World's Largest Copper Producer Expands Production, Increases Taxes in One Day, Initiates Sharpest Rate Hike in Two Decades

In one day, Chile, the world's largest copper producer, broke several big news stories in quick succession. First, Chile's central bank announced the largest interest rate hike in nearly 20 years, followed by the Chilean government's mining policy blueprint for the next 30 years and the passage of proposed legislation for a corporate tax on minerals, which is closely related to Chile's copper mining industry.

Chile's central bank raises interest rates by 75 basis points to 1.5%

Since the July interest rate resolution the Federal Reserve released a hawkish signal to raise interest rates, emerging economies have been forced to open multiple rounds of interest rate hikes, scrambling to "run" the Fed to ease internal and external inflationary pressures.

On Tuesday, Chile's central bank announced a 75 basis point interest rate hike to 1.5%, the sharpest rate hike in Chile in 20 years. According to Bloomberg, 12 of the 17 economists previously interviewed expect the Chilean central bank to raise rates by 50 basis points, while the remaining five economists expect the second hike of 25 basis points.

Chile's consumer price index (CPI) rose by 4.5% in the 12 months to July this year. Chile's central bank has an inflation target of 3%, with a tolerance range of plus or minus 1 percentage point.

Luis Felipe Alarcon, the chief economist for Europe and America, said in response: Given the strong consumption, fiscal expansion, and inflationary pressures, a 75 basis point rate hike by the Chilean central bank is realistic. If the factors driving the rate hike to persist, the Chilean central bank is likely to maintain that rate hike pace.

Highest tax in copper mining countries

As the world's largest copper producer, Chile's every move here not only touches the hearts of global commodity investors but also affects copper prices, which have been soaring since last year.

On the same day, the Senate Mining Committee of Chile's Congress approved draft legislation on copper royalties by a vote of 3 to 2. It will next go to the full Senate for a vote, with possible amendments.

This is a royalty bill that aims to significantly increase the tax on copper mining in Chile (a royalty bill). The new bill is intended to soften the version passed in the lower house of Congress in May of this year.

Like other mineral countries, the Chilean government seeks a larger share of mining profits to cushion the negative impact of the new crown epidemic.

Bloomberg data show that the current copper royalty tax rate in several major copper mining countries around the world is around 41%, with Peru at 40.7%, South Australia at 44.6%, British Colombia at 40.1%, Mexico at 41.6%, and Chile's current 41.6%.

Chile's proposed copper royalty increases to 82.3% and another proposed tax to replace the current profit tax is 56%, both significant increases over the current rate.

Some economists have commented that the bill would make Chilean copper mining companies far more taxed than other copper-producing countries, thus weakening their competitiveness and creating a heavy tax burden in Chile.?

And this is just the beginning. Chile is currently drafting a new constitution that could set stricter rules on water, minerals, and community rights ahead of November's presidential elections.

While a new copper royalty system will likely replace the current profits tax, it is not included in the bill. Some government officials have suggested that the two regimes could operate simultaneously. Most of Chile's major mining companies have signed tax stabilization agreements until 2023.

The blueprint sets the tone for 30 years

?On the same day the committee adopted the draft, the Chilean government unveiled its blueprint for mining policy over the next 30 years, listing plans to require the country's mining companies to improve traceability, reduce water use in the event of a prolonged drought and enhance leadership diversity.

Among the most talked-about are copper production volumes. Chile aims to maintain its current 28 percent market share and increase annual production to 9 million tons by 2050.

This is not a small number. According to the U.S. Geological Survey (USGS), Chile accounts for about a quarter of the global supply of copper and lithium, and in 2020 global copper production will be about 20 million tons, with Chile ranking first with about 5.7 million tons. And if Chile's intentions are followed, the country will need to increase its production by 57%.

Overall, from the supply side, Chile, the world's largest copper producer, raising taxes on copper mines will raise market concerns about the outlook for copper supply. From the demand side, the recovery of the global economy from the impact of the epidemic and the outlook for the renewable energy and electric vehicle industries to boost copper demand may further support the rise in copper prices.