10 Jun Mining supply chain and possible scenarios in the context of the pandemic
Prepared by Ronald Monsalve, Analyst of Strategies and Public Policies of the Direction of Studies and Public Policies of Cochilco and Jorge Cantallopts, Director of Studies and Public Policies of Cochilco.
To understand the importance of the supply chain in Chilean mining, we must contextualize the entire value chain of the activity. For this, using the data from the latest input-output matrix published by the Central Bank of Chile, corresponding to the year 2017, we can see that the value of the production of mining activity was 44,917 million dollars, of which 26,767 million dollars are value-added or GDP, and the rest, that is, 18,150 million dollars, are expenses that the activity carries out to operate.
This implies that the purchases annually made by the mining activity in its operation are about 14,790 million dollars, of which 18% are direct imports. In other words, approximately 2,7 billion dollars corresponds to goods and services that are directly imported by the mining sector.
If we add to this the entire investment process, which using the same input-output matrix as a structure, results in 37% of the total capital formation of the mining industry corresponding to imports of goods and equipment, that is, 3.9 billion of additional dollars in imported goods.
Table 1: Structure of the direct value chain of mining in Chile (2017’s values in millions of current dollars)
As summarized in Table 1, in 2017 the mining activity made direct imports for 6,619 million dollars, which implies that the imported supply chain is key to the operation and its investment process. An assumption of such importance is that a large part of the goods that the activities imports, either directly or through suppliers, are goods in which the local industrial supply is not able to provide optimally.
As mentioned by the president of SONAMI, mining established three priorities to face the pandemic: guarantee the health of workers and their family environment, ensure operational continuity and maintain the payment chain.
Despite the difficult time the country is experiencing, one aspect that benefits mining in the fight against Covid-19 is its strict discipline on security issues, which has facilitated the incorporation and compliance of health protocols.
To ensure the operational continuity of the sites, among others, it is necessary to ensure the supply of mining materials, equipment and services. In this regard, we will analyze what has happened with the supply of some inputs considered critical for mining activity and which Cochilco has been monitoring since 2015 with the preparation of a supply matrix.
For this article, only the assets associated with the operations that have been identified as critical by Cochilco are considered. This is the case of heavy truck tires, grinding balls and reagents such as lime, flocculants and extractants. The relevant thing about these materials is that 100% or a non-negligible percentage is produced outside the country and, therefore, they are imported. According to the figures provided by the National Customs Service, imports have evolved as follows:
Table 2: Imports of mining supplies 2019-2020
On the other hand, when analyzing imports from previous years (2014-2019 period), it appears that for the analyzed supplies sample there is no seasonality in shipments and, therefore, it is possible to compare the figures for the first quarter of 2020 with those of the preceding period.
That said, imports showed a decreasing behavior during the year 2019; a situation that remained during the first quarter of this year. This translated into a 12% decrease in imports in the first quarter compared to the same period last year.
Therefore, it is worth wondering if the drop in imports in the first quarter of this year corresponds to a slowdown that had been observed since 2019 is due to the impact of the pandemic, or is it a mixture of both.
To answer this question, we will analyze the evolution of imports according to the country or region of origin. In this regard we have the following:
Table 3: Imports of mining supplies 2019-2020, according to region
Due to the amounts involved, the drop in imports from China, the United States and Europe draws attention.
In the case of Europe, the confinement measures began at the beginning of March and, since shipping by sea takes between 22 and 25 days to travel between Europe and Chile (depending on the port), the impact of the Covid-19 should be reflected in the figures from April onwards. The same occurs with the United States since the pandemic began to affect that country days after it occurred in Europe. Therefore, with the available information, it is not possible to conclude that the drop in imports from Europe and the USA is due to the pandemic’s impact.
In the case of China, this Lunar New Year holiday was extended and the first half of February was very convulsed in that country. China’s customs services, administration and large infrastructures (ports and airports) operated with minimal services, which affected the operations of entry and exit of goods in the country.
One fact to keep in mind is that maritime transport between Shanghai and the ports of the central zone of Chile normally takes between 35 and 40 days. In other words, the import statistics should reflect the impact of the Covid-19 from the second half of March 2020 onwards. Furthermore, in this period some suppliers indicate that maritime logistics began to show delays and in some cases increased costs.
For example, grinding balls represent a significant percentage of the CIF value of imports of Chinese origin and recorded a low level in March (US$ 9.7 million), but higher than in February (US$ 6.9 million). Therefore, as of March, it is difficult to establish a significant impact of Covid-19 on imports and, if these decreased, it seems that they are due to a decreasing trend observed in the previous year.
However, how have providers perceived the effects of the pandemic? To answer this question, some companies that import materials for mining were directly consulted. In general terms, they agree that the pandemic caused a drop in the flow of maritime transport and delays in logistics attributable to sanitary measures imposed by governments. Likewise, although some factories in Europe stopped their activities, they are gradually resuming their production.
A positive aspect is that both in Asia and in Europe they are returning to normal activities and, therefore, the risk of non-production and dispatch of mining supplies decreases.
It is difficult to venture into a scenario for the future since Chile and our continent are still going through the critical stage of the pandemic. However, providers’ fears for the future are related to the impact that prevention measures could have on local logistics. For example, delay in customs, lack of personnel to operate warehouses and transportation, delays in deliveries due to confinement measures and the implementation of sanitary cordons, to name a few.
Alternately, the high dependence on the operation and investment process of imported goods should serve to trigger the reflection on how to reduce supply risks and at the same time promote the virtuous development of local suppliers at all levels of complexity and importance of the mining supply matrix.