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Viewing cable 06SANTIAGO776, CHILE: COPPER INDUSTRY REVIEW

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Reference ID Created Released Classification Origin
06SANTIAGO776 2006-04-13 17:11 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Santiago
VZCZCXYZ0041
RR RUEHWEB

DE RUEHSG #0776/01 1031711
ZNR UUUUU ZZH
R 131711Z APR 06
FM AMEMBASSY SANTIAGO
TO RUEHC/SECSTATE WASHDC 8889
INFO RUEHBJ/AMEMBASSY BEIJING 0176
RUEHBR/AMEMBASSY BRASILIA 3146
RUEHBU/AMEMBASSY BUENOS AIRES 2990
RUEHCV/AMEMBASSY CARACAS 0923
RUEHLP/AMEMBASSY LA PAZ APR LIMA 4532
RUCPDOC/DEPT OF COMMERCE WASHDC
UNCLAS SANTIAGO 000776 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
COMMERCE FOR SARA MCDOWELL 
 
E.O. 12958: N/A 
TAGS: ECON EMIN ETRD EINV CI CH
SUBJECT: CHILE: COPPER INDUSTRY REVIEW 
 
1. (U) Summary: Copper represents nearly half the value of 
Chile's exports and remains a key component of Chile's 
economy.  Record copper prices explain in part Chile's real 
GDP growth rates of over six percent in 2004 and 2005.  Chile 
currently produces 37 percent of the world's copper, more 
than the next six top producers combined.  China is its 
largest consumer, purchasing about 20 percent of Chile's 
annual copper production.  A Chinese company, MinMetals, and 
the state-owned Chilean company, Codelco, signed in February 
2005 a joint venture to invest USD 2 billion in Chilean 
copper production.  Codelco is responsible for about 40 
percent of Chile's copper production, with the remainder 
privately produced.  The new Bachelet administration is 
expected to fund some of its social programs with copper 
revenues.  End summary. 
 
Copper's Place in the Chilean Economy 
------------------------------------- 
 
2. (U) In dollar terms, copper exports represented 43.8 
percent of the total value of Chilean exports in 2005, or 
just over 15 percent of Chile's total GDP.  Copper is by far 
Chile's most important product, and it is important to GOC 
financing and long-term planning.  The GOC does not count on 
the record copper prices of recent years to remain a 
long-term trend; as of mid-April, the price of a pound of 
copper stood at USD 2.70.  For its budgeting purposes, it 
counts the price of copper at under a dollar per pound.  At 
the same time, GOC officials have indicated that the first 
social programs under the Bachelet government -- free health 
care for those over 60, expanding the coverage of the 
national health care plan, and increasing the minimum 
guaranteed pension -- will be financed at least in part by 
the government coffers filled with copper profits. 
 
3. (U) As a further reflection of the key role copper plays 
in determining Chile's real GDP growth rate, the Chilean 
Central Bank closely tracks the trends in long-term copper 
prices and uses copper statistics to predict potential real 
GDP growth.  While Chile's overall economy is doing well, 
record copper prices have pushed real GDP growth to 6.1 
percent in 2004 and 6.3 percent in 2005. 
 
Chile as a Global Supplier 
-------------------------- 
 
4. (U) Copper is the dominant sector in Chile's trade 
relationship with the rest of the world.  Despite the 
diversification of exports and the growth of Chile's overall 
economy, copper remains king.  After the end of the Pinochet 
military government in 1990, Chile attracted large inflows of 
foreign capital, particularly direct investment in mining. 
The rush of private investment boosted Chile's copper output 
from 18 percent of the world's supply in 1990, to 37 percent 
by 2004. 
 
5. (U) In the last two years, a range of factors -- including 
the GOC's limits on production -- have driven copper prices 
far above USD 2 per pound and kept them there.  Copper cost 
70 cents per pound in 2001, and was priced at USD 2.70 per 
pound as of mid-April 2006.  In 2005, Chile produced 5.1 
million metric tons of copper or approximately 37 percent of 
world production, more than the next six copper producing 
countries combined.  While Chilean annual production has not 
increased in recent years, remaining at around 5.1 million 
metric tons, the northern Andean region of Chile contains 40 
percent of the world's proven copper reserves. 
 
Commercial Ties with China 
-------------------------- 
 
6. (SBU) In 2004, China's share of world copper usage was 
20.4 percent, making it the world's single largest copper 
consumer.  By comparison, the United States was second at 
14.5 percent.  China currently consumes about 20 percent of 
Chile's annual copper production.  A Chinese company, 
MinMetals, in February 2006 signed a deal with Codelco for a 
USD 2 billion dollar joint venture.  While the joint venture 
is not directly related to the free trade agreement Chile and 
China signed in November 2005, one of Chile's chief trade 
agreement negotiators told econoff that securing long-term 
access to Chilean copper was clearly a key motivating factor 
for China in seeking the trade deal. 
 
Role of State-Owned Codelco 
--------------------------- 
 
7. (U) State-owned Codelco alone is responsible for 40-45 
percent of Chile's copper production and 15-17 percent of 
total world production.  The GOC's management of Codelco has 
seen its share of controversy, with recent scandals renewing 
the debate over privatization.  Given Codelco's clear role in 
providing long-term revenue for the GOC, there is little 
support for such a move and no serious plans for selling 
Codelco.  Even the Chilean military has a vested interest in 
Codelco remaining a state-owned entity, as 10 percent of all 
Codelco revenues go to military procurement by law.  In terms 
of its equity value rather than income stream, in 2006, 
Goldman Sachs estimated Codelco's financial value at USD 26 
billion. 
8. (U) President Bachelet named Jose Pablo Arellano as CEO of 
Codelco in March 2006.  Arellano has a Ph.D. in Economics 
from Harvard and was previously Minister of Education and 
budget director for the Ministry of Finance.  In making 
Arellano's appointment, Bachelet reiterated her campaign 
pledge to use copper earnings to fund programs to help the 
three million Chileans who live below the poverty line.  With 
copper hitting new all-time record prices nearly every week, 
this will be a relatively easy promise to keep for now. 
 
9. (U) Comment: The jump in copper prices since 2003 has 
given the GOC some unexpected income.  This will allow 
President Bachelet room to inaugurate new as well as expand 
existing social plans.  Record copper prices have also been 
the key to allowing Chile to record GDP growth higher than it 
would have otherwise.  Without the high copper prices, the 
Chilean economy would still have recorded good GDP growth in 
recent years as many of the fundamentals such as declining 
unemployment and low inflation are not tied to copper.  Chile 
has succeeded at developing a range of non-traditional export 
sectors in order to diversify its trade profile.  But world 
demand for copper means copper will likely continue to play a 
dominant role in Chile's trade with the world and in defining 
the country's overall real GDP growth. 
KELLY