Chile Mining Industry Pertaining to Copper

Executive summary

As an emerging market in the Latin American region, the nations’ mining industry in general, and copper production in particular is of great significance to this country. Towards this end, Chile has managed to maintain the position of a leading global producer of copper. The Chilean government through the state-owned mining company Codelco, exerts a controlling effect on the copper production chiefly because it of significant importance in terms of contributing to the Chilean exchequer. Even then, there are still many private copper mining companies, and these have benefited from the military-adopted policy of free-market in Chile. The mining industry and in this case, the copper sector in Chile, is often affected by a number of macro environmental factors. To start with, copper has become quite politicized in Chile for economic reason ever since the 19th century.

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Economically, copper represents more than 50 percent of the total export earnings of the country. For those who are willing to do business in Chile, it is important to learn the business etiquette of the people, such as a prompt arriving at business appointments. In addition, the period between January and February is when most executives and their staff as well tend to go on holiday, meaning that business activities are often low during this period. Owing to great political and economic stability in Chile, the country has been declared as the lowest risk investment country within the Latin American region, and a corresponding A+ rating by Standards & Poors (S &P). This notwithstanding, it is important for willing investors into the Chilean copper mining industry to undertake an industry analysis beforehand, in order to identify bottlenecks within the sector, and devise strategies on how to overcome these.

Introduction

As one of the most significant mining nations in Latin America, Chile has managed to maintain the position of the largest producing countries in the world. In 2004, the copper production in Chile attained the 5.3 million metric tones, with Codelco (the Chilean state-owned mining company of copper) accounting for 32 percent of that specific production. What this means therefore is that the privately-owned mines in Chile had surpassed Codelco, which had hitherto come to be regarded as the chief producer of copper (Chilean copper commission statistic bulletin 2001).

In 2000, Chile led the world in terms of cooper production, accounting for 34.4 percent of the global copper mining (Chilean Copper Commission Statistic Bulletin, 2001). This translated into an economic gain of US $ 7.25 billion; a figure that represents approximately 90 percent of the entire country’s mining export earnings (Chilean copper commission statistic bulletin 2001).

Perhaps this is why such countries like the United States have for a long time now been “courting” Chilean authorities, possibly to share the copper mining spoils. In the 1920s, the United States redoubled its investment into the rich copper mines of Chile, with the result that mining gained ground to become a key pillar of the country’s economy. Chile’s mines were “the classic enclave economy of Latin America” (Collins & Lear 1995). Not only were they under the control of foreign-based investors, but their operations too were restricted to the northern mountain sides and great deserts, away from the ‘populous central valleys’ (Chilean copper commission statistic bulletin 2001).

There was a partial connection of the export activities to other areas, courtesy of railroads that linked cities, ports, mines and agricultural areas, as well as through a flow of extensive groups of workers to and fro the rural areas, cities and mines, in line with the mining economic ups and downs (Collins & Lear 1995). The foreign-based mining operation was of benefit to the national economy in as far as the government managed to tax profit for purposes of provision of services, jobs, and economic infrastructure to a rapidly increasing middle class.

Chile macro analysis

Economic environmental impact of copper mining in Chile

Chilean copper has played a significant role in the country’s economy for as long as 1825, a time when the Americans and the British embarked on a competition as forewing direct investors into the Chilean silver and copper mining market. 10 years later, Chile was already exporting close to 12, 700 tonnes of copper on an annual basis, most of it finding its way into the United States (Kuczynski & Williamson 2003). By 1860, copper already represented a 55 percent portion of the nation’s economy, thereby making the country to become highly reliant on the mineral.

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Following the end of the 1879-83 pacific war Chilean copper quantity continued rising significantly. While copper demand placed Chile miles ahead of other countries within the Latin American region, the country’s increased reliance on the mineral placed it at the mercy of the global market. Consequently, the economy of Chile went ‘into a tailspin’ following Europe’s industrial slump and a resultant drop in the price of copper (Riesco et al 2008).

