BMI View: Elevated energy costs and rising opposition will remain key threats towards the growth of Chile's mining sector over the coming years. Although the recent rejection of the planned US$5bn Castilla thermoelectric plant will further worsen the country's power situation, we believe Chile is still a bright spot for investment given its excellent business environment. Overall, we forecast average annual growth for the sector to come in at 2.6% from 2011 levels, reaching US$49.1bn by 2016, compared to 9.0% between 2007 to 2011.
We expect to witness a slowdown in Chile's mining sector growth over the coming years as energy problems and rising opposition threaten to constrain growth and reduce the likelihood of several large scale projects coming online. That said, we believe Chile will remain one of the most promising region for mining investment due to its stable political environment and favorable sector regulation. Overall, we forecast average annual growth for the sector to come in at 2.6% from US$43.2bn in 2011 to US$49.1bn by 2016, compared to 9.0% between 2007 to 2011.
|Slowing Growth But Still Strong|
|Chile - Mining Industry Value & Growth|
We believe the lack of adequate power generation facilities in Chile will remain a key impediment towards the development of future mining projects and that substantial improvement in the country's power sector is unlikely to happen anytime soon. Lately, Chile's Supreme Court upheld an injunction blocking construction of the planned US$5bn Central Castilla thermoelectric power plant project, a joint venture between Brazilian billionaire Eike Batista's MPX Energia SA and Germany's E.ON. The ruling, which cites environmental reasons, substantiates concerns over emerging regulatory risks in Chile and forebodes downside pressure on the country's power and mining industry, which have been hampered by soaring costs and power cuts since 2010. If the country is unable to develop significant new electricity production capacity over the next decade, whether through coal or renewables, billions of dollars worth of mining project investment plans could be put on hold or costs could overrun.
|Mining Strains Energy Grid|
|Chile - Electricity Consumption By Segment (GWh)|
We expect Chile's mining sector to come under increasing pressure in the coming quarters as energy supply raise concerns about the sector's future prospects. The Castilla project was planned to provide energy to the booming mining area of Atacama, home to the richest copper reserves in Chile and attracted interest from some of the largest players in the industry. It has been reported that Cerro Casale owned by Barrick Gold and Kinross, Lumina Copper's Caserones mine and Barrick's Lama mine are gearing up for operations in the surrounding region. Given the level of stakes involved, we highlight that the passing of the Castilla project is vital towards unleashing the growth potential of the Atacama region and helping to boost output in one of Chile's most important mining area. In our view, it is highly doubtful that the country will be able to achieve its goal of attracting US$100bn in mining investment by 2020.
Although the companies are allowed to resubmit their application following further environmental impact study, we do not expect to see the project being approved in the near term. We believe any significant efforts to shore up power producing capacity in the energy starved nation remains vulnerable to strong opposition by environmental groups. Indeed, environmental groups have resisted the construction of mega power projects ranging from coal fired, thermoelectric plants in Chile's northern Atacama, to hydropower dams in the southern Patagonia region. Indeed, it is estimated that more than US$22bn and 8,000MW in energy investment have been suspended in Chile.
|Short-term political||Long-term political||Short-term economic||Long-term economic||Business environment||Composite|
|Scores out of 100, with 100 the best. Source: BMI|
|Emerging market average||62.1||58.6||52.0||50.5||42.9||51.5|
|Global market average||64.3||61.8||53.6||53.3||46.7||54.5|
Still A Favourite In The Americas Region
That said, Chile will remain one of the most promising in the Americas region due to a stable political environment and favorable sector regulations. Despite concerns over potentially drastic electricity supply deficiencies and rising opposition to the environmental impact of mining activities, BMI's country risk team continues to rank Chile first among its regional peers due to its market-friendly policies, strong institutions and stable political environment. We are optimistic that Chile's excellent business environment and abundance of mineral reserves will continue to attract mining interest from both foreign and domestic companies. Given that Chile is the world's largest copper producer, at 32% of global mine output, we expect majority of the mining investment to focus on developing copper deposits which accounts for approximately 60% of the country's total exports in 2011. While we feel that an inadequate power infrastructure in Chile poses risks to the development of future projects, the mining sector will continue to be one of, if not the most important drivers of the Chilean economy. In view of its massive importance to the economy, we believe the government's stance towards the mining sector will remain favorable in 2013 and beyond. Though the country is unlikely to witness spectacular growth in its mining sector over the coming years, it will nevertheless be one of the brightest spot for investment.
|f = BMI forecast. Source: BMI|
|% change y-o-y||-15.7||55.6||10.6||2.2||2.1||2.4||3.0||3.1|