Falling copper prices cause Chilean crisis

Back    Forward

The price of copper keeps falling owing to the slowdown of the Chinese economy in particular. To Chile, which holds the largest reserves in the world, this means less growth, less tax and currency revenues and also a number of small mining operations shutting down at an increasing pace? Thousands of mine workers across the industry are losing their jobs and their families their income.


The “curse of raw materials”

With 38% of the world’s copper in its subsoil, Chile is its main producer: 5.6 million tons yearly — five times the production of the US, Australia, Peru or China — but the price of a metric ton is now half as much as it was at its peaks. It dropped from $8,400 to 4,400. 

“Copper is Chile’s salary,” said Salvador Allende, and rightly so, as mining accounts for 13% of the Southern Pacific country’s GDP. Entire regions make a living mining copper in small and medium-sized operations.

The crisis is deeper in the far North. These very days, in Copiapó, 220 loaded trucks are staying put waiting for the price of copper to rise. The cost of production for a small mine comes to $3 per pound and to $2.6 for a medium-sized mine — this is an unsustainable cost against a current price of $2.04 per pound, even adding the 40 cents contributed by the state.

Reckoning ancillary production — machinery, transport, construction — the number of employed in the industry increases by four times. Now, however, in areas like Tierra Amarilla, in the middle of the Atacama Desert, trucks make no more than three trips a day against the ten they made before the crisis, and flights decreased by a fifth. The number of small mining operations shrank to 928 from 1,131 at the beginning of 2015, El Mercurio reports. Unemployment will worsen come autumn when miners who worked in the grape harvest come back up from the valleys.” These are people with very specific skills that cannot reconvert”, said Eduardo Catalano with the local mining association. “The state should look after them and their very special skills”.

Workers in large mining operations are not faring better. Escondida mine, the world’s and Chile’s largest copper mine, laid off 1290 people, which translates in around 7,000 families that no longer have an income; Anglo American’s El Soldado laid off last year 6,000 workers. In all, the industry shed 23,050 jobs between October and December last year, according to the Chilean Institute of Statistics.

Big Mining handles 70% of Chilean copper. The remaining 30% is mined and marketed by Codelco, the state-owned copper company. Both state and public companies now face in 2016 “prospects that are worse than expected”, according to the freshly appointed Finance Minister, Rodrigo Valdés.

State coffers are feeling the pain too, because copper contributed to the nation’s tax revenues since early 1900 by as much as 16%. And here is where things don’t add up in Codelco, and in what could turn out to be the most massive fraud in the copper industry.

The copper futures scam

Even with prices around 50 cents to the dollar, Codelco never missed contributing to the nation’s budget — up until ten years ago, precisely then, when the price of copper peaked to $3.5 per pound. Valdés stated that Codelco’s profits would amount in the current exercise to “close to zero.” How could that be possible? This is what economist and lawyer Julian Alcayaga, of the NGO Comité para la defensa del Cobre, asked himself before taking on too a closer look at Codelco’s books. The explanation lays with futures transactions: contracts whereby Codelco agreed to sell copper at a given expiry date at a given price. Coincidentally, these prices where in the last ten years always less than half the average market price ($ 1.36 when the average market price was 3.42 in a case).

“It is not credible that these were errors in the projected prices of copper: this was a deliberate action to lose money to favor a specific market participant,” said Alcalaya in an interview to Radio Universidad de Chile. “Records of losses begin in 2010 and go on up to 2014”, said the economist who estimated a damage to Codelco — and thus to the Treasury — of $21 billion. Curiously, the Chilean media did not show much interest for the complaints filed to courts, but this could reverse because now the case is resting on the desk of the High Complexity Prosecutor, who specializes in high-profile fraud. A prestigious Mexican magazine, Proceso, published a long investigative journalism article on the issue of the “zero profits” of the company which extracts and sells the equivalent of the combined copper production of Canada and Australia.

It is not unusual for the industry behemoths to record in the books controlled losses from futures transactions in order to pay fewer taxes in the country they mine a commodity. In this case, however, the Chilean NGO’s suspect is that these losses are hiding an attempt by one or more corporations to bankrupt Codelco, and take over its 1.7 million tons a year — a stunning 11.4% of the world’s red metal pie.

Bachelet’s government is tackling both the crisis and inner dissent

Codelco’s losses could have funded for over ten years the free-quality-university-for-all reform, one of Michelle Bachelet main reforms. The President in the meantime has a hard time relaxing even during the government’s summer recess. Last year, she had already arrived in Caburgua, in the Chilean Patagonia, when a tax evasion scandal involving her daughter in law broke.

As we write, the presidential palace administrator, Cristián Riquelme, resigned because of alleged bribes in contracts granted to companies, including the one involved in her daughter in law’s probe (Caval case). Senior officials might now be held accountable in the copper futures scam that happened during her previous term and that of Ricardo Lagos (of her same coalition).The crisis, the scandals and social inequalities fed a climate of skepticism that spreads farther at every call by the ruling coalition to “realism” and to the need to accommodate the interests of very different parties. Hillary Clinton is using Bachelet’s slogan “Estoy Contigo” (I’m with you), but part of the Chilean population does not seem to buy that anymore — her disapproval rating rose to 67%.

Nueva mayoría, the new name of the center-left alliance that governed almost continuously since the fall of the Pinochet dictatorship, was formed until the 2013 elections by a spectrum ranging from the Christian Democrats to the Socialist Party. From December 2013 on, the Communist Party and many new young political leaders entered the grouping. The CP being part of the government could explain the low degree of social conflict despite the economic and social issues that are currently affecting the most safe and reliable country in Latin America. Young leaders of the new left, however, are growing impatient with a majority so varied that is too slow, they believe, in adopting the reforms promised: labor, free tertiary studies, the democratization of the pension and the health care systems, and last but not least, a new Constitution. “There are tensions between the old left that considers governability a priority and the new left that perhaps would rather lose to the right than win with old left leaders,” said Max Colodro, a philosopher and political analyst in a TV interview with La semana politica. Even so, Chile is once more a democracy laboratory – this time as to the fate of grand coalitions.

The peaceful environment in Lake Caburgua, where the President stays during recess, is in stark contrast with that in the rest of the country.

Continue reading this article and all other Eastwest and content.

Subscribe for 1 year and gain unlimited access to all content on plus both the digital and the hard copy of the geopolitical magazine for € 45, or gain 1 year of unlimited access to only the website and digital magazine for € 20