In 1990, copper earnings accounted for half of the export earnings of Chile, and a 15 percent further representation of the country’s GDP. By 1993, the union of Chilean copper workers had a workforce of 19,000. Of these, 5,000 were employed by COLDECO. In 1992, copper production in Chile attained the 1.94 million tons mark (Chilean copper commission statistic bulletin 2001). For the 10 year period between 1984 and 1994, the copper industry in Chile contributed US $ 15 billion to the country’s treasury.

Since 1978, the Chilean economy has experienced an average expansion rate of 7.2 percent, with that between 1990 and 2003 falling to an average of 5.6 percent. Mining in general, and copper in particular, has been attributed to this observed economic expansion of the country. In essence, copper mining has been beneficial to the country, and is a critical source of the government’s revenue.

Political

The copper industry in Chile has not escaped political interferences. In 1955, both the United States and the Chileans governments entered into the new treaty law, an agreement that sought to alter the taxation system of the United States as a foreign direct investor into the Chilean copper mining industry (Chilean copper commission statistic bulletin 2001). As a result of this treaty, the United States enjoyed a reduction in taxes as well as other benefits, in return for investing in novel industrial plants that would ensure Chile enhanced its participation in the global production of copper.

In 1970, Salvador Allende-led left wing coalition came into office, and they sought to pursue a nationalization exercise of the industry. As a result, CODELCO came into being, with the result that the government’s share into the copper sector was raised tremendously. The Allende regime was marked by a period of economic slump, GDP decline and massive rates of inflation. Consequently, the country underwent a political and economic instability, paving way for the ascension into power of Pinochet in 1973.

Following the 1973 overthrowing of the previous regime by Pinochet, the already nationalized mines in Chile remained under the control of the state, in spite of the junta’s pro- U. S. inclinations. To-date, this still remains the case, mainly due to sentiments of the public, and also since Codelco generously contributes to the country’s exchequer. Not only does Codelco pay taxes, but all its dividends are received by the government. Furthermore, Codelco is charged 10 percent tax on the basis of the value for exported copper and copper-related products. This is in accordance with the Chilean laws 13, 136.

According to article 1 of the mining code of Chile (Riesco et al 2008), “”The State has absolute, exclusive, inalienable and imprescriptible ownership of all mines”. Besides the Mining Code, all the foreign-based mining investors are also required to comply with the Decree Law No. 600. This is the law that incorporates investment contract and foreign investment

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A compliance with this law allows for 10 years tax invariability, right from the point of production commencement, an acquisition of a foreign-based exchange market, as well as a right for the return of tax-free capital back into the country. For those companies that account for revenue of over U.S. $ 50 million, these stands a chance to have their tax invariability extended for a period of up to 20 years.

On the 16th day of June, 2006, the “Diario Oficial”, the official gazette of Chile, published Law 20.026. This is the law that set up a definite tax on activities of mining, effective form the first day of January, 2006. The law is made up of sliding scale, in line with the production of copper from nil less than 12,000 tonnes on an annual basis to 5 percent for an annual production greater than 50,000 tones, above the 12,000 tonnes of cooper mined by a company yearly (Chilean copper commission statistic bulletin 2001).

For those foreign-based copper mining companies that had signed the DL 600 contract prior to the first of December 2004, are to-date prone to a tax of 42 percent, these have been exempted from this clause of the law (Chilean copper commission statistic bulletin 2001). Those companies that generates a revenue of above US $ 50 million have chance to be awarded a mining taxation invariability, but nevertheless have to pay the customary income tax.

Cultural

With a population of approximately 14 million people, close to 5 million of these people in Chile are located at its capital, Santiago. The ethnic composition of Chile is 95 percent mestizo (that is, a population of mixed of Indian and European blood), a further 3 percent pure Indians (a majority of whom are Araucanian), and members of the European descent constituting less than 2 percent (Roraff & Camacho 2007).

Spanish is the official language in Chile, although some of the business people and employees of tourist centers speak English quiet eloquently. In spite of Chile lacking an official religion, nevertheless 78 percent of the population identifies themselves with the Roman Catholic faith, and 13 percent of them are Protestants. Still there is quiet a fairly large number of Chileans who consider themselves to be atheists.

