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CHILE: Chile Struggles to Meet Copper Demand

Although the country has an abundant supply of the metal, it lacks the resources to boost production at its mines.

by Rebecca Bream, Paul Harris and Kevin MorrisonThe Financial Times
June 6th, 2006

"Temporary" was the word Chilean President Michelle Bachelet chose during her first state of the union speech last month to describe a surge in the price of copper.

Copper prices took up a good portion of Bachelet's speech because the Chilean government owns Corporacion Nacional del Cobre de Chile, or Codelco, the world's biggest producer of copper. Proceeds from the sale of the metal helped the country to post a record budget surplus last year and continue to line the country's coffers.

But although Chile has an abundant supply of copper, it does not have an abundant supply of the resources it needs to get it out of the ground — including water, capital and even workers.

Such constraints have kept Codelco and other producers in the country from boosting production fast enough to meet rising demand. In fact, a fear that Chilean mine expansion will be delayed is one of the factors that has lifted the price of copper.

Last month Codelco cut its outlook for short- and long-term copper production, estimating that output this year would fall by 6.5% to 1.71 million tons and keep falling next year.

Codelco's failure to develop its copper resources drew criticism in 2004 and 2005, when copper prices started to rise. The outgoing executive president, Juan Villarzu, had an ambitious expansion plan and sought to spend as much as $1.5 billion each year for the next 15 years to boost copper production from 1.74 million tons per year to 3 million tons by 2020, but he did not have the money to do so.

His incoming successor, Jose Pablo Arellano, thus faces the thorny issue of how to fund the plan. Despite generating a profit of $1.68 billion in the first quarter of the year, Codelco is unable to retain any of that for investment because, as a state company, its profit goes to the government.

Borrowing is not an easy option as Codelco's debt level affects the debt level of the government and its credit rating.

Villarzu says the solution to the funding issue is simple but controversial: Allow Codelco to retain and reinvest profit.

Water is another problem. Mines are big consumers of water, which is used in the processing of copper, and some of Chile's copper mines are located in the Atacama desert, one of the driest regions on the planet.

Because fresh water is precious, miners are looking to the sea. Tom Albanese, executive director of copper at Rio Tinto, said last month that Rio and BHP Billiton had invested $200 million in a desalination plant for Escondida, the world's largest producing mine. It will pump seawater a distance of 200 kilometers.

Albanese said other mines in the Atacama region faced a similar challenge. "Multiply Escondida's new water requirements with all the mines in northern Chile, and the dimension of the problem becomes apparent," he said. Copper mines in the Atacama area produce about 3 million tons a year, or just under one-fifth of global copper supply.

In some cases, copper companies in Chile have chosen to produce less despite the strong demand for the metal.

London-based Antofagasta, which is controlled by Chile's billionaire Luksic family, cut copper production last year from its giant Los Pelambres mine in central Chile.

It did this to maximize the production of molybdenum, a metal used to make stainless steel that is found alongside copper.

The price of molybdenum soared last year at a rate outstripping the copper price, so Antofagasta chose to mine ore that had a higher proportion of molybdenum, and a lower proportion of copper, to maximize profit. It is now pushing ahead with ambitious expansion plans for copper production from Los Pelambres.

As Bachelet said, price rises are temporary. But it seems the challenge of making money from the spikes is constant.





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