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Chile Copper Crisis

Chile's Economic Decline

Written by Brian Hicks
Posted July 30, 2013

Too much of a good thing is rarely a good thing at all. And that’s what is going on with Chile’s copper production right now.

There’s a huge rise in production, but the demand isn’t meeting up. What does that mean? It’s likely you know already, but I'll tell you anyway.

When you have too much supply and you don’t sell it, you lose money. You also lose money when you have to lower prices to increase the demand. In both of these cases, one result abounds: there’s a loss of money.

copper barsChile has always been known for its copper, currently standing as the world's top producer. It has some of the biggest copper production plants in the world. In April, output for 2013 was anticipated to reach 5.58 million tonnes. Now estimates have fallen to 5.53 million tonnes.

But Chile is still working to produce more. Codelco’s new Ministro Hales mine is starting up this year, and it also is increasing production at the Callahuasi and Escondida mines. The nation is a little copper hungry, but is it wise?

Chile’s Declining Copper Demand, Prices, and Economy

Chile wants to be a big achiever. It wants more copper, but with the age of its mines, sliding grades, increasing costs of production, and an energy problem, the nation may not end up meeting its goals. This doesn’t mean that it is low on production, but it may not be possible for the nation to reach the heights of production it desires.

In addition, prices for copper are declining, which is putting a damper on the financial ability to produce. Cochilco, the country's copper commission, decreased copper price estimates to $3.27 per pound from $3.57, Mining Weekly reports.

A decrease in copper prices could be a risk to the Chilean economy. It’s an export-dependent nation, with 60 percent of its revenue coming from exports. Falling prices mean less money coming in – not a good thing for Chile at all with its huge production power. And this isn't good for the U.S. economy either.

Historically, falling copper prices often signal that the stock market may be in for a collapse, according to Societe Generale’s strategist Albert Edwards. It may be time to get away from equities for this reason.

The copper situation throughout the world isn’t looking much better, but Japan at least saw an increase by 1.1 percent per metric ton, the U.S. didn’t see a change last week, and China was down only by .6 percent. It’s obvious Chile is in a much worse situation than the rest of the world, but copper around the world isn’t surpassing investors’ expectations by any means.

It’s not all bad though. Yes, the industry is volatile, so you may be nervous, but BHP Billiton (NYSE: BHP) and Rio Tinto (NYSE: RIO) are in the works of creating a future of profitability.

Copper Investing

You may want to sit on the sidelines for just a bit longer before making any decisions for your portfolio. This decline in pricing may not last long, and with the production in Chile, if prices increase, you may end up with a return that will be much more pleasing to you.

From Reuters:

Global copper output is likely to increase, keeping prices stable or triggering a slight drop soon, but that will be offset by strong demand in the long run, according to an interview with BHP Billiton CEO Andrew Mackenzie published on Sunday.

“Copper is a key part of our strategy for the future, as is iron, coal and oil,” Mackenzie told El Mercurio newspaper. “There could be a preference to invest more in copper than in other commodities in the future because we see that in the long run it might have better returns.”

Mackenzie believes there will be a rise in demand of 3 percent annually soon. He derives this expectation from the recent $3.43 billion investment BHP Billiton made in a sea-water destination plant at the Escondida mine in Chile.

If you’re already investing in Chilean copper mines, hold tight. If you’re looking to get into it now, you have two options. You can get in while the prices are dropping and swallow any near future decline as you await the expected rise again, or you can wait until the copper prices start to rise.

With all of the investments BHP Billiton is making, you may start to see copper bounce back sooner than later.

 

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