DP; Mr. George Silva Rossi; Mr. Hernan de Solminihac, Minister of Mining, Chile; HE Mr Tomas Muller Sproat, Chilean Ambassador to the UK.
This week marked the anniversary of the extraordinary rescue of the 33 Chilean miners. It is therefore timely to record that last week I attended a conference held at Bloomberg’s in the City where the new Minister of Mining, Hernan de Solminihac presented the case for investing in mining in Chile. The event was organised by the Anglo-Chilean Society of which my wife is Vice-Chair together with three leading mining companies all with extensive investments in Chile, Anglo-American, Rio Tinto Zinc and Antofagasta. Chile is today one of the world’s major mining countries and it expects to further enhance its position once massive investments materialise during the coming decade. The country’s exceptional geological conditions are only part of this success story. A well-established commitment to an open economy as well as policies that promote investment and new business endeavours are also part of the equation.
Snr de Solminihac began by showing how GDP growth in Chile has steadily outstripped the rest of Latin America and Chile can now claim to be the leading economy in that region on many counts. This rests on its attitude to Free Trade, having signed 20 Free Trade Agreements with 57 countries with 3 going through Congress and one more in negotiation. It scores well on several international rankings being the lowest in Latin America for Country Risk and Corruption, and the highest in the region for Transparency, Investment, Economic Freedom, Connectivity and Business Environment. On most of these it is among the top twenty countries in the world usually exceeding its former colonial master Spain.
In terms of mining it has had a clear past, present and no doubt future. Its past was dominated by its leading position in the world from 1900 to 1920 for nitrates. This brought many European mining engineers to Chile but then after the First World War Germany invented synthetic nitrates which replaced the natural ones in fertilisers. But the engineers and associated craftsmen stayed on and began to exploit Chilean reserves in copper. By 1990 it held the leading position in the world for copper production which it has maintained ever since with 34% overall share of global markets. In the future copper will continue to be important but it will be joined by lithium, gold, silver, potassium and molybdenum.
Today mining contributes 25% of GDP and 22% of the national budget and will be key in President Piñera's target of reaching developed nation status by 2018. Most of the growth in copper production has come in privately owned mines while the nationally owned mining company Codelco is now about 35% of the total.
Of course, the price of copper, as all minerals in the recent past, has been volatile, falling 30% from its peak of nearly $10,000 per tonne in July. But the cost of extraction in Chile is lower than other competitive producers and Chile has prudently built reserves from its high priced windfall and so can be confident in its budget forecasts. When I worked in Chile in the early 1980s I learnt to watch the price of copper as a barometer on the health of the Chilean economy.
Mining, of which the great majority is copper, accounts for 50% of total exports as a historical average and despite heroic attempts to diversify Chile’s exports this has grown to nearly 60%. About 200,000 workers are employed in the industry and this is a potential constraint on growth as the mines are mainly in the less inhabited and less hospitable northern regions.
Chile accounts for 24% of known copper reserves in the world and Chile counts very highly in the Policy Potential Index ahead of regions like Arizona and behind only Alberta in Canada. Plans to invest are assessed over an 8 year cycle and these plans have grown strongly in recent years and currently stand at $67bn of which 63% is set to come from private companies. These plans indicate that production of copper will rise from 5.4 million metric tonnes to 7.2mn by 2016.
Minister de Solminihac touched on the recent crises in Chile and the lessons learnt.
The famous rescue of the 33 a year ago (see my blog The Chilean Way 23rd October, 2010) in which his predecessor as Minister of Mining, Lawrence Golborne had distinguished himself, had taught many lessons about finding innovative solutions. First, the importance of team work. Then the commitment to solving difficult problems; it was felt that the most difficult had been to locate the 33 men 700 metres underground with no maps and no proper information, even more difficult than drilling a rescue shaft and engineering a rescue vehicle for their release. After that the country had resolved to improve safety through awareness, investment and training and already in the first half of the year the number of accidents involving fatalities had reduced by 50%. The goal was to reduce fatalities to zero.
Then there was the earthquake and subsequent tsunami which had caused $18 bn in damages.(see my blog Huge Earthquake in Chile, Not That Many Dead 8th April, 2010). Here they had resolved to rebuild the country with a sense of urgency and at least as far as infrastructure was concerned had achieved that. Less than 10 months after the catastrophe, the fifth most powerful earthquake in the world in recorded history, the entire infrastructure had been repaired or replaced. Snr de Solminihac showed dramatic before and after images of destroyed roads, bridges and harbours and their replacements. Domestic housing would take longer because the damage was more widespread.
In questioning Snr de Solminihac identified the greatest challenges to these plans as finding sufficient resources in water, energy and people. Water could be addressed by the use of sea water and therefore this was also an energy problem as energy would be needed to transport the sea water and to desalinate it.
Energy is the biggest problem as Chile is not rich in natural energy supplies except potential hydroelectric supplies and these are in the south rather than the north where most of the mineral resources are located. Chile, a very long country, has divided its grid in two. The need is to at least double its energy supplies every ten years. I suspect the answer may be a diplomatic one as some of Chile’s neighbours are well endowed with energy but are reluctant to sell to Chile because of ancient squabbles. In conversation with the Minister afterwards I asked him why he had not spoken of solar energy, after all the Atacama Desert in the north of Chile is the driest in the world. He said it was not a solution as it was simply too expensive.
Finally, people. Another 60,000 workers may be needed to deliver the plans but here Mr de Solminihac, while recognising that the problem was difficult, was more optimistic as he commented that only 6% of workers in mining were women while in one state owned mine it was 34%.
Yet again I came away from an official event with Chilean representatives impressed with their optimism, their fortitude and their desire to make it happen. I felt a huge contrast with their opposite numbers in the developed West who have little idea of how such plans are delivered and only talk in the vaguest terms about the key industries in their economies.
Copyright David C Pearson 2011 All rights reserved