Even after independence, Chile continued to hold onto an aristocratic and rigid society of land owners, who were descendants of the initial settlers from Spain. From here, there was a lesser class of domestic servants and peasants. The aristocratic land owners managed to shield themselves from paying hefty taxes. Voting was also on the basis of literacy and property qualifications, and this locked out most of the peasants (Roraff & Camacho 2007).

There was a rapid rise of the Chilean middle class during the latter period of the 19th century. This was mainly made up of educated mestizos. With growth in both industries and trade, and specifically after the post world war one collapse of the hitherto aristocrat-controlled nitrate market, there resulted a relaxation on the land owning rights. As a result, new groups of professional people, manufacturers, traders, and intellectuals started occupying the middle class, with mounting calls for reforms (Roraff & Camacho 2007). These groups were out to capture the government’s attention, in addition to their attempts at promoting social and economic change.

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At the moment, the social structure in Chile could be categorized into roughly three groups or classes. The upper class is made up of aristocratic land owners, wealthy merchants and industrialist, military men, and politicians. Even though these two segments that constitutes the upper class have both prestige and power as common attributes, they however do not see eye to eye economically and politically. Both these groups were in support of a military rule, although a majority of them resorted to a reinstallation of democracy by the end of the 1980s (Roraff & Camacho 2007).

The Chilean middle class is to a greater extent, made up of urban dwellers, with a wide variation in income, interests, and occupations. It consists of teachers, professionals, civil servants, university professors, small merchants, and private employers, investors and industrialists. This middle class is increasing both in size and economic muzzle, and they could be poised for an economic revolution in the years to come. According to Prahalad and Lieberthal (1998), this increase in the size of the middle class is what shall eventually bring to an end corporate imperialism in the emerging markets.

A majority if the members of this class were beneficiaries of the rapid rate of economic growth that swept across Chile in the late 1980s, through to the 1990s. The Chilean lower class is made up of crafts workers, farm laborers, miners, and factory workers. An upward social mobility in Chile has been quiet common, perhaps buoyed by the inception of a policy of free-market economy by the military rule.

In terms of gender roles, women enjoy an elevated level of independence in comparison to their counterparts in other nations within the Latin American region. Not only do they take part in public life, a significant number of them are involved in various professions and trades.

Business culture

While in Chile, arriving late for a business appointment leads to one being kept waiting, never mind the person you are supposed to see may not be attending to a pressing issue at the time. This way, the Chileans are made to ‘appear’ as if they are ‘in demand’ and thus extremely busy. Of course, the waiting time reduces with an increase in the level of importance of an individual (Roraff & Camacho 2007).

However, reputable companies that enjoy international ideology tend to break away from this concept. For a majority of the business meetings, a handshake is the starting point, gender notwithstanding. This is especially the case if it is a first business encounter.

With a progressive development of business relations, the two parties involved tends to become quite demonstrative, to include embracing in the case of men. As for the women, a kiss on the cheek is quite normal. Chileans have a tendency to use two surname on their business cards; that of both their fathers and mothers. However, a person is only addressed using the surname of their father.

Investors are often advised to avoid making business visits to Chile in either January of February, seeing that a majority of the executives and their staffs too are usually on holiday, meaning that this is a period of slowed business activities.

In terms of communication, it is worth of note for any business person that business people in Chile have a tendency of not answering phone calls, e-mails, letters, or even faxes in a prompt manner (Roraff & Camacho 2007). In addition, it is not common for these business people to acknowledge messages, with a majority of the business persons failing to respond until such a time as an opportunity either presents itself, or they instead get a definite answer. In case one asks someone to have a job done, the fact that such a person says they will do such a task is not a guarantee that it shall be accomplished right away.

Demographics

Starting from the middle of the 19th century, there was a rapid rate of growth of the various cities in Chile, in tandem with the thousands of immigrants who were trickling in from both the countryside and abroad, buoyed by enhanced modes of communication and transport.

