As Chile maintains its pivotal role in global mineral production, Punta El Monte offers an in-depth analysis of the early 2024 landscape, providing a comprehensive overview of one of the world's most prominent mining hubs with its Chilean Mining Industry Report.
GENERAL OVERVIEW - MARCH 2024
The government has emphasised the necessity of tax reform to fund initiatives that require increased public spending, such as pension and health reforms. Congress has recently agreed to discuss a tax reform bill, but the opposition has declined to raise tax revenue through higher taxes. The legal initiative places significant emphasis on reducing tax evasion and avoidance.
On another front, Chile experienced a significant increase in foreign direct investment (FDI) in 2023, with a flow of USD 21,738 million (+19.2% YoY), the fourth highest figure in the last 20 years.
To further encourage FDI, the executive branch has submitted a bill to Congress that aims to reduce the time required to obtain approvals for large investment projects by one third. The proposed measures aim to consolidate 380 procedures from 37 public services into a single location, creating a one-stop shop. This initiative could make significant progress as both the ruling party and opposition agree on the need for improvement.
Chilean government has announced that, as part of its national lithium strategy, it has designated the two largest salt flats in the country as strategic areas where the state should have control over exploitation. However, it has also created opportunities for production through public-private partnerships and private enterprises in other areas.
ECONOMIC SCENARIO
Economic activity has exceeded expectations in two out of the last three records, resulting in a 0.2% expansion in GDP at the end of 2023. Additionally, the 2.0% monthly expansion (MoM seasonally adjusted) in January has left growth projections for this year in a positive state. GDP is expected to expand by 2.0% in 2024 and 2.1% in 2025.
As for the demand components, household consumption is reported to have completed its correction phase after the over-expansion generated by the pandemic stimulus. Meanwhile, fixed capital investment is still expected to remain weak. Therefore, consumption is projected to increase by 1.8% and 2.5% this year and next, while investment is expected to decline by 1.3% this year and increase by 2.2% next year.
The country's inflation control has been elusive, with a significant downward surprise in January and an opposite trend in February. In fact, year-end inflation projections have increased from 3.0% in last year's report to 3.5% in this edition. However, over the two-year period, they remain anchored to the 3.0% target.
The monetary authority has responded by reducing the policy rate by varying degrees in its latest meetings. They reduced the reference rate by 50 bp in October, 75 bp in December, and 100 bp in January. The projections indicate that it will be at 4.50% at the end of the year and 4.00% over the two-year period.
In addition to normalizing inflation and the monetary policy rate, there has been a significant correction in the current account balance. At the end of last year, the current account balance showed a deficit of 3.6% of GDP, compared to 8.7% of GDP the previous year. This improvement was aided by an 8.7% depreciation of the exchange rate over the last three months.
Finally, in 2023, the fiscal deficit was 2.4% of GDP, slightly higher than the 1.9% estimated by the Ministry of Finance. For this year, the fiscal authority projects a deficit of 2.4% of GDP, while market economists forecast it to be closer to 2.8% of GDP. By 2025, it is expected to remain at 2.4% of GDP.
COPPER SECTOR OVERVIEW
Mining exports have recently recovered and are expected to continue to do so throughout the year. It is worth noting that lithium shipments have grown to almost 10% of mining exports in 2023, despite a recent drop in price.
Additionally, mining exploration in Chile reached its highest level in ten years, amounting to USD 832.7 million.
However, it is important to note that the sector's productivity has fallen again after rising during the pandemic. Between 2021 and 2022, there was a 0.5% reduction in total factor productivity.
Nevertheless, Codelco's production recovery, expansions like Pelambres, and upcoming projects such as Quebrada Blanca and others will increase national production from 5,330 kMT to 6,874 kMT in 2029, according to Cochilco's projections.
Employment in the mining sector has increased by 1% since the previous report, while national employment has remained stagnant.
Nonetheless, mining labour costs have only expanded by 3.3% between October and January, which is lower than the 4.1% national expansion. This wage recovery is due to the cyclical recovery of wages after being subdued during the health crisis.
In the December-February quarter, copper cathode exports decreased by 4.6% compared to the previous period, while concentrate exports fell by 6.3% QoQ. As a result, total mineral exports declined by 3.8% QoQ.
Additionally, imports of mining capital goods contracted by 26.1% in the same quarter compared to the previous period due to the completion of some large projects, such as Quebrada Blanca.
In contrast, the mining investment portfolio for the next five years will increase from USD 20,445 million to USD 25,055 million (+22.5%). Additionally, investments totalling USD 4,942 million (+11.0%) are planned for this year in the sector.
COPPER MARKET
Between the end of December and the end of March, copper prices rose by 3.0% due to a recovery in the Chinese market and limited supply. Price projections for the upcoming year indicate some stabilization, which may be impacted by geopolitical tensions.
However, forecasts for world refined copper supply have been revised down from 27,534 kMT to 26,882 kMT in 2024, a decrease of 2.8% from 2023. Meanwhile, a 4.5% increase is forecast for 2025.
Demand is also expected to see a more moderate expansion, with an estimated growth of 0.4% in 2024 and 2.0% in 2025.
At the time of publication, Cochilco had not yet released the quarterly report on cash cost fluctuations in Chilean mining.
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