Great Mines

Mining now accounts for 55.2% of Peru’s exports, or around 11.2% of its GDP, although the economy has diversified over the past two decades. The range of metals that Peru exports has also diversified, and the country is now a significant exporter of copper, zinc, tin, lead, molybdenum, bismuth, and other minerals. Peru is currently the world’s third largest producer of copper and zinc, and contains 13% of world’s known copper reserves and 22% of its silver.

Because of the nation’s history and the size of the industry, mining is inexorably linked to the economic wellbeing of Peru. For example in 2013, 24% of total FDI went to mining projects, and that same year, tax revenues from mining accounted for 9.44% of the total take, far less than 2006, when mining revenues accounted for nearly 21% of total taxation.

In late 2012 and early 2013, global demand for minerals fell and prices for key metals declined to their lowest levels since 2008. In 2014, GDP growth slowed to 2.4%, although investment in the mining sector remained robust in 2013 at $10 billion, and may have reached as high as $14 billion in 2014.

Many small miners backed away from projects, or else were forced to shutter in 2013 and 2014, although the story for the major players is notably different. Chinalco, Hudbay Minerals, Buenaventura, Southern Copper, and Freeport McMoRan have persevered with plans throughout the country, mostly in copper. Nearly $13 billion in copper production investment is still on track for 2016 despite the volatile copper index.

This refusal to blink is partly due to long term copper price forecasts, which predict a rise in the medium term, in tandem with resurgent global demand. Although China, the world’s largest copper consumer, may have entered a “new normal phase of growth, copper remains a crucial element in manufacturing and construction, the backbones of global growth. According to industry groups, in the first 11 months of 2014 copper demand grew by 10%. US and emerging market demand, combined with declining ore quality at some of the world’s largest mines, may even lead to shortages down the road, according to some analysts.

Crucially, there is also the question of volume and production cost. Peru is currently the world’s 3rd largest copper producer, but after the large mines currently under construction reach full capacity in less than five years, Peru will surpass Chile to become the world’s second largest producer. With volume come increased revenues and decreased costs per ton of concentrate

Peru has significantly lower costs than its southern neighbor Chile due to abundant hydroelectric and gas resources, lower labor costs, and fresher mines that require less investment in order to extract ore. Those facts are generally true for all of Peru’s mining operations, although investment metals and base metals are expected to stay low in a high-interest rate atmosphere and a sluggish global economy. Copper will likely play a much larger role in Peru’s economy in five years, and in the meantime, billions of dollars in mining investment will drive construction and services in the Peruvian economy.

The role of minerals in the Peruvian economy was complicated, and ultimately weakened by 2014’s sustained low mineral prices. Government intervention in the form of a raft of infrastructural projects was swift but only came after the economy had already slowed significantly. The political pain of this transitional period has caused a large-scale reevaluation of the nation’s economic structure and engendered the political will for infrastructure projects, although not broader reforms.

Growth in 2015 and beyond will depend on mining projects and mineral prices, but other developments have the potential to win many additional billions in investment. As long as mineral prices are low other sectors will find themselves playing a growing role in the national economy. As 2014 proved, that shift is positive in the long term, painful as it may be now.