In terms of age structure, 24.1 percent of the populations are below the age of 14 years, while those between 15 and 64 years from the bulk, at 67.4 percent. That above the age of 65 constitutes 8.5 percent of the population. By 2007, the Chilean population was estimated to have been growing at an annual rate of 1.223 percent (Roraff & Camacho 2007). Members of the Spanish and Basque region descendants constitute a large portion of the Chilean immigrants arriving into the country from southern France. The average life expectancy of the Chileans is 76.96 years, while the infant mortality rate stands at 8.36 deaths in every 1,000 live births.

Chilean mining industry analysis

Chile has emerged as the global capital for copper, seeing that the nation account for more than a third (35 percent) of the global output of copper. The Chilean mining industry is extremely significant to the country’s economy; given that this sector’s GDP contribution is in the double digit level (Chilean copper commission statistic bulletin 2001). Nevertheless, copper still remains the principle mineral that accounts for a larger portion of the total foreign exchange in Chile.

There are other minerals besides copper, such as gold and silver, but their levels of significance in terms of economic and political impact are no where near those of copper.

The Chilean production rate of copper was poised to rise by 5.5 percent in 2008, to hit the 5.9 million tones, an increase of 300,000 tonnes based on the production level of the previous year. This is as per the projections of SONAMI, the industry association of the Chilean copper industry. In 2007, copper output was at 5.588 million tonnes, an increase of 3.8 percent.

According to SONAMI, an increase in the growth of copper market projected to enhance its production to 6.1 million tonnes this year. Last year, SONAMI estimated an average price of copper of US $ 3.30 for every pound (Chilean copper commission statistic bulletin 2001).

However, decline in price is expected this year and indeed for the next couple of years, up to 2012, then the association forecast the average copper price to stand at U.S. $ 2.50 for every pound.

Nevertheless, these price estimates depends heavily on how the economy of the United States is fairing. In April 2008, the output of copper plummeted by a rate of 5.6 percent (year-on-year), following a strike action by copper workers based at the Codelco (Chilean copper commission statistic bulletin 2001). Thanks to its geological endowment, the mining industry in Chile is poised to continue obtaining gains from elevated process of metals. Towards this end, SONAMI estimates an annual growth rate for this sector of 3.8 percent for the period between 2008 and 2012.

Chile risk analysis

In their journal, “strategies that fit emerging markets’, Khanna, Palepu and Sinha (2005) have observed that a majority of the fast- growing economies usually tend to provide “poor soils for profits”. Part of the problem why foreign-based direct investors fail to succeed in these kinds of economies is due to a deficiency in specialized regulatory and intermediary systems which such multinationals could banks on.

For the successful businesses however, these shall often seeks to identify such institutional voids and find ways of working around the voids. Even then, a majority of the companies refuses to let go of their traditional business strategies which they have for a long time adopted, and thus are familiar with. Such strategies often place emphasis on standardized approaches towards new markets, to the extent of even “”experimenting with a few local twists” (Khanna et al 2005).

Khanna et al have further opined that owing to a lack of regulatory systems, mechanisms of enforcing contracts and specialized intermediaries, “institutional voids” in emerging markets hinders the decision by multinationals to implement globalization strategies. These are among some of the business risk analysis elements that business investors into such emerging economies as Chile ought to take into consideration before embarking on such a venture.

As a nation, Chile enjoys great political and economic stability and with 161 points, it is the lowest risk investment country within the Latin American region. (El Mercurion Agency 2008). Additionally, Chile has been ranked as the overall best Latin American emerging economy, leading to an A+ rating by Standards & Poors (S & P).

In terms of credit strength, Chile is today the world’s largest producer of copper, and a considerable production amounts of molybdenum byproducts too (Khanna et al 2005). The cost position of the Chilean copper mining industry is also quite competitive, while the mineral reserve base is long-lived. Furthermore, the generation of cashflow and earnings in the Chilean mining sector in general, and specifically within the copper sector, is quite solid.

