Outlook 2019: Reasons to be cheerful
Announcements in 2018 of major copper mining investments such as Antofagasta Minerals' expansion of Los Pelambres and Teck Resources' Quebrada Blanca Phase 2 (QB2) are not an exception but rather are part of the reactivation of the mining industry in Chile.
At least, that is the sentiment of industry experts.
During 2018, the mining sector was the one that showed the most dynamism in the country, with increased capex of private sector companies and state copper miner Codelco, according to a central bank survey.
"In investment, the largest portion of interviewees said they were starting to note an increase related to the capacity for expansion or new projects compared with previous surveys," the central bank said.
Fitch Solutions increased its 2021 Chilean copper in concentrate production growth forecast from 5.4Mt in 2018 to 6.0Mt in 2021 "as a strong project pipeline comes online by 2021."
"Investor sentiment towards large scale copper projects remains resilient, especially amongst large industry players. The trade war between the world's two largest economies... has commodity markets unsure on how long the dispute will continue and by how much China's economy will initially slow down. Despite this, corporate investors are favoring long term demand fundamentals and a supply deficit through 2022 rather than postponing a decision," said Fitch Solutions in a report.
Mining investment will grow 88% in 2019 to US$10.52bn compared to 2018, according to a report from Chilean state copper commission Cochilco. For 2020, the commission forecasts mining investment of US$10.38bn.
In a recent interview with BNamericas, the president of private sector mining association Sonami, Diego Hernández, said the Chilean mining industry's main strategic challenge is to keep attracting investors and making investment thrive.
"Mining investments announced this year [2018] which amount to US$11.3bn, including expansions of Spence, Los Bronces, Los Pelambres and QB2 copper mines – which will begin operations between 2021 and 2023 – are very positive," Hernández said.
Juan Carlos Guajardo, executive director of Plusmining told BNamericas that uncertainties at a global level are yet to be overcome for decisions to be made. "We have specific announcements like QB2 or the Los Pelambres expansion. We do have projects in the pipeline but they are not much. The process will unfold gradually and once we see an improvement in global economic stability, I think we'll see a more sustained process," he said.
Other important aspects to consider in boosting mining investment are regulations and legal certainties, said Guajardo. "It's necessary to take the path of parliamentary discussion to resolve the environmental issue [SEA reform bill], the tax issue and the labor issue. This could take from one to two years, so this uncertainty is added to the one of global economic stability," he added.
COPPER MARKET
The year 2018 was marked by the trade spats between the US and China and industrial metals, especially copper, have suffered price declines.
The uncertainty of lower global economic growth and especially the uncertainty about China's future – the country consumes nearly half of the world's copper production – ended the bullish trend the market was seeing since end-2016.
Sonami expects copper deficits for the years 2019-20 to be more pronounced in 2021 and 2022, and envisages copper prices for 2019 of US$2.95-3.05/lb.
"However there are risk elements that can modify that outlook, I refer to China's behavior as the main consumer of copper in the world. The great risk is China's high level of indebtedness," Hernández said.
Sonami's president also cited as risk factors future interest rate increases by the Federal Reserve, recessionary winds, due, among other aspects, to the high probability of the yield curve inverting, and the end to monetary and fiscal stimulus in the US. And most importantly, the trade war between the US and China. All these factors could put downward pressure on the price of copper, Hernández said.
Guajardo believes that while the current macro-economic prospects are still negative, the price of copper will not change much in 2019 and will remain in the range of recent months.
"However once the US-China conflict has more clarity, I do believe we are going to see a stimulus intervention by China's government that could change that scenario and could bring the price closer to a level of around US$3.0/lb," said the Plusmining executive director.
ADDED VALUE LITHIUM
Sebastián Piñera's government has been clear about its position regarding the lithium industry. The priority for the metal, according to mining minister Baldo Prokurica, is to climb the value chain, trying to advance more on the manufacturing side, producing materials to manufacture batteries or even batteries themselves.
State development agency Corfo recently announced the launch of a tender to build a center for energy transition and advanced materials for the development of lithium.
The center is intended to add value to the industry in three areas: solar energy, low emissions mining and advanced lithium materials and other minerals for electromobility.
Another issue to look out for is Corfo's disagreement with Albemarle about the so-called preferential price for lithium. Some 25% of Albemarle's production is supposed to be sold locally for processes that add value to the lithium industry, according to a contract signed by the company and Corfo.
Corfo head Sebastián Sichel announced in October that after fruitless talks with the US company, the two will go to arbitration at the International Chamber of Commerce in Paris.
The arbitration was due to begin before the end of 2018, but according to sources close to the process cited by El Mercurio, it was postponed due to a possible new proposal from Albemarle.
On the other hand, SQM and Corfo did reach an agreement on the price that will be offered for its lithium to companies that add value to the metal within Chile. Sichel said that a second "lithium call" to select those companies will be launched on March 4.
LABOR NEGOTIATIONS
In 2018 a total 32 collective contract negotiations were held in Chile, including most prominently BHP's Minera Escondida.
The high number of negotiations and a new labor reform in the pipeline encouraged miners to adopt a more conciliatory approach, avoiding, for the most part, strikes.
In 2019 another 17 contract negotiations are envisioned, and "they must be observed with caution," said Guajardo.
One of the trends that will dominate the new negotiations are higher labor costs versus the decline in productivity, believes Guajardo.
"It's necessary to reconcile lower costs and improved productivity. This year [2019] maybe there's more space to address this challenge. In 2018 there was more willingness to pay and less space to address this necessity. Maybe these conditions change in 2019 and therefore we must be attentive to how it unfolds," he said.
Overall, however, Chilean mining industry experts are optimistic about 2019. The following three years will see new projects come online, although there is still a sentiment that the project pipeline is not too extensive and most of the projects are brownfield.
Another key downside to the positive outlook on Chilean copper production over the coming years is the ongoing decline in ore grades.
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