Free Essay

Chile Copper

In: Business and Management

Submitted By cyrilringeling
Words 2046
Pages 9
BUSINESS CASES

COPPER, THE CHILEAN SALARY

TOMAS ALBIÑANA - #51728
CYRIL RINGELING - #51911
EUROPA – UNIVERSITÄT VIADRINA
FRANKFURT (ODER)
2014

Table of Contents

Introduction 3
Reaction to the Crisis 4 Would prices recover and sustain the pre-crisis level? 6 Fiscal Policy in Piñera’s Government 7 Codelco, the Chilean Company 8 What would Piñera and his finance minister Felipe Larraín do once they were in office? 9
Conclusion 10
Bibliography 11

Introduction

The Chilean economy faced a very important challenge when the price of copper dropped in 2008 cause of the global meltdown. Considering Chile is the largest producer of copper in the World, satisfying 36% of global demand, the fast fall down on the prices of the commodity put in alert its economy. Chile has the 28% of cooper reserves worldwide and represents a 14,2% of its GDP and also 57% of its exportations with an amount of U$D 49 billon. Codelco is a Chilean state owned copper mining company, it is currently the largest copper producing firm in the world and produced around 1.66 million tonnes of the metal in 2007, 11% of the world total. According to that situation, the Minister of Finance, Dr. in Politic Economics from Harvard University, Andrés Velasco, acted proactively looking for accurate solutions trying to prevent the effects of the international crisis. The economic crisis of 2008-2014 began in 2008 and it was originated in United States. Among the main factors that caused the crisis were: economic deregulation, high prices of raw materials due to high global inflation, overvaluation of the product, global food and energy crisis and the threat of a worldwide recession, as well as a loan, mortgage and market confidence crisis.

Reaction to the Crisis

It was impossible to say or think that Chile would not had been affected by the economic crisis, and many thought that it would be greatly damaged by the passage of the crisis, but with the investment of over 4 billion dollars, the government made a series of decisions to stimulate the economy and provide liquidity to the financial system, and afford direct benefits through bonds to 3 million Chilean of the most vulnerable sector. Measures such as these made the country able to face better the crisis. Copper price fell in October 8th to its lowest price in the last 5 years, copper spot prices on the Comex division of the New York Mercantile Exchange closed at US$2.3665 per pound. As a consequence of the decrease in copper prices, Chile suffered a reduction in the GDP in the first three trimesters of 2009. The international Crisis smashed hard the Chilean economy, in 2009 the GDP fell down by 1,5%, being the first recession in the last ten years. The domestic demand decreased by 6% and the CPI dropped by 1.4%, its first negative annual inflation since the 1930s. The Government Macroeconomic policy reacted quickly. On one hand, the fiscal policy became very expansive and the budget went from a surplus of 4.3% of GDP in 2008 to a deficit of 4.4% in 2009. Public spending rose by 17% in 2009 and tax revenues declined considerably, not only by the economic downturn, but also due to some temporary tax cuts. The “Banco Central de Chile” on the other hand, implemented both conventional instruments and unconventional monetary policy to deal with the crisis. During the previous two years, inflation placed on the goal, strongly influenced by rising food prices in the world (Chile is a net importer of grains), but also by a very dynamic aggregate demand.

In January 2009 due to the crisis arrival to the country, the “Banco Central de Chile” began an aggressive process that consists in a reduction of the interest rate. In July 2009 it reached a low record of 0.5%.
Other policies implemented were: • Investment and consumption: US$700 million additional to those included in the budget were implemented in to public investment projects. There were additional incentives for afforestation for US$ 20 million. US$41 million were contributed to the Municipal Common Fund to maintain employment levels. US$1,000 million of capital to Codelco were provided. • Financing companies: In this area the Provisional Monthly Payment was reduced to US$460 million during 2009. • Supporting People: Welfare delivery of US$80 per family to low-income groups, the final cost of the delivery was US$224 million and the anticipated income tax refund involved a cost of US$220 million. • Employment and Training: The measures subsidized formal employment with a cost of US$102 million, to train staff had a cost of US$147 million. In the second half of 2009, the Chilean economy began to show signs of recovery. The fourth-quarter growth was positive and the expectations for the short term improved substantially. In February 2010, an earthquake (the 5th strongest recorded in the world) introduced a pause in the recovery process, and in the first quarter the GDP grew only by 1.5%. However, after the initial negative effects, Chile retakes the strong growth momentum and the prior second quarter GDP grew by 6.5%.

The former Minister of Finance explained that the reason of why the process of recession has been so short, stating that- “in the years 2005, 2006, 2007 and 2008, Chile had surpluses in copper and we did not spend more than we could. We paid debts, we invested, and a portion of it was saved. Thus, in 2009 with the crisis, we fell three consecutive quarters and after the fourth we were growing up again." (Majluf, 2012)

Would prices recover and sustain the pre-crisis level?

In 2007 was registered the highest price of copper at the moment, the amount was 323.246 US cents per pound, in the year 2008 the London Metal Exchange showed the first reduction in copper prices, being at that moment 315.316 US cents per pound. The lowest point reached in this fall was in the year 2009, the price of the commodity was 234.217 US cents per pound. After the most critical moment in the crisis copper price started to grow up, reaching 341.978 US cents per pound in 2010, following this tendency and accompanied by the recovery of the Chinese and US economy the worth became to increase, in 2010 the copper price was 341.978 US cents per pound and in 2011 it reached its historical maximum of 399.656 US cents per pound.

Thereafter, price level made steady. In the following chart is possible to appreciate the price behaviour since January 2007 until the end of 2013.

