ROLE OF COPPER IN CHILEAN ECONOMY Patricio Meller, Bernardo Lara & Gonzalo Valdés January 2010 1
Basic Data: Chile 2009 Population (millions) 17 Yn/cap (US$ PPP) 14,299 GDP (billions US$) 243 Territory (km 2 ) 755,839 Total Exports (2008; billions US$) 66 Copper Exports (2008; billions US$) 33 (50%) World Copper Reserves Share (2008) 36% (1 st ) Source : WEO, Central Bank of Chile 2
Chilean Copper Data -Chilean World Production Share -Chilean World Reserves Share -Chilean Production by Companies -Chilean Firm Production Composition 3
% 45 Chilean Share of World Copper Production 1900-2008 40 35 30 25 20 15 10 5 0 1900 1910 1929 1938 1950 1960 1970 1980 1990 2000 2008 Fuente : World Bank (1987), World Bureau of Metal Statistics 4
World Copper Reserves Year 2008 Canada; 2 Reserves 2008 Kazakhstan; 2,2 Russia; 3 Zambia; 3,5 Other; 11 Chile; 36 Indonesia; 3,8 Mexico; 4 Australia; 4,3 Poland; 4,8 Peru; 12 China; 6,3 United States; 7 World Copper Reserves Year 1992 Other; 19,2 Canada; 3,8 Kazakhstan; 3,3 Chile; 26,7 Reserves 1992 Russia; 4,9 Peru; 3,9 Zambia; 5,6 United States; 14,8 Indonesia; 2,5 Mexico; 4,4 Australia; 3,8 Poland; 5,9 China; 1,3 Source: COCHILCO 5
Chile: Production by type of companies Source: COCHILCO 6
Chilean Production Share - CODELCO and Private Companies (%) 90 80 70 60 50 40 30 20 10 0 CODELCO Private Companies 1980 1990 2000 2008 Source: COCHILCO
Importance of Copper in the Chilean Economy -Copper X/Total X -Copper Share Fiscal Revenue -Annual Investment in Cu -Employment in Cu 8
% of Total Exports 90% Chilean Copper Exports / Exports Basket 80% 70% 60% 50% 40% 30% 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 Source: - Central Bank, save for copper. - Copper data by Chilean Copper Commission. 9
25% Copper Share of Fiscal Revenue Chile, 1994-2008 20% 15% 10% 5% 0% 1994 1996 1998 2000 2002 2004 2006 2008 Source: DIPRES, CSO - Monthly Bulletin of Statistics, Ministry of Finance and National Planning 10
4 500 Annual Mining Investment in Chile (millions US$) 4 000 3 500 3 000 2 500 2 000 1 500 1 000 500 0 1976 1980 1984 1988 1992 1996 2000 2004 2008 State companies Private firms Total Source: CODELCO & Foreign Investment Committee. 11
Copper Mining Employment: 1% - 1.5% Copper GDP Share: 5.5% - 7% 12
Importance of Copper in the Chilean Economy (2008) -Copper X/Total X 53% -Copper Share Fiscal Revenue 15% -Annual Investment in Cu US$4400 M -Employment in Cu 1.5% -Copper GDP Share 6% 13
Effect of Cu Price on Macro variables Net Trade Balance ++ Capital Inflows ++ Growth + Government Expenditures (US$) 0 Government Expenditures (% GDP) 0 Exchange Rate 0 Manufactured exports 0 14
Real Copper Price 1900-2007 (US$/TM) 10 000 9 000 8 000 7 000 6 000 5 000 4 000 3 000 2 000 1 000 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 Source: USG Survey (US$-1998) 15
Real Copper Price 1974-2007 (US$/TM) 7 000 6 000 5 000 4 000 3 000 2 000 1 000 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 Source: USG Survey (US$-1998)
Chile Net Trade Balance and Copper Price Source: Central Bank of Chile and COCHILCO. 17
Chile - Ratios of Copper Exports (USD) / Non-copper Inflows (USD) Foreign Investment Inflows: Sum of direct and indirect foreign investment. Non-copper Inflows: Foreign Investment Inflows plus non-copper exports. Source: Central Bank of Chile and COCHILCO. 18
Chile - Government Expenditure (real $) and Copper Price Source: Ministry of Finance and COCHILCO. 19
Government Expenditure (% GDP) Copper Pirce (cents US$/lb.) Chile Government Expenditure (% GDP) and Copper Price 30 400 25 350 300 20 250 15 200 10 5 150 100 50 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 0 Gov. Expenditure Chile (% GDP) Real Copper Price (BML, US$ cents/lb.) Source: Ministry of Finance and COCHILCO. 20
GDP Growth and Copper Price in Chile 1980-2003 GDP Growth and Copper Price in Chile 2004-2009 Source: COCHILCO and Central Bank of Chile. 21
Chile Manufactured exports and Copper Price 1980-2007 Source: Central Bank of Chile and COCHILCO. 22
Real Exchange Rate (2000=100) Copper Price (cents US$/lb.) Chile Real Exchange Rate and Copper Price 200 400 180 160 140 120 350 300 250 100 200 80 60 40 20 150 100 50 0 1980 1984 1988 1992 1996 2000 2004 2008 0 Real Exchange Rate (2000=100) Real Copper Price (BML, USD cents/lb.) Source: WEO and COCHILCO. 23
Long Run Rules Macro Stability Central Bank autonomy Long Run Monetary Policy (p target: 2% - 4%) Fiscal Surplus Exchange Rate Regime: Clean Free Float Long Run Fiscal Policy: Structural Fiscal Surplus (0.5% GDP) Royalty Sovereign Funds 24
Structural Fiscal Surplus: Ministry of Finance uses L.R. g & P Cu to calculate structural revenues Fiscal Surplus (0.5% GDP) is required. Then $ Gov. Savings if present P Cu and/or g > than L.R. $ Gov. Deficits if present P Cu and/or g < than L.R. Implications Gov. expenditure smoothing Countercyclical policies 25