With regard to credit challenges, it is quite tricky to fund strategic expansion and growth objectives, while at the same time also overseeing certain levels of debt increases. The maintenance of a cost competitive position in line with an increase in the cost environment of the copper product input is also another challenge within the sector. There is also the challenge of exposure to a currency whose revenue base is the dollar, relative to one whose cost base in the peso.

Conclusion and recommendations

The copper mining industry in Chile is of significant importance to the country.

In the past decade, crises have blown up quite easily in the Latin American region. Consequently, this has acted to diminish the “chronic crisis vulnerability of the region” (Kuczynski & Williamson 2003), and this needs to be a high priority objective for any willing investor into the region.

If at all this is to be attained, it is important that the existing macroeconomic policy be reoriented, to ensure a shift from a short-term economic gain to the maintenance and achievement of such strong fundamentals as low public debt in relation to the GDP, sound fiscal position, and substantial reserves. These are some of the factors that shall woo for example, direct foreign investors into the Chilean copper industry.

Furthermore, the existence of a free-market policy as evidenced from the case scenario of Chile is another positive factor that seeks to woo investors into a country. Nevertheless, the political atmosphere within a nation impacts significantly on the economic performance of a nation.

In the case of Chile, the government appears to have a highly controlling effect on the copper industry. Given the bureaucracy levels to which a majority of the countries operates, this could in effect discourage investors from venturing into newer markets.

On the other hand, the intervention of the government is called upon to sometime restore sanity at such a time as when turmoil may be experienced within a given sector. It is also a good sign to the business community that such a government is committed to their course.

Works cited

Chilean copper commission statistic bulletin (2001). Web.

Collins, Joseph & Lear, John. Chile’s free-market miracle: a second outlook. Oakland, CA: Food First Books, 1995.

Ghemawat, Pankaj: distance still matters: the hard reality of global expansion. September 2001. Harvard business review.

Khanna, Tarun, Palepu, Krishna, & Sinha, Jayant. (2005). “Strategies That Fit Emerging Markets”. Harvard Business Review. Web.

Kuczynski, Pedro-Paul & Williamson, John. Restarting growth and reform in Latin America. Washington, D. C.: Peterson institute, 2003.

Prahalad, C. K. & Lieberthal, Kenneth (1998). “The end of corporate imperialism”. Harvard business review. Web.

Roraff, Susan, & Camacho, Laura. Culture Shock! Chile: A Survival Guide to Customs and Etiquette (Culture Shock! Guides). London: Marshal Cavendish Corporation, 2007.

Riesco, Manuel, Lagos, Gustavo & Lima, Marcos.” Corporate Taxation and Social Responsibility in the Chilean mining industry: Pay your taxes debate: perspectives on corporate taxation and social responsibility in the Chilean mining industry. UN Research

Institute for Social Development, 2008. Web.

Endnotes

  1. Chilean copper commission statistic bulletin (2001). Web.
  2. C. K, Prahalad & Lieberthal, Kenneth (1998). “The end of corporate imperialism”. Harvard business review. Web.
  3. Joseph, Collins & John, Lear. Chile’s free-market miracle: a second outlook. Oakland, CA:Food First Books, 1995.
  4. Manuel, Riesco, Gustavo, Lagos & Marcos, Lima.” Corporate Taxation and Social Responsibility in the Chilean mining industry: Pay your taxes debate: perspectives on corporate taxation and social responsibility in the Chilean mining industry. UN Research Institute for Social Development, 2008. Web.
  5. Pankajv, Ghemawat. “Distance still matters: the hard reality of global expansion”. September 2001. Harvard business review.
  6. Pedro-Paul, Kuczynski & John, Williamson, Restarting growth and reform in Latin America. Washington, D. C.: Peterson institute, 2003.
  7. Susan, Roraff & Laura, Camacho, Culture Shock! Chile: A Survival Guide to Customs and Etiquette (Culture Shock! Guides). London: Marshal Cavendish Corporation, 2007.
  8. Tarun, Khanna, Krishna, Palepu, & Jayant, Sinha, (2005). “Strategies That Fit Emerging Markets”. Harvard Business Review. Web.
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