"Today, the significant copper demand is the reaction of China to face a punctual crisis. The stimulus will gradually decrease returning to an estimated Chinese refined copper demand growth lower than 2% in 2022."

Alejandra Fernandez

MINING DIRECTOR, FITCH RATINGS

March 24, 2021

What has been the impact of the pandemic on the Chilean mining industry?

The effect of the pandemic has been quite limited in Chile. Copper output fell below 1% year-on year, according to Cochilco. Increasing commodities’ prices together with lower cash costs has offset this.  The sharp depreciation of the Chilean peso against the dollar and lower energy and mining supply expenses contributed to the cash costs decrease. This was not the case of Peru, where copper output fell over 12% yoy, putting pressure to its cash costs.

The mining industry scaled back on investments, reducing maintenance and sustaining capex following the obligation of limiting personnel on mine sites and cushioning the impact of the outbreak on cashflows.  Most companies also reduced dividends.

On the bright side, the pandemic could positively impact the mining industry's future efficiency. Mining companies realized that there is space to increase productivity as they were able to maintain output with less personnel on-site.

To what extent is Chile the innovation hub for mining technology in the region?

Copper grades are declining globally, especially in countries with a long mining history like Chile. Some Chilean mines have a history dating back over 100 years, such as Chuquicamata. As a result, Chile needs to be at the forefront of technological advancements in mining to address this challenge. But there are other challenges such as water scarcity. Most mining activity is located in the northern part of the country where the driest dessert in the world is located. We see an increasing number of mining companies investing in desalination and other water management techniques as a result.

What have been the key drivers of the copper price recovery?

Among the key drivers that allowed the copper price to rebound was the sizeable Chinese government's stimulus to boost their economy post pandemic, and China’s extremely high copper inventory build-up of 1.2 metric tonnes of refined copper in 2020, followed by other factors such as expected higher U.S. stimulus, expectations of lower trade tensions between US and China, weakening of the dollar and optimistic news regarding coronavirus vaccines.

Are we beginning a new commodities supercycle?

I would disagree; the current bull commodity market responds to a demand shock that differs in duration and intensity. What happened in the supercycle resembled more an awakening of a giant: China and its process of conversion from an agricultural to an industrial economy with sizeable capital investments that resulted in years of two digits Chinese copper demand growth. Today, the significant copper demand is the reaction of China to face a punctual crisis. The stimulus will gradually decrease returning to an estimated Chinese refined copper demand growth lower than 2% in 2022.

What are the biggest challenges facing the Chilean mining industry today?

Some of the main challenges facing the industry today include water scarcity, declining ore grades, increasingly stringent environmental regulations and communities’ opposition to new investments.

Mining companies are also struggling to navigate their relationship with labour unions.  Copper production in Chile had experienced disruptions in the last couple of years after strikes, blockades and protests. This year we will be monitoring the outcome of important labour negotiations such as El Teniente of Codelco, and Los Pelambres of Antofagasta.

Do you see the changes in the constitution impacting investor confidence?

The process is in a too early phase to conclude whether it will or not.  We are not considering a material change to the institutionality that could bring uncertainty to mining investors. The copper mining activity is fundamental to the Chilean economy, representing over 50% of its exports with a significant multiplier effect on the country’s GDP.

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