Chilean mining costs highest in the world, despite saving measures

Mining costs in Chile, the world’s No. 1 copper producer, were among the highest in the world last year even though most companies spent 2015 cutting expenses and placing projects in the back burner, a new study released Monday shows.

Data from the Mining Council, which groups the largest copper, gold and silver miners operating in Chile, reveal that production costs in the country last year were 5.4% higher than its global peers’ average.

Production costs in Chile, the world’s No. 1 copper producer, were 5.4% higher last year when compared to its global peers’ average.

Mine level cash costs in the country that is responsible for nearly 6 million tonnes of global annual copper production of 21 million tonnes fell last year to an average of $1.3 per pound, local paper El Mercurio reports. In the rest of the world, the average was between 82 cents to $1.05 per pound.

The news comes as a bit of shock for the industry, as the costs of mining copper in Chile last year maintained the downward trend they had been following since 2013, reaching $2.16 per pound, which is about 3.5% less than the $2.24 they hit in 2014.

But the South American nation has also been hit by high energy costs, which threatens the competitiveness of the country's copper industry and poses a major challenge for new developments.

Electricity costs in Latin America’s wealthiest economy climbed 11% per year from 2000 to 2015, making it one of the most expensive places in the world to secure energy for mining projects. But ever since, a boom in solar power installations has helped curb electricity costs.

The other issue is copper grades. While the nation has the world's richest reserves of the red metal, grades are falling at its massive but aging copper mines, making it difficult to maintain output and putting pressure on costs.

Better times ahead

The future is suddenly looking brighter, with many analysts forecasting a spike in copper prices as the market begins to enter a supply deficit expected to kick off in 2021.

Copper market is poised to enter a "substantial" supply deficit from 2021 onwards, pushing prices of the industrial metal higher.

"In the near term, mining companies are not investing in additional capacity and copper demand is growing at a pace of around 2 percent a year," the head of Chile's national mining association Sonami, Diego Hernández, said Monday.

Speaking at the Copper 2016 industry conference in Kobe, Japan, Hernández said that supply growth will likely begin to drop from around 2019 and the market will face a “substantial deficit” in the next decade, coinciding with a demand recovery.

He noted that such demand and, therefore, copper price increase will be driven population growth and urbanization in China and other emerging countries, and less fossil fuel use amid climate change, Reuters reports.

Copper briefly surpassed $6,000 a tonne last week and headed for the biggest weekly rally ever as the metal became the target of Chinese speculators and bets that US President-elect Donald Trump will pour money into infrastructure.

Goldman Sachs analysts cautioned in a report Monday that such rally is coming "too much too fast," because the impact of Trump's infrastructure plan (he promised a "$1 trillion over a 10-year period" in his victory speech) on global demand was tiny compared to that of China.

Overall, US copper and steel demand shifts would represent just a 0.4% increase in total demand, with all else constant, the analysts noted.

Chilean mining costs highest in the world, despite saving plans

Chuquicamata is one of the largest open pit copper mines and the second deepest open-pit mine in the world. (Image courtesy of Codelco via Flickr)