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All eyes on Chile as virus pressure heats up

Mar 26, 2020 | 09:08 AM | New York | Andrea Hotter

Tags  Chile, Codelco, Escondida, coronavirus

Copper market participants should have been gathering in Santiago, Chile, for the annual CESCO dinner on Wednesday March 25. Instead, the country’s mining industry was nervously eyeing the spread of the Covid-19 virus pandemic, and its government was coming under increasing pressure to impose a lockdown similar to what India and South Africa have instituted.

Chile has so far restricted travel into the country and declared a national emergency a week ago to limit the spread of the coronavirus. It has stopped short of a lockdown, unlike its neighbor Argentina, which has one-third of the cases of Chile but imposed a mandatory quarantine last week.

To date, Chile’s copper production doesn’t appear to have been too badly impacted. 

But mining companies do not have to report production data unless they are going to miss their stated production guidance. Unless that guidance is very narrow, then a producer is not likely to have fallen out of range yet. 

That means announcements have typically been limited to a company imposing restrictive measures, slowing work or reducing capacity, but without revealing an actual production capacity or anticipated loss. 

These announcements include the suspension of construction at Teck’s QB2 project; the withdrawal of workers and effective suspension of Anglo American’s 300,000-tonnes-per-year Quellaveco project; and the removal of 75% of the workers from Antofagasta’s Los Pelambres expansion project, with parts put on care and maintenance. 

Twenty-one mining operations account for more than 90% of Chile’s copper production. According to Chilean copper commission Cochilco, the country’s copper output was expected to reach 5.87 million tonnes this year and grow to 5.91 million tonnes in 2021.

The world’s largest copper producing company, Codelco, and biggest copper mine, Escondida, are located in Chile.

Codelco has cut capacity - by how much is unclear - and has a deal with unions to maintain some level of production. 

The state-run miner produced 1.7 million tonnes last year, its lowest since 2008, as it continues to struggle with aging mines.

The giant Escondida mine, which produced 1.19 million tonnes last year, is continuing to operate, although it has restricted contract workers from entering the site. BHP has a 57.5% stake in the mine - located in the northern Chilean region of Antofagasta - while Rio Tinto owns 30% and a Japanese consortium holds the remainder. 

Other major producers have not reported any material impact to their operations in Chile as a result of the coronavirus. 

It is not just copper - Chile is a key producer of lithium, essential to the production of batteries for electric vehicles, through domestic producer SQM and Charlotte, North Carolina-based Albemarle Corp. Chile also produces silver and molybdenum as a byproduct of its copper output.

Meanwhile, ports are still open - except to cruise ships - and are continuing to ship material, market participants say. 

A quarantine could change this rapidly. 

Much will depend on whether mining is declared an essential industry; in South Africa it was not, in India it was. In both countries, the mining and metals industry constitutes a large part of the economy, including jobs. 

Similarly, in Chile, mining is a pillar of the economy, contributing $18 billion to gross domestic product last year, with copper accounting for $15.21 billion in exports.

As has already been seen in India, where mining and processing of commodities is exempted from the lockdown, steel producers have started cutting run rates and cargoes are expected to be disrupted in the coming days. Not much has been heard yet from the base metals side.

Meanwhile, banks are open, but reducing staffing means key documents such as bills of ladings and letters of credit aren’t being processed quickly, if at all. 

The coronavirus is already starting to have an impact on these kinds of services in Chile. Since Friday March 20, Cochilco has only been able to send and receive certificates of origin from 10am-noon Santiago time (1-3pm London time). 

Remember too that Chile has been battling social unrest over issues such as pensions, salaries and the high cost of public transportation. 

The discontent included criticism of the public health care system, which raises more than half of its budget from taxation and requires workers and pensioners to pay 7% of their income toward insurance. 

It is a system that is starting to be tested as the virus spreads and is another factor likely to play a role in the Chilean government’s next move.


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