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Chile - Copper Production

Chile accounts for about one-third of annual global copper production, and about one-third of world-wide copper reserves. According to the Copper Law enacted in 1954 by the government of Carlos Ibáñez del Campo (1952-58), the armed forces are entitled by law to 10 percent of the total copper earnings of the state-run Copper Corporation (Corporación del Cobre--Codelco).

Refined copper prices trended upward during the second half of 2010, with the London Metal Exchange Ltd. (LME) price ending the year at the then record-high level of $4.44 per pound of copper. Though fluctuating significantly, copper prices mostly remained above $4 per pound through August 2011, with the LME price reaching a record-high $4.60 per pound in February. In September 2011, in response to concern about the effect on copper demand from the mounting debt crises in the European Union and slower growth policies in China, the spot price fell sharply to $3.16 per pound during a 1-week period, the lowest level since July 2010.

In September 2011, however, the International Copper Study Group projected that global refined copper demand in 2011 would exceed refined copper production by about 200,000 tons, continuing the production deficit experienced in 2010, as operational problems and labor unrest, including strikes in Chile and Indonesia, continued to constrain world copper mine output. Global consumption and production of refined copper were projected to increase by 1.5% and 2.3%, respectively, in 2011.

In 2010, total mine production accounted for about 19.2% ($39 billion2) of the country’s gross domestic product (GDP) compared with 15.6% ($25 billion) in 2009, and copper mine production was valued at about $35 billion compared with about $22 billion in 2009. In real terms, the total value of mine production increased by about 1.2% compared with that of 2009.

Although copper's relative importance declined in the 1970s and 1980s, it was still the Chilean economy's most important product in 1992. The mining sector represented 6.7 percent of GDP in 1992, as compared with 8.9 percent in 1985. In 1991 copper exports represented 30 percent of the total value of exports, a substantial decline with respect to the 1960s, when it represented almost 80 percent of total exports. Mining exports in general accounted for about 48 percent of total exports in 1991.

At the end of 2009, the country was estimated to have the leading reserves of copper, lithium, rhenium, and selenium (tied with Russia) in the world. Since the late 1970s, the production of gold and silver has increased greatly. The lead, iron, and petroleum industries have shrunk since the mid-1970s, the result of both adverse international market conditions and declines in the availability of some of these resources. With a combined total value of about US$4 billion, two of the largest investments planned in Chile in the early 1990s were designated for aluminum-smelter projects in the Puerto Aisén and Strait of Magellan areas.

Two developments in the copper sector were noteworthy. First, in the 1987-91 period there was a substantial increase in the output of refined copper, as well as a relative decline in the production of blister copper. Second, the state-owned Copper Corporation (Corporación del Cobre--Codelco), the world's largest copper producer, still had an overwhelmingly dominant role (accounting for 60 percent of Chile's copper output in 1991). The so-called Codelco Law of April 1992 authorized Codelco for the first time to form joint ventures with the private sector to work unexploited deposits. Thus, in a major step for Codelco, in 1992 it invited domestic and foreign mining firms to participate in four joint explorations in northern Chile. Poreignowned private firms were to become increasingly important as new investment projects got underway.

The heightened importance of these foreign private firms in large-scale copper mining also resulted from the international business community's improved perception of Chile and from a mining law enacted during the Pinochet regime that clearly established compensation rules in the case of nationalization and otherwise encouraged investment in this sector. Given this more favorable context, Phelps Dodge, a United States mining company, and the Sumitomo Metal Mining Company, a Japanese firm, signed a US$1.5 billion contract in 1992 with the Chilean government to develop La Candelaria, a copper and gold mine south of Copiapó. The mine's potential production of refined copper was equivalent to about 10 percent of Codelco's entire production.

Despite the decline in copper's importance, Chile continued to be affected by the vagaries of the international copper market. The high variability of copper prices affected the Chilean economy, particularly the external accounts and the availability of foreign exchange, in several ways. In the 1987-91 period, the international copper market was very favorable; for example, copper prices in 1989 were 50 percent higher than in 1980. By May 1992, however, the price of copper had declined to about its 1980 level. The government decided to counteract the effect of the variability of copper prices by creating the Copper Stabilization Fund, which worked as follows: whenever the price of copper increased, the government would direct a proportion of the increased revenues into the fund; these resources would then be used during those years when the price of copper fell below its "normal" level. This institutional development helped Chile at least partially free itself from the volatility of the copper market.

In 2010, many of the world’s leading private mining companies were deeply invested in the mining sector of Chile. These companies included Anglo American plc and Antofagasta plc of the United Kingdom, Barrick Gold Corp. and Teck Cominco Ltd. of Canada, BHP Billiton Ltd. and BHP Billiton plc of Australia and the United Kingdom (BHP Billiton), Freeport-McMoRan Copper & Gold Inc. of the United States, K+S Aktiengesellschaft (K+S AG) of Germany, Rio Tinto Ltd. and Rio Tinto plc of Australia and the United Kingdom (Rio Tinto), and Xstrata plc of Switzerland.

BHP Billiton reported that the Escondida Mine would be able to produce at a rate of about 1.3 million metric tons per year (Mt/yr) of fine copper by sometime during the second half of 2014 or the first half of 2015 compared with the slightly less than 1.1 million metric tons (Mt) produced in 2010. BHP Billiton also reported that Minera Escondida Ltda. (which was 57.5% owned by BHP Billiton) planned to complete a crusher and conveyor system relocation project to access higher grade ore at the Escondida Mine by the end of 2012. This expansion, combined with completion of a debottleneckingproject to provide additional copper ore processing capacity at the Laguna Seca concentration plant, could enable increased production of copper in concentrates at Escondida by the end of 2013 or sometime in 2014. Anglo American expected to increase the production capacity at Los Bronces Mine to about 400,000 metric tons per year (t/yr) of copper in concentrates by 2012 compared with an estimated 250,000 t/yr in 2010.

In 2010, mining and the extraction of crude petroleum employed 66,063 workers compared with 62,102 workers in 2009 and 64,268 in 2008. Workers directly employed in mining and the extraction of crude petroleum accounted for only about 1% of all employees in Chile, but this figure does not include the large number of workers who provided necessary services for these mineral extraction sectors (such as administrative, consulting, legal, marketing, security, and transportation services), those who were employed in domestically producing downstream mineral-based products from the raw minerals extracted in Chile, and those whose jobs otherwise critically depended on the extraction of minerals in the country.

In a mining survey conducted by Business News Americas Ltda. between October and early December 2011, 45% of survey respondents said that Chile had the best investment climate in Latin America for mining investment. The Fraser Institute’s ranking of Chile as a desirable destination for investment by private companies in the mining and quarrying sector was 8th out of 79 jurisdictions worldwide in 2011 compared with 7th out of 72 jurisdictions in 2010. Chile was the only jurisdiction outside of North America that consistently ranked among the top 10 for mining investment in the Fraser Institute’s mining survey. Uncertainty owing to labor negotiations, changing tax regimes, uncertainty in output prices, accidents, equipment failures, or even natural hazard incidents (such as earthquakes) is ever present and could affect many of the projected timelines for mining projects or companies’ production plans at existing mineral production facilities.





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Page last modified: 04-12-2012 19:02:22 ZULU