South America Outlook

by Royce Lowe

Turmoil Will Slow Its Growth

South America is having more than its share of turmoil these days. Latin America has long been a favored destination for major mining companies as a reliable source of metals, particularly copper. But more and more it’s becoming a trouble spot. Chile’s raising taxes, Peru’s in social unrest. All is not well. The problem seems to be clear enough. State infrastructure, pensions, education and health care left much to be desired in much of the region, even before the pandemic that exposed deep inequities.

Inflation, still high, is making a bad situation worse, and governments have made expensive promises they’re now under pressure to fund. Social and environmental concerns are also top of the agenda in local communities.

It’s not just copper that’s causing the rumpus. Chile, whose president was elected with a green agenda, last week rejected a $2.5 billion iron-ore project near a nature reserve in the north and is creating a state company to unlock its lithium potential.

But concern focuses on copper production in a region where three countries alone -Chile, Peru and Mexico - account for roughly two-fifths of global reserves. Major copper mines are already involved in Peru’s upheaval. All this, plus optimism around demand as China reopens, plus low inventories, and it’s no wonder copper is trading near its highest levels in over seven months.

Chile’s state-owned giant Codelco, messed around for years by successive governments, is an extreme continued example. Last year, it produced 10% less copper than planned due to operational setbacks, and its chairman has said keeping output steady is a “tremendous challenge.” Other miners in the country have also reported shortfalls, blaming low grades and drought.

The situation in these key mining jurisdictions will only be aggravated as Latin America settles into a period of sluggish growth. Peru faces an institutional crisis, while Chile still has major tax and constitutional questions to resolve. We may be only at the start of a new wave of popular disruption and resource nationalism with which miners - and the wider world - will have to contend.

Unrest has rattled Peru since the ouster and arrest of former President

Pedro Castillo, upending commodity supply chains from metals to organic coffee. The disruption comes at a particularly precarious moment for copper markets. Inventories stand at historically low levels while mining companies warn demand for the metal is poised to skyrocket with the growing electrification of vehicles.

Base metal prices have been on the rise since New Year’s after China, a top consumer, abruptly abandoned Covid-19 controls. Goldman Sachs Group Inc. predicts ongoing deficits and forecast a record price of $11,000 a ton for copper within 12 months. Strategic competition between the U.S. and mainland China, and a renewed global push for energy transition, are key potential drivers of new business opportunities in Latin America in the five to ten-year outlook.

An S&P Global Market Intelligence open-source review of 141 investment pledges made by firms investing in the South American region during January-October 2022 highlights how firms from China, South Korea, Japan, and Australia are increasingly positioning themselves in the region. Mining attracted most investment pledges, followed by hydrocarbons, automotive, and telecommunications. Over the five-year outlook, renewable energies, critical minerals, and advanced manufacturing should gain prominence.

Author profile: Royce Lowe, Manufacturing Talk Radio, UK and EU International Correspondent, Contributing Writer, Manufacturing Outlook. n

FEBRUARY 2023