The Trade Numerologist: Peru’s Big Bet on Copper Market

Peru is already the world's second largest copper exporter and recent elections indicate it's prepared to bet even more heavily on mining.

That's a smart play as long the world economy, in particular China, does well. Copper is essential to making the pipes and electrical wiring that go into new houses and cars, making it essential as an economy reaches further stages of development.

Although Peru has a number of assets, including a long coast with rich fishing waters, and a strong agricultural sector, its export economy has become increasingly dependent on copper, and two other raw materials, gold and oil.

Peru top exports, Jan.-Oct. 2018

• Raw copper $10.3 billion
• Gold $5.7 billion
• Oil $2.4 billion
• Edible fruits and nuts, $2.3 billion
• Copper articles $1.9 billion
• Food waste $1.7 billion
• Fish, crustaceans $823.3 million
• Apparel $735.9 million
• Zinc $721.6 million
• Coffee $471.7 million

The copper business has become so important that the performance of Peru's export economy in 2019 and beyond will depend in large part on the mines run by international corporations like Freeport-McMoRan, Rio Tinto, BHP Billiton, and Anglo-American.

Earlier this month, Peru's central bank said the economy will grow 4.9% in the fourth quarter over the year before, after growing only 2.3% in the third quarter.

Peru lies along a volcanic belt running from Utah to Chile that harbors large amounts of the world's minable copper deposits. The wealth of gold and other minerals in Peru's hills has been a target of foreign investors since the 16^th century, when the Spanish invaded. It was in the 20^th century, with the development of electrical wiring, that miners switched their attention to copper from gold.

But for international mining companies that started flocking to Peru since the 1970s, there's always been a catch. The country has one of the world's strongest anti-mining movements, dating back to native fighting the Conquistadors in the 16^th century.

Mining firms must invest hundreds of millions of dollars to obtain permits, which are dependent on the political willingness to permit the digging of mines and the construction of processing plants.

But in regional elections held on Oct. 7, Peruvians elected a slate of regional leaders who, overall, are considered more supportive of mining firms than their predecessors. That should allow Peruvian copper exports to keep growing.

Peru copper exports, Jan.-Oct., 2010-2018

• 2018: 6.6 billion kg
• 2017: 6.4 billion kg
• 2016: 6.2 billion kg
• 2015: 3.9 billion kg
• 2014: 3.1 billion kg
• 2013: 3.1 billion kg
• 2012: 3 billion kg
• 2011: 2.6 billion kg
• 2010: 2.5 billion kg

In particular, Peru has focused its export growth on selling in China. It signed a bilateral investment agreement in 1995 and a free trade deal in 2009. In return, China has ramped up its investment in Peruvian mines. In 2014, a group of Chinese firms led by Minmetals bought the Las Bambas mine for almost $6 billion.

Peru's top customers for copper, Jan.-Oct., 2018

• China 4.2 billion kg (+15%)
• Japan 666.6 million kg (+5%)
• South Korea 411.6 million kg (+11%)
• Germany 292.3 million kg (17%)
• Brazil 171.9 million kg (-7%)
• Spain 148 million kg (-33%)
• Bulgaria 125 million kg (-17%)
• India 120.9 million kg (-56%)
• Namibia 110.8 million kg (+7%)
• Philippines 75.1 million kg (-45%)

The stakes for global copper markets are high. In recent years, thanks to investment in massive supermines like Cerro Verde, controlled by US miner Freeport-McMoRan, Peru has outpaced Indonesia and Australia to become the world's number two exporter of raw copper.

Top copper exporters, Jan.-Sept., 2018

• Chile $13.5 billion
• Peru $9.5 billion
• Indonesia $3.5 billion
• Australia $3.3 billion
• Canada $2 billion
• Mexico $1.94 billion
• Brazil $1.94 billion
• Spain $1.88 billion
• US $1.3 billion
• Kazakhstan $610.4 million

To be sure, Peru's copper production and exports don't only depend on politics. The risk of a global slowdown in demand also clouds the outlook. And prices have been sluggish recently, driven down by lower expectations for Chinese industrial demand. If Peru does catch a cold from the rest of the world, it faces a risk of a major slowdown.

Meanwhile, as it ships copper and gold to Asia, Peru is buying more and more consumer goods from China, like electronics, toys and shoes, and commodities like wheat, corn and oil from the US.

Peru's top sources of imports, Jan.-Oct., 2018

• China $8.4 billion (+15%)
• US $7.9 billion (+17%)
• Brazil $2 billion (-2.6%)
• Ecuador $1.7 billion (+42%)
• Mexico $1.6 billion (+9.6%)
• Colombia $1.4 billion (+10.6%)
• Chile $1.1 billion (+12.5%)
• Argentina $1 billion (+5.8%)
• Germany $902.2 million (+2.9%)
• Japan $894.7 million (+2.6%)

Despite the risk of weak copper prices, the outlook for Peru is less gloomy than for other economies of similar size which are dependent on one or two natural resources. A big reason is that Peru has aggressively globalized during this century. In the last 20 years, it's negotiated free-trade treaties with, among others, the US, Canada, Singapore, China, Korea, Mexico, Japan and the European Union.

Posted 17 December 2018 by John Miller, Guest Blogger