing “three years of good prices”.

However, it is important to note that increasing demand based on easing Covid restrictions is not the only factor at play for copper's current rise. Covid mitigation regulations have created a squeeze on the supply-side too, as mines globally have had to temporarily close or faced shortfalls in production due to said Covid compliance rules. Now that this is easing, and mines in Peru, the world’s second largest copper exporter, and other states are soon able to begin operating at increased capacity, the rapid rise of copper may be somewhat arrested by an increased supply on the market.

In this context Chile needs to be somewhat wary of any plans for re-investment in expanding new mining operations as these increase output and create jobs that might find themselves on a fragile footing if the expected profits do not materialize at the levels believed. Such a turn would have a detrimental socio-economic effect exacerbating the currently charged political environment.

A further key issue too here is the risk of mining unions to push for better pay in the short term due to the increased price and profits. The mining unions against backdrop of Chile’s wider socio-economic turmoil over rising levels of inequality, have already been vocal about the need for improved pay and conditions, with some mines even striking in 2020.

The temptation is there then for all parties to push to increase the production and production costs of copper on the back of this newfound windfall, only to later find it was not sustainable.

Such a move right now would even hurt Chile’s longer-term prospects, as the global push towards electrification and renewable infrastructure means that demand for cooper, used extensively in this, will steadily grow, but the commodity itself is finite. Chile over-producing now to capitalize on the current rapid increase in price, may see future profits that could greatly benefit the state’s finances significantly undercut.

Caution then should be advised to Chile’s hard-pressed government and mining unions regarding any scheme to permanently ease unemployment and/or improve conditions and pay through increased copper output. The hoped-for profits are not settled, with the supply-side story still yet to unfold.