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Chile Commodities May 2023

Chile: Copper prices fall in May; Congress approves new mining royalty

Copper prices dipped in May to USD 8,243 from the prior month’s USD 8,809, and tracked slightly above USD 8,000 in early June. Prices have been weighed on in recent weeks by signs that China’s economic rebound is faltering, together with muted industrial activity in the Euro area and the U.S. Moreover, Peruvian supply has bounced back now that social unrest has eased. The latest data shows that Chilean copper output fell 1.1% in annual terms in April, following a 4.7% decline in March.

Copper prices are seen averaging slightly higher than their current level later this year, but will remain below the USD 9,000 to USD 10,000 levels which prevailed for much of 2021 and early 2022. On the supply side, Chilean copper output will continue to be constrained ahead by declining ore grades and water shortages, which will be partly offset by several new projects due to come online. The combination of lower average copper prices this year compared to last, soft domestic copper output, sluggish economic momentum and high social spending demands will see the fiscal balance slip back into deficit in 2023.

In May, Congress finally approved an updated mining royalty law after several years of wrangling. The royalty will increase the mining sector’s tax burden to levels above those seen in other key producers such as Peru or Canada. This could make Chile relatively less attractive as an investment destination going forward. On the other hand, the end to royalty-related legislative uncertainty and the large right-wing majority in the council tasked with drawing up a new constitution should be positive for mining firms’ sentiment.

On the fiscal and political implications of the royalty reform, EIU analysts said:

“The government anticipates that the royalty will generate 0.5% of GDP in new revenue. […] The royalty will have little impact on our fiscal forecasts, as the government will channel the new funds into regional development and social initiatives. However, the fact that the bill passed with support from most opposition parties reflects the government’s willingness to dilute reforms, auguring well for its pending pension and tax reforms.”

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