Industry Trend Analysis - Copper Sector To Recover Despite Labour Challenges In 2017 - MAY 2017


BMI View: Chile ' s rigid labour market will pose considerable challenges to copper miners looking to keep costs low and improve margins amid price volatility in 2017. Nonetheless, the country's copper sector will return to growth by 2018 as prices stabilise over the coming years.

Chile's copper production will face increasing headwinds from tough labour negotiations, as miners continue to contend with declining ore grades and elevated water and power costs. In January and February, Chile's copper output slid by 2.9% and then 15.6%, respectively, due to the 43-day strike at BHP Billiton's Escondida mine. Upcoming scheduled contract negotiations, for which the Escondida strike set a tense tone, include Anglo American's and Glencore's Collahuasi mine and Antofagasta Minerals' Zaldivar mine.

We have revised down Chile's copper production forecast, from 1.0% growth in 2017 to a modest 1.0% contraction due to the estimated losses from Escondida and a lack of any significant new capacity expected to come online over the coming quarters. We forecast Chile to produce 5.4 million tonnes (mnt) of copper in 2017, down slightly from 5.5mnt in 2016, and return to gradual production growth thereafter. Additional downside risks remain due to uncertainty surrounding the upcoming negotiations.

Labour Expenses To Comprise Significant Portion Of Costs
Chile - Average Operating Copper Mining Cost Breakdown (%), 2005-2015
Source: Cochilco Report

Based on our copper price outlook and the regulatory environment in Chile, firms will likely face fierce labour negotiations over the remainder of the year. We forecast prices to increase by 12.9% y-o-y to USD5,500/tonne in 2017, incentivising workers to seek higher wages and other benefits, however we expect prices to plateau in 2018 and grind higher thereafter, leaving mining companies reluctant to increase spending. According to Cochilco, Chile's state copper commission, wages have accounted for an average of 21% of operating costs over the past decade, representing the largest single portion of costs.

Moreover, in April, the new labour law will come into effect, strengthening union positions by essentially barring firms from reducing previous benefits, starting negotiations at the previous contract's minimum benefits and prohibiting the replacement of striking workers. The growing role of Chile's environmental regulatory body in pursuing and fining water mismanagement and contamination in the mining industry will also raise costs.

Mining Sector Lay-Offs Set To Continue
Chile - Mining And Quarrying Lay-Offs (thousands of people), Monthly
Source: Banco Central De Chile

Positive Long-Term Outlook Still Intact

While Chile's copper sector will face considerable challenges over the coming quarters, we remain positive on the country's mining industry outlook over our forecast period to 2021. Miners in the country will remain ahead of the curve in terms of technological advancement, renewable energy integration into power mixes and shifting towards seawater desalination to limit use of increasingly scarce freshwater resources. Chile will remain the largest copper producer globally by a wide margin, supported by vast reserves and will see significant growth in the nascent lithium mining sector.

In terms of regulatory environment, our Country Risk team expects former president Sebastian Pinera, who holds a more business-friendly stance on labour reforms, to win the election in November 2017 ( see 'Chile Vamos Likely To Win General Elections, While Independents Make Historic Gains', January 3). As such, we see scope for a repeal or at least modification of the labour law over the coming years and expect Chile to cement its reputation as an attractive mining investment destination in general.

Workforce Rigidity Presents Hindrance To Industry Outlook
Sub-Regional Labour Cost Scores
Scores out of 100, higher score = lower cost of labour. Source: BMI Mining Risk/Reward Index
Chile Copper Production Forecasts (2013-2021)
Indicator 2013 2014 2015 2016 2017f 2018f 2019f 2020f 2021f
f = BMI forecast. Source: National Sources, USGS, BMI
Copper Mine Production, '000 tonnes 5,780.00 5,750.00 5,760.00 5,500.00 5,445.00 5,526.67 5,609.58 5,721.77 5,864.81
Copper Mine Production Volumes, % y-o-y 6.37 -0.52 0.17 -4.51 -1.00 1.50 1.50 2.00 2.50
Copper mine production, '000 tonnes, % of global 31.6 30.7 30.2 28.4 26.3 25.9 25.3 24.7 24.6