Chile's royalty and global factors expected to affect copper market

Although the Chilean copper commission Cochilco raised its price projection for the metal to US$3.90/lb for this year from US$3.85lb, in 2024 it is expected to drop to US$3.80/lb, the agency said earlier this month. 

The weakening of the dollar, the risks to global copper supply, slower manufacturing growth in China and the recently approved royalty in Chile could be factors.

"After the approval of the mining royalty, we could find certain drops in sales values in 2024. Although the bill was approved to increase fiscal coffers and be a contribution to Chile's GDP of 0.4%, it could harm the value of the red metal, since there is an increase in taxes, and this can be reflected in the sales of the metal and in turn harm the demand at the international level,” Nataly Venegas, FXGlobe markets analyst, told BNamericas.

With the royalty, countries like Peru and Australia have lower taxes and would be favored, she said.

Mining minister Marcela Hernando said this year there will be lower supply of copper worldwide due to the delay in starting operations in mining projects in Chile, and lower production at current mines, according to a statement from Cochilco.

The minister's comments reflect delays that state copper giant Codelco has faced at its structural projects and its production is expected to drop again this year, as is output at BHP's Escondida, Antofagasta Minerals’ Antucoya and Anglo American units in Chile.

However, new projects such as Quebrada Blanca Phase II, Los Pelambres complementary mining infrastructure, operational continuity of Minera Zaldívar or Polo Sur and Centinela optimizations, should help increase Chile’s copper production by 5.9% this year compared to 2022 to 5.6Mt.

“The price of the metal could be lower than expected if the contraction of economic activity in the United States and Europe is greater than expected; if new stress scenarios occur in the world banking system with a strong credit crunch; lower-than-expected growth in Chinese manufacturing; and more persistent inflation," said Cochilco's executive VP Joaquín Morales in a letter in early May.

FXGlobe’s Venegas said that in the case of the US, if there were to be a contraction of its economy due to the continuous rate hikes by the Federal Reserve, "we could find a negative variation in the price of copper, although if the Federal Reserve is close to the inflation targets, we could see a drop in the price of the dollar in the second half of 2023 and this would have a positive impact on the price of copper, approaching US$3.90/lb.”

For this year, thanks to the expected 5% growth in China, Cochilco says its demand for copper would grow 2.2%, reaching 14.4Mt. Meanwhile, the global demand for refined copper would reach 25.74Mt, an increase of 2.2% compared to last year, while the world supply of refined copper would reach 25.68Mt, 1.5% more than in 2022. All in all, there would be a deficit of 67,000t of copper, Cochilco forecasts.