Wednesday, January 21, 2009

Chile's Copper Industry Tarnishes

BHP Delays $6.75 Billion Escondida Expansion on Slump (Update2)

Chile’s Copper Windfall Props Up Spending as Ecuador Defaults

"BHP Biliton, dueña de Minera Escondida, anuncia 2 mil despidos en Chile" El Mercurio

"Anglo American paraliza parte de su producción minera en Venezuela" America

Chile is the world's largest producer of copper, and copper has been called "the engine of Chile's economy". Like many Latin American countries, raw materials make up a large portion of Chile's gross domestic product (GDP). Copper accounts for approximately one quarter of government revenue in Chile, and the government sets its budget based on copper price forecasts. Unfortunately for Chileans, its "copper engine" is slowing as copper prices have fallen dramatically in light of the global economic slowdown. Mining companies are beginning to reduce operations in Chile as copper prices have fallen 68 percent from their May 2008 record highs.

Today Australian-based BHP Billiton Ltd., the world’s largest mining company, announced it will delay $6.75 billion in projects at its Escondida copper mine in Chile. BHP also announced a cut of 2000 jobs in Chile, 2300 jobs in Australia, and 1650 jobs in the United States. Those layoffs represent 6 percent of BHP's global workforce.

Escondida is the world's largest copper mine, producing one quarter of the copper from Chile. Output at the mine is already down approximately 12 percent from last year. Diego Hernandez, president of BHP's base metals division, explained that the price of copper will stay "relatively low" over the next 12 to 18 months, and that BHP "can withstand this level of prices."

BHP is not the only mining company scaling back in Chile. London- based Antofagasta Plc also said this month it fired workers at two copper mines in Chile. In December, BHP, US-based Freeport-McMoRan Copper & Gold Inc., and UK-based Anglo American Plc placed $3.1 billion USD of Chilean projects on hold.

The Chilean government assures its citizens they have little to fear. Their government is still in the black, because it set its 2008 budget based on a copper price forecast of $1.37 a pound, less than half the average 2008 copper price. Copper is currently trading at approximately $1.43 USD per pound. Also, the government saved over $28 billion USD when copper prices were higher, so state-run services will not face spending cuts in the near future.

Chile is not the only Latin American country affected by the mining industry slowdown. Yesterday Anglo American temporarily halted production at its biggest nickel mine in Venezuela.

1) What type of risks does a country face when its revenue is heavily dependent on raw materials?
2)How can that country minimize those risks?

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