Mineral resources and commodities have been a blessing and a curse for Latin America since the Spanish began extracting silver in Potosì, Bolivia, in 1545.
The region’s economic fortune has been partially dependent on commodities: improving with surging demand and worsening when demand, and prices, fell. The region is rich in minerals such as lithium, copper, silver, bauxite, zinc and nickel, among others. Many are key components in strategic industries, such as renewable energies and e-mobility.
Chile, Peru and Mexico hold an estimated 40% of global copper reserves, while roughly two-thirds of the world’s lithium reserves are in Latin America.
The current green sustainability agenda is fuelling an increased demand for minerals and presents an opportunity for long-lasting economic prosperity in the region.
To meet the Paris Agreement goals to combat climate change, clean energy technologies’ share of total demand will need to rise over the next two decades to more than 40% for copper and rare earth elements, and almost 90% for lithium, according to the International Energy Agency (IEA).
A typical electric car requires six times the mineral inputs of a conventional car, and an onshore wind plant requires nine times more mineral resources than a gas-fired power plant, reports the agency.
However, there are several challenges Latin America must face for the next commodities boom be a game changer for the regional economy.
Global headwinds
Last year saw strong commodity prices, including oil and metals which benefited countries such as Brazil, Colombia, Chile and Peru.
This year, commodities markets are experiencing volatility, mainly as a result of the war in Ukraine, energy prices, lack of investment, lower liquidity or financing constraints.
“Take the case of Chile, which exports copper but imports oil, or Brazil which exports oil but it also imports a lot of oil derivatives or fertilisers. This has affected the terms of trade,” says Bertrand Delgado, Latin America strategist at Société Générale.
The cumulative 12-month trade balance has declined in Brazil and Chile over the past six months
The commodities markets in Latin America cannot withstand the pressure from global trends, such as inflation and rising interest rates.
“The cumulative 12-month trade balance has declined in Brazil and Chile over the past six months. Even in Colombia, we have seen deterioration in the trade balance in July,” says Olga Yangol, head of emerging markets research and strategy for the Americas at Crédit Agricole Corporate and Investment Bank.
Before the Covid-19 pandemic, commodities in general were out of favour in investment portfolios because they were increasingly considered pollutants, which meant less investment in business development.
“Companies had started returning money to shareholders to appease them so that their share prices were not impacted too much. This has resulted in a lack of capital for expenditure, exploration and mining projects,” according to Michael Haigh, global head of commodities research at Société Générale.
There are also concerns regarding a global economic slowdown, which will inevitably impact demand for commodities. “We forecast China’s growth at 3% this year which, for the country, is considered recessionary territory. And there is significant demand decline from Europe and even the US,” adds Ms Yangol.
And of course, there are issues around energy security because of Russia’s invasion of Ukraine, resulting in higher energy prices, meaning some metal manufacturing is more costly.
Recently, several mining projects have been delayed. In September, Newmont, the world’s largest gold miner, announced that it will delay the investment decision for the Yanacocha Sulfides mining project in Peru until the second half of 2024. The decision took into consideration the “unprecedented and evolving market conditions”.
if we do not start adding new units to the market, global production will decrease dramatically in the years to come
“There are some projects ongoing now, but not many after 2025 because of the current market conditions. People are holding back on new investments,” explains José Ignacio Pérez, managing director at the European office of Chilean company Codelco, the world’s largest copper-producing company.
“Codelco is investing $40bn over 10 years to expand the life of mines and keep the current level of production,” adds Mr Pérez.
The company operates a huge project in Calama, Chile — once the biggest open-pit copper mine in the world and it is now on track to become the world’s most modern underground copper mine. At El Teniente, another of the company’s mines, exploration is expanding deeper underground to find the mineral.
“Getting approval for new mines is more difficult nowadays, but if we do not start adding new units to the market, global production will decrease dramatically in the years to come,” Mr Pérez explains.
Another issue relates to ore quality, which has continued to deteriorate for several commodities. The average copper ore grade in Chile declined by 30% over the past 15 years, according to the IEA. This results in more energy nrequired to extract metal content from lower-grade ores, which in turn means higher production costs and greenhouse gas emissions.
Enough metal?
The question now is whether Latin America, and the world in general, can provide enough metal to support the energy transition.
The US Geological Survey distinguishes between proven and unproven reserves, with the latter referring to commodities that are known to exist, but whose extraction costs and efforts are uncertain.
“For copper, based on current consumption, there’s about 30 years’ worth of proven reserves and hundreds of years of unproven reserves,” says Mr Haigh.
“So, it’s not like there isn’t enough metal to build all the offshore wind farms that we need. But in order to make them more viable, the cost of the metal is going to go up because it is just more expensive and difficult to get it out of the ground,” he adds.
“In the future, we will have a gap of nine million tonnes of copper to cover if we don’t increase production from now to 2030. On one hand, we can rely on recycling, and we have seen a lot of companies investing in metal recycling centres, so we know it is possible. We estimate that three million tonnes will be covered by recycling. To cover the rest, we also need new mining projects and the industry needs the right incentives for that to happen,” says Mr Pérez.
This year and next there are three new large projects — Quebrada Blanca in Chile and Quellaveco in Peru, as well as Kamoa-Kakula in Congo — which together will probably increase global supply by 5% or 6%, according to Hugo Perea, chief economist at BBVA Research in Peru. “Aside from these, we don’t have new projects coming up,” he adds.
Domestic headwinds
There are country-specific obstacles to additional investment in the region, despite potential increasing demand for these commodities.
“It still seems to me that Chile and Peru are not going to be able to produce or export more volumes, which is what matters from an economic growth point of view,” explains Ben Ramsey, head of Latin America economic research at JPMorgan.