Copper mining royalties applied in selected countries Chile Country/Region Royalty Tax Basis < 20,000 TM 20,000 50,000 TM > 50,000 TM 0.5% - 1% 1.5% - 4.5% 5% Taxable income Zambia 0.5% - 2% ad valorem on net residual value (RNF) Australia Western Australia 5% Concentrate: 5% of value Metal: 2.5% of value Peru 1-3% Mobile scale based anual sales USA Michigan 2-7% Adjusted sales value Canada Saskatchewan 5-10% 5% net profits (increasing to 10% according to output levels) Source: Otto et al, 2007. 26
Total Fiscal Revenue (Millions US$) Source: COCHILCO, CSO - Monthly Bulletin of Statistics, Ministry of Finance and National Planning 27
Sovereign Funds in Chile Rationale (Chilean Sv abroad of Copper Surplus) Government Expenditure Stability Intertemporal Redistribution Prevention of Dutch Disease Contributions and withdrawals are regulated by a Fiscal Responsibility Law Funds among best-functioning and transparent of the world (8th Peterson Institute ranking) 28
Sovereign Funds in Chile Sovereign Funds allocation: US$ 25 B (15% GDP) Pension Reserve Fund: Transfers copper resources intertemporally to finance future pensions = US$ 3.5 billions Human Capital Fund: Finance graduate studies abroad. Stock US$ 6 billions. Annual flow from returns finance the studies. Economic and Social Stability Fund: Stock US$ 13.7 billions. Annual flow from returns are revenue for Fiscal Budget. In the 2008 crisis, U$ 6.9 billions were used.
Copper Views: XX XXI Centuries XX Century : Pessimistic View w/r Cu Why? XXI Century: Optimistic View w/r Cu Why? 30
XX Century: Bias Against-Cu A. Conceptual Level -- LA 1950-1970 Prebisch : Deterioration T.T. Dependence Theory : Center Periphery Enclave Hypothesis Export Pessimism B. Political Economy -- Chile 1900-1973 Large Cu Mining 1900-1970: Foreign Firms Under-development & Foreign Exchange shortage Presi Allende: Cu: master beam of development Dictatorship 1973-1990: Structural Trilogy 31
XX Century: Bias Against-Cu C. Conceptual DC Views Natural Resources Curse ( J. Sachs, 1995) 2 Sector Model Industry/NR (P. Krugman 1987) Dutch Disease (Decade 80s) Corporative Groups & Corrupt Politicians D. Democracy Pragmatism Post 1990 Chile needs Foreign Investment Comparative advantages => F.I. in Cu F.I. in Cu --- Induces F.I. & Domestic I => Boom g 90s Ǝ private and state firms in Cu : No problem 32
XX Century: Bias Against-Cu E. Perceptions w/r Cu at end XX 2nd Export Phase Foreign Firm: no copper tax (Disputada) DC Consumption Cu F. Synthesis Perception w/r Cu XX Cu: enclave Cu: foreign Only X Cu will not make Chile DC Investment in R & D for new uses of Cu 33
XXI Century: New Issues A. Chilean Discovery: Cu is important P CU = US$3/# Cu Fund: US$25.000 millons (15% GDP) B. New Issues Development Strategy: Clusters (NNRR) CHINDIA => Cu generates + US$ futuro => Cu. Problems related to > Cu Production Energy Carbon Water 34
Refined copper consumption kn/capita 20 Copper Consumption Kg/Hab.- 1970-2008 18 16 14 12 10 8 6 4 2 0 1970 1980 1990 2000 2008 China Germany Japan Korea United States Source: COCHILCO 35
Megajoule/MTF as Shown 6 000 Fuel Use per Ton of Copper Content 5 000 4 000 3 000 2 000 1 000 0 Open Pit Underground Mine Concentrating Plant 2001 2008 Source: COCHILCO
Megajoule/MTF as Shown 9 000 Electricity Use per Ton of Copper Content 8 000 7 000 6 000 5 000 4 000 3 000 2 000 1 000 0 Open Pit Underground Mine Concentrating Plant 2001 2008 Source: COCHILCO
Gigajoule / TMF Projected Use of Energy 40 35 30 25 20 15 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Business as Usual Energy Efficiency Source: COCHILCO
Energy Sources 2000, North of Chile Energy Sources 2009, North of Chile Diesel; 1,6% Hydraulic; 0,6% Hydraulic; 0,4% Gas; 42,0% Diesel; 22,8% Coal; 55,8% Gas; 20,1% Coal; 56,6% Hydraulic Coal Gas Diesel Hydraulic Coal Gas Diesel Energy Sources 2020, North of Chile Geothermal; 6% Wind Power; 3.50% Hydraulic; 0.40% Gas; 2.30% Coal; 87.70% Source: COCHILCO
Million MT CO 2 Equivalent KMT Fine Content 18 Total Greenhouse Gas Emissions and Copper Production, Chilean Copper Mining Industry 6 000 16 14 5 000 12 4 000 10 8 3 000 6 2 000 4 2 1 000 0 2000 2001 2002 2003 2004 2005 2006 2007 0 Direct Emissions (Direct Fuel Use) Indirect Emissions (Electricity Use) Copper (kmt Fine Content) Source: COCHILCO
Proyected Demand of Water for Copper Production in Chile Millions of m 3 600 550 500 450 400 350 300 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: COCHILCO
ROLE OF COPPER IN CHILEAN ECONOMY Patricio Meller, Bernardo Lara & Gonzalo Valdés January 2010 42