28 Dec CHECK NOW OUR 2018 BALANCE: BITTERSWEET
2018 could be qualified as a transition year for Chilean mining. A year in which we saw the first signs of reactivation of investment in new projects, and expansions; and important advances in initiatives aimed at face the future challenges the sector is dealing with. However, it was also a year in which uncertainties persist regarding the situation of the copper market, and legal and institutional issues that affect the sector still need to be solved.
Regarding investment, 2018 was more auspicious, mainly due to a change in the expectations of the copper industry. After the long depression that followed the end of the supercycle, mining companies, despite a lower price than the previous year, improve their expectations of price recovery in the medium and long-term and manage to “clean the house”, consolidating cost reductions, lowering debt and thus achieving a more solid financial situation. All these factors, together with the opportunity to invest against cyclically, explain the decisions to materialize projects, among which those of Antofagasta Minerals stand out, which gives the incremental expansion of Los Pelambres next to the construction of a desalination plant, the Project QB2 from Teck that gets its environmental approval and incorporates Sumitomo as a partner in the initiative and Anglo American’s recent announcement to develop new ore reserves in Los Bronces, prolonging the life of that operation.
These investments, together with the large projects under construction, the “structural” ones of Codelco and the exploitation of sulfides in BHP’s Spence, seem to indicate that Chile would finally be resuming its leadership in the industry after a prolonged lethargy. In fact, according to the recently published Statistical Yearbook 2018 of the International Copper Study Group (ICSG), between 2008 and 2017, Chilean copper production grew by just 175,000 tons, reducing its market share from 34% to 27%, while Peru grew from 8% to 12% in the same period.
However, uncertainty persists about the direction of the copper market. Despite solid fundamental factors – stable demand and good prospects for long-term growth due to the emergence of electromobility and an increasingly difficult supply – the ups and downs of the trade war and its effects on world growth and potential geopolitical conflicts, they keep the price of copper relatively low and with high volatility. The price recovery depends on these variables and there is no clarity about when they dissipate. Hence, the importance of decisively addressing a series of issues at the level of public policies and the management of mining companies that help mitigate these uncertainties and take charge of the present and future challenges of Chilean mining.
Reviewing these issues, 2018 was bittersweet.
Among those that show progress, we can highlight the institutional consolidation of Valor Minero and Alta Ley, initiatives that aim to propose and implement public-private solutions to the topics of dialogue and virtuous community insertion of mining activity and strengthen technological innovation in mining, respectively.
It is also noteworthy the impetus that mining companies and various organizations have given to incorporate as central management issues, the inclusion and diversity of gender in the sector. Not only as discussions and wishes but with tangible results.
For a greater relevance for the viability of mining in the long term, an agenda has also been made visible to face the challenges imposed by the increasing automation of mining operations and the development of “green mining” aimed at mitigating the impacts of mining in the national ecosystem and in the international trade of minerals and metals.
Along with these aspects of greater optimism, there are still issues of great relevance where it is not appreciated, mainly by the State, a sense of urgency in solving them.
Among these, the concretion of the announced reform to the System of Environmental Evaluation (SEE) that strengthens the institutionality that intervenes in this process, beyond the SEE, and isolates the decisions of instances and political considerations.
On the other hand, the design of a policy for the development of lithium, which leaves behind obsolete legislation inspired by myths overcome by the evolution of the market, and allows the growth of a sector with obvious competitive advantages compared to other countries where, on the contrary of Chile, the industry grows vigorously.
Despite the enormous effort made by the Codelco administration to reduce costs and continue advancing in the development of its structural projects, and despite the announcement of USD 1 billion capitalization in the middle of the year, there is no real will to resolve the serious financing problem that afflicts the company since the return to democracy.
Thus, during 2018, not only there was no progress made in defining Codelco’s capitalization policy, which would allow it to develop, create value for all Chileans and compete on equal terms in the global copper industry; but while the Government announces a project to establish a mechanism to finance the Armed Forces with the intention of making it transparent to the country the allocation and control of resources for defense, the initiative establishes that for the next eight years, Codelco will continue to be charged by a tax 10 percent of its gross copper sales by the Chilean treasury. This is the opposite of what was stipulated in the multiple bills announced in the last twenty-five years, which were mainly inspired to free Codelco from a discriminatory tax that seriously affects its management.
On other fronts, the discussion of a proposal that modernizes and stimulates the mining exploration in Chile remains stagnant due to the obstruction of very specific interests that are not part of the Great Mining, opening opportunities for investors and companies allowing them access to unexplored mining properties to increase the mineral resources of the country and that today are not available because of the legislation that the rest of the mining countries left behind many years ago. In this sense, there is no willingness to face the exhaustion of Enami’s business model, its precarious financial situation and obsolete corporate governance, which continue to hinder the vigorous development of medium-sized mining, unlike the rest of the mining countries.
Finally, 2018 comes to unequivocally ratify that the mining sector is the engine of the economy and that while the political, business and social leaders of Chile do not assume this reality, our future as a “mining country” can be seriously threatened.