HISTORY AND FUTURE DYNAMICS OF THE CHILEAN MINING INDUSTRY
by Juan Carlos Guajardo, Executive Director of CESCO (Centre for Studies of Copper & Mining)
The mining sector in Chile on the one hand is extremely influential, on the other hand it has
remained distant from society (where the agricultural sector has been the most important) and even political elites. Today, there is little debate in Chile about the mining sector and its future.
CESCO tries to fill this gap, as an autonomous and financially independent think tank. CESCO also organises events such as "CESCO week", one of the biggest mining conferences worldwide, and tries to build bridges of dialogue with China, the buyer of up to 65% of Chilean copper.
Today the global scenario that has characterised the sector over the past 10 years is changing, as the continuous rise of commodity prices came to a halt. The last decade was in fact characterised by a productivity crisis, as the rise of China, starting in 2003, and its demand for commodities put stress on the supply side.
As the mining industry was not prepared to cover China's excess demand, it ran "emergency policies"
between 2004 and 2014 and many companies took hasty decisions. These errors, once discovered by the shareholders, led to a withdrawal of investments which the sector is currently experiencing.
In Chile, additional internal conditions put stress on the mining sector. The main challenges are energy and water supply, as well as the inadequate institutional framework for environmental impact assessments and dialogue with indigenous groups. This has led to conflicts between the mining industry and local communities and has produced a bottle neck of pending cases, decreasing business confidence.
In the future, commodity prices will continue to fall (copper: below US$3 in 2015), as the industry has by now increased capacities and will produce surpluses in the next two years, while the Chinese economy is growing at a slower pace (having run an unsustainable economic model with inefficient corporate structures, stress on environmental resources and high levels of corruption).
Generally supply and demand will become more balanced.
Another plausible development is collusion in the copper sector within the next 10 years, as is currently occurring in the iron sector. An OPEC-style cartel existed for a short time in the copper industry (CIPEC) but failed as agreements were not respected by all members. Some international institutions are trying to counteract this tendency by advocating more transparency on supply, demand and stocks.
Chile is anxious to prevent another shock comparable to the nationalisation of the copper industry under Allende and the sudden death of the saltpetre industry. To prevent a similar shock in the copper industry, investments in technology and innovation are urgently needed, a difficult objective as the sector is very conservative and with a low degree of confidence, and tends to invest in
material of low face value, instead of more expensive quality equipment with lower life cycle cost.
The good news is that China will continue to buy copper from Chile. Despite currently being the second largest copper producer worldwide, China only holds 4% of global copper reserves.
