Chile holds firm as copper market corrects

As the world’s leading producer of copper, there are grave concerns in Chile about China’s economic slowdown. The Oilholic doesn’t often touch on base metals on this blog, but being in Chile, one decided to break from tradition.

Over the last decade, China has displayed a voracious appetite for copper, with much of it coming from Chile. Clear indications point to a slowdown and even Beijing admits the country’s growth would be nowhere the double digit percentages it has posted in recent years that made the commodities world grow accustomed to the party.

No party lasts forever, and what the Oilholic finds here in Santiago de Chile is that no one need teach the Chileans that lesson. Policymakers, while anxious about it, saw China’s slowdown coming and are in confident mood they’ll weather the storm. The Chilean government can’t ignore the fact that the Chinese consume just shy of 50% of the world's refined copper, and as such Beijing is both directly and indirectly a major trading partner.

However, local economists’ thoughts and financial journals here in Chile appear to suggest one of the world’s leading copper producers is gearing up for a compound annual growth rate in Chinese copper demand in the range 2.5-3.5%; that’s less than half of the near 8% demand noted between 2010 and 2014.

If anything local forecasts are towards the lower end of Wall Street predictions and those put out by major European investment banks including Societe Generale, Barclays and Deutsche Bank. Droughts in Chile and other disruptions have tempered market sentiment on the oversupply front.

Disruptions in PNG and Zambia have also helped as have cuts announced by Glencore. To this effect, local analysts feel while the copper market is heading for leaner times, the effect would be less pronounced than say in the case of nickel or zinc. Supply/demand imbalances will persist but not to the extent feared both in Chile and beyond.

However, there is one thing though. As with oil, given the extent to which commodities have become an asset class, it is worth examining what the punters think. For the few this blogger has had a chance to interact with here in Chile, the copper market remains net short, using the COMEX copper (not LME three-month futures) contract as a benchmark.

The positioning might be net short, but it isn’t as bad as what local analysts noted over the first quarter of this year, especially mid-February to late-March. So right now, smaller end of life miners in Chile appear to be in trouble, but others including the majors operating in the country appear to be holding firm on their cautious outlook.

Finally, past crises have taught most regional governments a thing or two about managing the situation in troubling times. Some like Venezuela consciously choose not to learn, while others like Chile do learn and manage their exposure to volatility better.

There’s no reason to believe why 2015 would be any different. President Michelle Bachelet who oversaw the 2008-09 downturn during her previous stint in office, remains a steady hand, despite declining domestic poll ratings. That’s all for the moment folks as one heads to Buenos Aires for a short pre-election hop. In the meantime, this blogger leaves you with an amazing view from Cerro San Cristobal. Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2015. Photo I: Flag of Chile in Santiago. Photo II: Cerro San Cristobal - Santiago, Chile © Gaurav Sharma, October 2015

Latin America's commodities downturn problem

The Oilholic finds himself roughly 5,300 miles west of London in Bogota, Colombia wandering around the city’s rustic and charming La Candelaria area. 

It’s the beginning of a journey through South America to find out how the recent commodities downturn is affecting the market mood and investment outlook in what (still) remains a very commodity-exports driven continent. 

One gets a sense of opportunities missed and dismay from those who saw the downturn coming – not just here in Colombia, but looking outside in at Chile, Argentina, Peru and of course that colossal corruption scandal at Petrobas in Brazil. While the sun was shining, and China’s double digit economic growth was fuelling the commodities boom, attempts should have been made at macroeconomic diversification instead of relying on a party that was bound to end sooner or later.

We’re not just talking oil and gas here; take in everything from minerals to soya beans, or copper specifically in the case of Chile. Most Latin American currencies got marginal power boosters during the commodities boom, if not a case of full blown Dutch disease, which resulted in lacklustre performance from non-commodities sectors that became increasingly uncompetitive and to an extent unproductive over the last 10 years.

The International Monetary Fund reckons come the end of 2015, if headline regional growth touches 1% we’d be lucky. In fact, in its latest update the IMF confirmed that Latin America would see its fifth successive year of economic output deceleration. While past commodity busts have triggered regional financial crises, thankfully not many locally as well as internationally, including the IMF, expect a repeat this time around. That’s largely down to the fact LatAm economies, with notable exception of Venezuela, have not indulged in fiscal populism and daft economic policies.

In sync, ratings agencies, while negative on the economic outlook of many countries in the region, but only fear a sovereign default in Venezuela. However, another negative aspect of dependency on the commodities market is that investment – especially on terms prior to the market correction – would be hard to come by.

Just ask Mexico! As the Oilholic noted in a recent column for Forbes, phase I of round one of Mexico’s oil and gas licensing was a damp squib. Hence, with the September 2015 (phase II) bidding round, the Mexicans had to adjust their thinking to attract (and eventually) secure a decent take-up of available blocks.

Peru’s nascent oil and gas market, Colombia’s emerging and hitherto impressive one face similar challenges as will the copper market in Chile. Argentina faces a general election on October 25th while Brazil is in a technical recession with the IMF seeing few improvement prospects for 2016.

Productivity, in all five countries is down with workers spending hours in a day commuting, and traffic jams (the first of which the Oilholic has already experienced) are legendary enough to give Bangkok and Delhi a run for their money. 

Over the coming weeks yours truly will make sense of it all talking to experts, policymakers, fellow analysts and local folks one is likely to meet and greet while having the odd touristy mumble about. That’s all for the moment folks! Keep reading, keep it ‘crude’!

To follow The Oilholic on Twitter click here.
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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2015. La Candelaria, Bogota, Colombia © Gaurav Sharma, October, 2015