Another obstacle to increased investment in the sector is the political nature of some of the governments in the region, which are not necessarily friendly to private investment. With the recent election victories of Gabriel Boric in Chile and Gustavo Petro in Colombia, a new era of left-wing administrations has begun in Latin America.
Colombia’s congress is debating a bill that would ban fracking in the country, pushing Ecopetrol, the state-run petroleum company, to suspend its fracking pilots for 90 days. Meanwhile, Mr Petro vowed to accelerate the energy transition in the country by denying the issuance of any new oil contracts.
Some countries have not exploited their entire natural resource base. “That is the case with Ecuador with mining or Colombia with unconventional hydrocarbons such as fracking. These things are not necessarily going to be developed or exploited because of local environmental concerns,” adds Mr Ramsey.
Mining in Ecuador was slow to develop in comparison to other Latin American countries, despite large estimated mineral reserves. Mining currently contributes to around 1% of the country’s gross domestic product.
There are prospects for growth in countries like Argentina. “The country should surpass $500m worth of lithium exports this year, from what used to be around $100m. I think it’s still marginal in terms of thinking about the overall trade flows, which is what matters for the macro economy of the country,” says Mr Ramsey.
In Chile, deliberations on a new constitution have raised concerns on mining sector property rights — concerns that remain, despite citizens voting against the change via a referendum in September.
Today, communities are more aware of the environmental impact of mining. Mining generally requires large volumes of water for its operations and can cause long-lasting water pollution, according to the IEA.
This year, Peru faced multiple protests from local communities in its mining areas, which in some cases resulted in the halting of some operations.
In April, Chinese mining firm MMG had to suspend operations at its Las Bambas mine, one of Peru’s largest copper mines accounting for 2% of global copper supplies. The move followed locals entering the property and accusing the company of non-compliance with various agreements.
The country’s central bank forecast in September that mining investment would fall 3.7% this year. The same month, the government proposed a social fund financed by mining companies to finance development projects and improve the living conditions of communities near mining sites.
“There needs to be a real inclusion of civil society,” explains Susana Herrero, coordinator at the Center for Economic Research at Universidad de Las Américas in Quito, Ecuador. “Governments need to explain how these mining projects can benefit the citizens. The population is interested in knowing how education is going to be better in the next 10 years, for example.”
Mr Pérez adds: “On one hand, we acknowledge that mining has an impact on the environment, but on the other hand we need metals to meet all the climate change targets. As an industry, we need to minimise our impact to help find this balance.”
Codelco is committed to decrease 70% of its carbon footprint by 2030 and reduce the use of continental water by 60% by increasing the use of water from the ocean.
Commodity dependence
A key issue is how to manage resource revenues to distribute economic benefits effectively and avoid the classic boom and bust cycle that characterise countries dependent on commodities.
“Colombia has been trying for a long time to avoid its over-dependence on oil, given that there is a limited amount of it in the country. In Brazil, we always had discussions about how to industrialise the country,” recalls Gustavo Arruda, head of Latin American research at BNP Paribas, highlighting how much this topic is relevant in the regional public discourse.
Commodities have always been associated with lack of industrialisation and underdeveloped economies. “We should not be ashamed of producing commodities, given that they are needed globally,” says Mr Arruda. “The sector is becoming more and more technologically driven. In Brazil, it has been the one that had the most gains in productivity over the past 10 years.”
Mr Perea adds: “When you analyse the past few years here in Peru, you can find a strong correlation between export prices and investment in sectors other than mining.”
Peru is set to continue growing at around 2% to 2.5% per year. “With opportunities like mining that will last six or seven years, we should be growing at around 5%. And we need to speed up growth rates to reduce poverty and increase job creation, otherwise this is going to be explosive in social terms,” explains Mr Perea.
In many cases, commodities revenue has been used for current expenditure rather than long-term projects
Some countries have developed different ways to attenuate the impact of the fluctuation of commodities prices. “In Chile, our fiscal budget is not based on the current copper price, but on the long-term price,” says Nicolás Grau, Chile’s minister of economy, development and tourism.
Mr Ramsey points to prudent fiscal policies, inflation-targeting central banks and flexible exchange rate regimes as examples. “Governments need to continue to reinforce some of the anchors of macroeconomic stability which have been built over the past 20 or 30 years to withstand booms and busts,” he says.
When that was not the case, as in the 1980s, any commodities price volatility quickly translated into a financial or balance of payments crisis, he recalls.
The question is then how to guarantee that the revenues from the commodities sector flow to the broader economy. “In many cases, commodities revenue has been used for current expenditure rather than long-term projects. What is needed is investment to change the structure of the economy, building more infrastructure and reducing the informal economy,” says Ms Herrero.
A long-term view
Commodities seem to be reacting like there is a recession looming, according to Mr Haigh. “It’s critical to understand that it is normal to experience business cycles within commodities supercycles,” he says.
“If we are talking about a specific metal supercycle based on green transition plans, we are talking about 25 years out into the future. This is a normal timeframe in the history of commodities supercycles.”
The first commodities boom, from 1879 to 1914, was prompted by the Industrial Revolution. The second was from 1945 to 1973, following the second world war. And the third was triggered by China’s accession into the World Trade Organization in 2001 and stopped prematurely by the 2008 global financial crisis.
The demand for minerals and metals is likely to remain an engine of the current economic model, despite prices and demand fluctuating.
In the medium-to-long term, the outlook for commodity markets is structurally bullish, as some commodities are going to be in hot demand because of the green transition, according to Mr Delgado.
“By 2024, we expect copper prices to move up aggressively because of an increase in demand and decrease in supply,” adds Mr Perea. “At that time, the global economy should also start to recover.”
It seems unlikely that the momentum of battling climate change is going to either stop or reverse. Whether the speed of the transition slows or accelerates, it is here to stay.