Source:http://www.lme.com/metals/non-ferrous/copper

Fiscal Policy in Piñera’s Government

In the first quarter of 2010, the first point of discussion between the new Government and the new opposition were focused on the deficit issue. At the end of the second quarter of that year, public finances were again generating a cash surplus that showed a strong expenditure containment exercised under the management model of structural balance. Despite the earthquake, they insisted on maintaining the established spending budget law, using reallocations of expenditure to accomplish the reconstruction by shifting the next two budget years. Thus, the counter-cyclical fiscal policy is an arbitrary decision that incumbent on the President and his economic team.

Codelco, the Chilean Company

In 1973, 94% of copper production was in the hands of the state; in 2007 this percentage was reduced to 31%.

Source: http://www.archivochile.com/Ideas_Autores/caputoo/caputolo0052.pdf

Because the facilities given to private capital, foreign investment in Chile soared from the 90’s, along with the production of the red mineral. Codelco is 100% owned by the State of Chile. His owners are all Chileans. Copper is exported to customers worldwide. The main market is Asia (59.8%), followed by Europe (17.9%), South America (11%), North America (10.2%), Oceania (1%) and Africa with 0.01%, according 2012. Laws do not permit privatize Codelco because exist a constitutional amendment for which the government does not have the necessary votes required to change it.

What would Piñera and his finance minister Felipe Larraín do once they were in office?

The mission of Piñera’s administration was: “Set the final basis to lead Chile to reach the standards of a developed nation to the end of the decade, and in this way move towards economic principles and quality of life as countries of the Organization for Economic Co-operation and Development (OECD) without leaving the social and spiritual development” The main economy proposals of Piñera’s government were: • Recover the growth capacity of the country, because economy progress not only facilitates the creation of jobs, but also is the best tool to finance social programs, overcome poverty and increase opportunities for Chile to achieve development. • Create more and better jobs. • Eradicate extreme poverty in the government period and move towards overcoming poverty at the end of the decade, maintaining a high rate of economic growth and job creation, improving social policies, especially, increasing access and quality of education. • Rebuilding the damage caused by the earthquake on February 27, 2010, through the reconstruction program launched in Concepción the same year. Create solutions that improve the existing infrastructure of the country and raise the households of hundreds of Chileans.

Conclusion

As a conclusion it is possible to affirm that the taken decisions by the former Minister of Finance, Andrés Velasco, and the former president Michelle Bachelet over the surplus and the fiscal policy were successful because Chile did not fall in a deep crisis as other countries in the region. The chart below shows the evolution of the GDP before, during and after the crisis. In 2009 the crisis smashed the Chilean economy very hard, however, thanks to the contra cyclical fiscal and monetary policy Chile could pass a really complicated period with a lot of success. Once the copper price started to grow up and Sebastián Piñera assumed the presidency of the state, the GDP recovered a high level of increase, even when Chile suffered the calamities of an earthquake. Nowadays, Chile is completely recovered of the worldwide crisis having the same economy philosophy they had before the meltdown and the copper is still the principal income of this large country. Given these economy background, the future of Chile looks favourable if we take in account that the country has a sustained growth over the years, it is a liberal economy which has signed free trade agreements with largest economies and economics blocks.

Source:Worldbank.org. (2014)

Bibliography

Ainzúa, S. (2014). Crisis económica en chile: la evidencia de problemas profundos. [online] Retrieved from: http://www.boell-latinoamerica.org/downloads/Crisis_economica__internacional__y_sus_efectos_en_Chile.pdf [Accessed: 3 Feb 2014].
Bcentral.cl. (2014). [online] Retrieved from: http://www.bcentral.cl/publicaciones/estadisticas/sector-externo/pdf/ice042012.pdf. [Accessed: 6 Feb 2014].
Bustos, A. (2014). El estado y las políticas públicas ante la crisis financiera — biblioteca del congreso nacional de chile. [online] Retrieved from: http://www.bcn.cl/carpeta_temas_profundidad/politica-economica-2009 [Accessed: 2Feb 2014].
Chandler, D. (2014). Copper prices drop on recession fears | news content from electrical wholesaling magazine. [online] Retrieved from: http://ewweb.com/news/copper-prices-drop-recession-fears [Accessed: 2 Feb 2014].
Eoi.es. (2014). Sole ferrer » la economía chilena frente a la crisis economica mundial. [online] Retrieved from: http://www.eoi.es/blogs/mariasoledadferrer/2012/02/19/entorno-economico [Accessed: 6 Feb 2014].
Ferrer, S. (2014). Sole ferrer » la economía chilena frente a la crisis economica mundial. [online] Retrieved from: http://www.eoi.es/blogs/mariasoledadferrer/2012/02/19/entorno-economico [Accessed: 4 Feb 2014].
Frigolett, H. (2014). [online] Retrieved from: http://www.fundacionequitas.org/descargas/barometro/barometro01-02.pdf [Accessed: 1 Feb 2014].
Lme.com. (2014). London metal exchange: copper. [online] Retrieved from: http://www.lme.com/metals/non-ferrous/copper/#tab2 [Accessed: 3Feb 2014].

Slideshare.net. (2014). Balance de tres años de gobierno del presidente Sebastián Piñera. [online] Retrieved from: http://www.slideshare.net/derechoalanoticia/130311-balance-detresaniosdegobiernodelpresidentesebastianpinera [Accessed: 6 Feb 2014].
Vergara, R. (2014). [online] Retrieved from: http://www.bcentral.cl/estudios/documentos-politica-economica/pdf/dpe38.pdf [Accessed: 6 Feb 2014].
Worldbank.org. (2014). World bank group. [online] Retrieved from: http://www.worldbank.org [Accessed: 5 Feb 2014].

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