20 Jul Exporting refined copper is good business
UC professor and Cesco member
Chile’s copper exports are mainly made of two products. First, refined copper, which consists of cathodes of at least 99.99% purity, and which is accepted by the London Metal Exchange, as a product whose price is traded on that and two other exchanges in the world. And second, in concentrates, which are fine gray particles, containing just under 30% copper, and which are melted and refined in smelters and refineries found in various parts of the world, especially China and Asia.
In 2019 Chile exported 52% of its copper in cathodes, and the rest in concentrates. In 1990 this figure was 12.4%, however, and the trend towards 2035 is that the copper exported by Chile in concentrates would reach, according to various projections, something like three-quarters of the total. In other words, Chile will increasingly depend on other countries to melt and refine its concentrates.
This is undoubtedly a cause for concern, since Chile, the world’s largest copper producer, will be selling mainly an intermediate product, and will lose direct contact with end customers, who are, for example, manufacturers of automobile, computers, cell phones and all kinds of electronic, electrical, and other products. At the same time, it will increasingly be at the mercy of China to smelt its concentrates, since in 2018 it had 37% of the world’s foundry capacity, while Chile, the third country with the largest smelting capacity, had about 8 %, and Japan (the second), a little less than 9%.
This dominance of China in smelters is increasing and will reach more than 50% in the coming years, obviously having a more dominant role than the current one, in setting the rates of fusion and refining, which the smelters charge to mining companies to melt and refine their concentrates.
But, also, there are other threats to Chile regarding these trends.
First, when a copper producer sells cathodes, he learns directly about the needs and demands of the end-user, that is, it gains intimate knowledge of market trends. An issue that these users are increasingly demanding is the traceability of the cathode, how it was produced, what environmental and social footprint it has. This communication with the end-user will be increasingly indirect for national producers given the productive trend.
Second, when Chile exports concentrates to China, this means emitting about a third more greenhouse gases (globally) than exporting cathodes. This due to two effects. The first is that the Chilean electrical matrix has fewer fossil fuels than the Chinese electrical matrix. And second, because transporting concentrates is more expensive environmentally than transporting cathodes. But, besides, the other life cycle indicators, such as, for example, the acidification potential, are considerably lower when cathodes are exported. In other words, if the current trend of increasing concentrate exports is not reversed, Chile will become more vulnerable and exposed to global environmental requirements, which are already clear.
A third threat is that concentrates that contain impurities considered toxic, not only have entry restrictions to most markets, but have more expensive shipping protocols, and that could mean impediments in the future. Also, the rates to melt these concentrates could rocket. In other words, Chile is virtually obliged to melt concentrates with toxic impurities in the country in the future. And it has many.
A fourth threat is that concentrates must have special facilities to be stored (something similar to what happens with oil). The global storage capacity does not exceed a few weeks of production, so it is possible that at some point supply chains will be cut, forcing the closure of the mines. This is what could have happened – and can still happen in the pandemic – and fortunately, it did not happen last April and May, when most of these chains in the world were cut. Instead, the cathodes can be stored indefinitely almost anywhere, and there are no obstacles to shipping.
What to do then?
The question Chile faces, and which is undoubted of a strategic nature since it affects nearly 50% of its exports, seems simple. New smelters must be built or existing ones must be expanded.
Why hasn’t this happened in an open market where any company in the world could have built new smelters in Chile?
For four reasons. The first is that Chilean smelters have not done very well in the last 10 years, four of the seven had systematic economic losses, and environmentally, it is only in 2019 that significant improvements are seen, after having to comply with the new environmental regulations imposed by Decree 28 of 2013. But, even so, Chilean smelters are far from reaching the average environmental standards that such facilities have globally.
So Chileans look at smelters as suspicious, polluting processes. It will not be easy to convince them that a new smelter will be so clean that even being inside it will not notice that it is working. This is what happens when you visit top smelters in China, in Germany, in the United States, and other countries. This negative perception of current smelters triggers a second obstacle: to obtain environmental permits and community license to build a new smelter. If there were a foreign investor, and there were in the last 20 years, who were willing to invest in Chile in a new smelter by placing their capital, they will have to have a State that collaborates in paving the way to obtain these licenses.
Third, national mining producers must commit a supply of concentrates for the said smelter. This has not happened in Chile in the last two decades, but the truth is that no one asked the Chilean mining companies if they would be willing. No obstacle to this is observed.
And fourth, the smelting business has an industrial nature, its incomes are lower than those of mining and they depend to a great extent on the management that is done, on labor productivity and the price of energy. The latter has been reduced to competitive levels in recent years. But, for a new smelter in Chile to be profitable, some business and labor practices will have to be changed to increase the average productivity of Chilean smelters at least twice what it is today.
The document published by Cesco in May 2020, entitled “Refined copper is good business for Chile”, proposes to build a new smelter in Chile, in response to the arguments presented above.
And it also raises a series of opportunities that are reopened for Chile with an initiative like this. Among others, to present this link of the productive chain in its true and valuable dimension, which was lost in the country, to recover a role that Chile had in smelting in the 90s, to rearm the technical, professional and academic teams that existed and developed a key team (Convertidor Teniente) that is installed and operating in smelters in Chile, Mexico, Africa, and Asia. If this smelter were to treat concentrates with toxic impurities, this leads to greater knowledge on the part of the community of Chilean technicians and experts. It leads to a serious restart of research into the great geological and chemical challenges that are present in the country’s current deposits, with increasingly complex minerals. The future of Chilean mining is likely to depend largely on the ability with which we face this.
Cesco’s proposal is based on robust evaluation of the profitability of a new refinery smelter in Chile. The proposal is that what is built be of the latest technology, financed and operated by a company with international experience, with the capacity to operate it in a profitable and environmentally sustainable manner, and that in principle be independent of a particular mining company. The proposal includes a focal role for the State, without providing financial resources, but supporting various aspects that may pave the way for the installation of a new smelter in the country.
Cesco has organized a large group of experts who are discussing this proposal with opinion leaders in the industry, in the government, and other areas, intending to launch this initiative in Chile.