EXPORTERS : Shine Is Off Price of Copper, but Chile Worries Less Now

As the leading exporter of copper, Chile is worried about a slump in the metal’s price on world markets--but not as worried as it would have been in past decades.

Lower copper revenues may drain energy from the economic boom that has made this country a model of free-market success. Partly because of that success, however, copper prices have less impact on Chile’s fortunes than they once did.

Diversification has reduced the importance of copper from about 80% of total Chilean exports in the early 1970s to half of that today.

Chile now ships a growing list of manufactured goods and is also a major exporter of fruit, forestry products, fish and fish meal.

Last year, the Chilean economy grew by 10%, the fastest rate in Latin America. Copper revenues helped give the country a healthy surplus of $700 million in its balance of payments.

The average price of copper on the London metals market in 1992 was $1.03 a pound, down from a peak of $1.29 in 1990 but still a lucrative level for Chile.

Then, in February, the price dropped below a dollar, and the downward trend has continued. Last week it went below 85 cents, the lowest since 1987.

Gustavo Lagos, executive director of Chile’s independent Center for Copper and Mining Studies, said the dip in prices is a result of flat world consumption as Western Europe and Japan struggle with economic stagnation while Russia and Eastern Europe face economic crises.

As demand has weakened, copper stocks have increased. “My opinion is that the price is going to go even lower,” he said, adding that the slump could last for years.

But he predicted copper prices will eventually rise again with the cyclical improvement of economic conditions in Europe. Therefore, he said, the slump is unlikely to interrupt major plans for billions of dollars of new investment in Chilean copper mining.

Chevron and Phelps Dodge are among American companies planning to invest.

Chile’s total production is projected to increase to 3.4 million tons by the year 2000 from 1.95 million tons in 1992. Chile accounted for 20% of world copper production in 1992; the United States produced about 18.5%.

Most of the private investment plans calculate production costs at less than 55 cents a pound for refined copper, and investors understand the cyclical nature of copper prices, Lagos observed. “The projects are going to start producing after this cycle has passed,” he said.

But, according to some analysts, less copper income could discourage the government from increasing investments in Codelco, the state-owned corporation that produces more than half of Chile’s copper. And low prices may fuel a debate on whether Codelco, often criticized for inefficiency, should be at least partly privatized.

“A reduction in prices will have significant influence on public opinion in the sense that if Codelco makes less profit, privatization is more justified,” said one analyst.

Joaquin Vial, an adviser to Finance Minister Alejandro Foxley, said reduced copper prices will have their biggest impact on Chile’s balance of payments and on its public finances. Over a year, Vial said, Chile loses about $40 million for every penny reduction in the price of copper. The current government budget includes revenues from copper exports based on an average price of 96 cents a pound.

Since 1986, the Chilean government has been investing in a kind of price-insurance fund that it can draw from when the price of copper goes below 92 cents. The fund has nearly $800 million, but it cannot entirely compensate losses from low prices.

“For the private sector, as well as the government, this means less possibility for spending, and so it somewhat limits or causes a loss of well-being for the country,” Vial said in a telephone conversation.

But he emphasized that diversification of Chile’s export menu “has helped enormously to deal with this problem.”