Copper solution

TOURIST shops sell polished copper trinkets. Building after building sports a bit of copper cladding. Even the taxi-drivers in Santiago, Chile’s capital, know the price of copper. It is not hard to guess what the country’s biggest export is.

Copper has been kind to Chile. It provides 20% of GDP and 60% of exports. Thanks to it, Chile’s economy is expanding by nearly 6% annually, while inflation and unemployment are enviably low. Poverty rates have tumbled; public services are mostly good. Chile has other strengths, such as agriculture, tourism and even high-tech. But small shifts in the copper price make headlines.

The copper mines themselves are far from the capital. Escondida, the world’s biggest (and the source of over 5% of global supplies) is a 1,300km (800-mile) trek north, in the middle of the Atacama desert. BHP Billiton, the world’s biggest mining company, operates two gigantic pits there. The deeper one is 3.9km from side to side and 650 metres from brim to bottom. Trucks as big as houses, working non-stop, haul 1.5m tonnes of rock out of Escondida each day. Managers may drive 150km in a shift. Last year the mine disgorged 1m tonnes of metal. Overall, Chile produces a third of the world’s copper.

BHP has 4,000 workers on site, plus another 13,000 contractors nearby. All live in a settlement built specially to serve the mine. There they can enjoy Zumba dance classes, a swimming pool and a pub with a jukebox and pinball but, alas, no booze. (Hard liquor and heavy machinery don’t mix.) The nearest town is the port of Antofagasta, 170km away, where ships are loaded with copper sheets and ore.

Copper demand has boomed since China’s rural population started moving to cities. The migrants need homes with copper wires and pipes. Emerging markets everywhere are gobbling up copper to put in bridges, cars, fridges and more or less anything that uses electricity. China’s recent slowdown has caused copper prices to slide by 15% since the beginning of the year, but they are still high (see chart).

BHP and other miners have invested heavily in Chile. Big deposits of copper ore are rare. Big copper-ore deposits in stable countries with business-friendly governments are even rarer. Zambia and Congo are not in the same league.

Chile’s copper industry is a hybrid. Codelco, the state mining firm, competes with private ones. In the past Codelco has suffered from a lack of investment, but that is improving. A change in corporate governance in 2010 is slowly making it more like a private firm, by freeing the board from political control.

In 2000-05 the government’s income from mining averaged $2.1 billion a year. As Chinese growth accelerated, that rose to $11.5 billion a year between 2005 and 2011. But the boom owed almost everything to the copper price. Chile’s output of the red metal has hardly grown in a decade.

Chile’s mines are ageing. When Escondida began producing in 1991, Chilean ore was on average 1.4% copper. Now it is a little over 1%. By 2025 it will have fallen to 0.7%. And thanks to decades of digging, the rock is now much farther down. Trucks haul ore from deeper pits, using more fuel and taking more time.

Miners must adapt to poorer ores. BHP plans to move a crusher and concentrator plant now sitting on several acres of ore that was once reckoned too low-grade to be worth mining. All Chile’s miners hope that better training may help to make their workers as productive as those in Australian or American mines. But other costs are rising too. Chilean wages are high, and workers are swift to strike. Codelco’s miners recently staged a one-day stoppage over working conditions, and three weeks of industrial action by port workers that ended this month held up 9,000 tonnes of copper exports a day.

Energy is costly and likely to get costlier. Chile has few domestic sources besides hydropower, and its dams are nowhere near its mines. The country is now rich enough to afford a muscular green movement, which has helped to block new power plants. To keep the environmentalists at bay, BHP is switching to using desalinated water pumped from Antofagasta, rather than draining the local water tables. That will add to costs.

Chile’s troubles are making other countries look more inviting. Peru, with ample gas, has several big mines in development (though it also has indigenous people who are reluctant to see their land torn up). Even the United States is looking competitive. Thanks to shale gas, energy is much cheaper than in Chile. Wages are sometimes lower, too. An American driver of mining trucks makes around $60,000 a year; a driver at Escondida makes $10,000 more. But red tape is harder for miners to deal with in America than in Chile.

The biggest threat to Chile’s copper boom comes from China. If the country that buys 40% of the world’s copper slows further, the price of the metal will fall again. And Chile can hardly turn all its copper output into knick-knacks for tourists.