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Peruvian political chaos could cause copper prices to soar

21:06, 15 February 2022

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Copper tubing
Peruvian copper production is threatened as demand increases - Photo: Unsplash

Copper prices could see hefty increases as Peru, a leading producer, is on the cusp of political chaos, swearing in its fourth government cabinet in six months.

Meanwhile, demand for the metal is at an all-time high.

On Tuesday afternoon, while other metals were in the red, only copper showed an increase, trading at $4.53 an ounce, up 0.48%. 

Meanwhile, the usage of copper is increasing beyond its normal usage in developed countries as the world moves towards carbon-reduction investments, every one of which requires more copper, said Richard Adkerson, chairman and CEO of the Freeport-McMoRan mining company.

Copper is being used in the transition to renewable energy. Electric vehicles require four times as much copper as petroleum-powered vehicles. And more than 65% of the world’s supply is used in applications to deliver electricity, including wind farms, solar panels and the power grid.

“I think we are headed towards a shortage of copper absent some black swan economic event,” Adkerson told CNBC recently.

The perfect storm

Together, Peru and Chile produce 4% of the world's copper, and Latin America’s sharp turn to the political left has caused consternation among investors and miners.

In no place is that more obvious than in Peru, where politics and protests threaten future supplies. There are angry communities across Andes countries and more government intervention from taxation to regulations that are resulting in production delays in an already tight market after years of underinvestment, analysts say.  

Luke Smith, a global resources portfolio manager at Ausbil Investment Management, said copper prices could increase from the regulatory and community activities in Peru for years to come.

“This increasingly becomes an issue as the deposits in various commodities become harder to find, more expensive to develop and are more likely to be found in emerging markets,” he said. “As a result, country risk is something those investing in all these miners increasingly have to consider.”

Political neophyte

In the summer of 2021, Peru elected Pedro Castillo, a former teacher and socialist, as its president. During his term, he called for higher taxes and stricter regulations on the mining industry.

Castillo said a rewriting of the constitution is needed to prioritise public investment in health and education, ensuring higher taxes on multinational companies.

Investors are leery of changing the document but redrafting the constitution has long been a goal of Peru's left.

Legislators have introduced bills enforcing tougher environmental regulations around mining in the resource-rich country that has a high poverty rate.  In November, the former prime minister said mines would shutter after community protests about the environmental damage done by mining.

"We will close the mines as soon as possible," the former minister said in November. "There will be no extensions, whether for exploitation, exploration or even shutdown."

Under Peruvian law, all mines have an expected closure date, although those dates can be modified if regulators allow it. However, many mining companies have existing contracts running for several more years, Commerzbank’s precious metal analyst Daniel Briesemann told Capital.com.

Briesemann explained Peru relies heavily on the tax revenue and royalties from mining companies. “By stopping any future projects, Peru would be cutting off part of this income,” he said.

The Castillo government eventually tamped down its fiery statements and started working with the mines to reopen.

Mine blockades

With this political shift, many communities have discovered the power of civil protest. Recent road blockades by protestors are ahead of the Castillo administration, which campaigned on the rights of marginalised Peruvians.

Often the protests against the mining companies are for myriad reasons, including deteriorating public health, environmental harm, high wages for mine workers and rights of local people.

On Tuesday, one community said it would restart a road blockade at one of the world’s largest copper mines, Las Bambas.

Las Bambas produces 2% of the world’s copper supply and alone represents 1% of the country’s gross domestic product, according to in-country reports.

The Las Bambas blockade comes after complaints by dozens of Andean communities have gone unheeded. Residents complain that mines pollute the environment. 

The blockades often halt trucks from heading to and returning from the mines.

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