20 Jul Investments in mining: Waiting
The pandemic has hit both national GDP, as well as private consumption and investment by 2020. Until now, mining has played a leading role to alleviate the economic crisis that Covid-19 brought with it, however, there is greater uncertainty about the rate of recovery of investment in the sector.
The last monetary policy report of the Central Bank was lapidary. The Covid-19 pandemic has forced to take strict measures for people’s health care, creating an unprecedented scenario for the national economy, which has led experts to project a contraction between 5.5 and 7.5% in total GDP for this year, a 6% decrease in private consumption and a drop of around 16% in investments during 2020.
The warning lights came on, and both the public and private sectors have sought instances to reactivate the investments as soon as possible, respecting the health measures.
The weight of mining
According to estimates by the Capital Goods Corporation (CBC) in its mining sector report for the first quarter of this year, for the five years 2020-2024 an investment of US$ 19,802 million was expected, with 64 initiatives with defined schedules. Of these, 26% correspond to state projects, and 74% to private ones. In terms of the manpower required in the construction of mining projects for the analyzed period, 2021 would be the one with the highest generation of employment with an average of 25,388 jobs in the year.
As of the date of the CBC report, the mining portfolio was equivalent to 34.9% of the total projects for the said five-year period, followed by Public Works with 33.8%. In third and fourth place are the real estate sectors with 13.1% and energy with 11%, respectively.
By 2020, according to estimates by the Ministry of Mining, the investment to materialize would correspond to US$ 5,104 million, 30.2% of the total national investment.
However, as a result of the coronavirus pandemic, nearly 95% of the investment projects that were being executed are paralyzed, a measure that aims to release workers in the sector and thus prevent the spread of the virus, due to the high number of workers required for the execution of projects and the greatest difficulties in maintaining the necessary isolation compared to mining operations.
For this reason, the investment materialized this year will be significantly less than estimated, keeping only minor projects with fewer health risks. The final amount will depend on when the projects can be safely resumed.
Despite this situation, the medium-term outlook is relatively optimistic compared to other economic sectors. Considering that the paralyzed projects were at different stages of execution, to the extent that the health figures improve sufficiently to protect the health of workers, their reactivation will be rapid, although their implementation will suffer delays of one to two years.
This is mainly the case for the Spence Growth Option projects of BHP, QBII of Teck, INCO-Pelambres of AMSA, New Mine Level, and other minor initiatives of Codelco.
Regarding the portfolio of projects that have not started construction, the uncertainty about their start is greater. In these cases, not only has the stage of studies and obtaining permits been delayed due to the effects of the pandemic, but uncertainty about the evolution of the market in the longer term could also delay final investment decisions.
Among the latter are the expansion of AMSA’s Centinela (DMC), El Espino de Punta del Cobre, the Collahuasi expansion, the Anglo American Los Bronces Integrated Project and Codelco’s Rajo Inca, among the most relevant.
From China, the consultant Li Lan, from BLC Lilan Consulting, estimates that the cessation of projects and possible changes in their schedules, “could affect supply in the future. But it will not affect the current supply and demand of the market”. The focus of concern is primarily on “the adverse impacts related to the pandemic in current operating mines. We have seen more concerns about possible disruptions in mining production in Chile”.
This underscores the concern that has fueled the recent rise in the price of copper. Even though copper production in Chile grew 3.2% in May, reaching 2.36 million tons, Cochilco has cut production projected for this year by 200,000 tons due to the pandemic.
Even in a complex scenario due to the economic consequences of the pandemic at a global level, analysts agree in foreseeing a favorable situation for mining and copper in the medium-long term particularly. Therefore, it is reasonable to expect that during the next year, with fewer uncertainties, mining companies go ahead with investment decisions that are currently waiting.
Although the volatility implied by the situation the world is going through makes it difficult to make more precise estimates of the impact that the crisis will have, mining in Chile has managed to be resilient during the pandemic, maintaining its production levels so far and, even more important, to be a fundamental pillar to contribute to the post-Covid economic reactivation, through investment and employment.