Chile and Peru’s copper for energy transition

Authors
Carla Selman | S&P Global Market Intelligence, Associate Director
Veronica Retamales Burford |  S&P Global Market Intelligence, Senior Research Analyst
Johanna Marris | S&P Global Market Intelligence, Senior Research Analyst

Contributor
Roger Padierna | S&P Global Market Intelligence, Research Analyst

As the world moves away from fossil fuels with the goal of reaching net-zero carbon emissions by 2050, the demand for minerals needed for clean energy technologies, such as wind and solar power, battery storage and electric vehicles will significantly increase in the coming decades. S&P Global Market Intelligence concluded in The Future of Copper” that demand for copper will double by 2035, which would require new mine capacity in order to be met. This special report examines the preparedness of Chile and Peru — the world’s largest copper producers with significant unexploited potential — to expand their production capacity to meet increased demand.

Copper will play a key role in the energy transition, being needed to expand power grids and transmission lines to bring renewable energy, such as solar and wind power, from sources to urban centers. Our copper study estimates that global demand will increase from 25 million metric tons in 2022 to 50 MMt in 2035 and to 53 MMt by 2050. Existing mines and projects in the pipeline are insufficient to meet this demand.

Chile and Peru produce 40% of the world’s copper output and have significant unexploited potential to help reduce the shortfall between supply and projected demand. According to the United States Geological Survey (USGS), Chile — the world’s largest copper producer — produced 5.39 MMt in 2022 and has the largest reserves, estimated at 190 MMt, or 21.3% of the world’s total. Peru, the second-largest producer, at 2.2 MMt in 2022, has the third-largest reserves behind Australia, with 81 MMt, or 9% globally. The USGS estimated that both countries, alongside Ecuador, could contain approximately 750 MMt of undiscovered copper resources.

Reframing global supply chains

Chile and Peru are likely to play a key role in reframing commodity supply chains as the US and European countries intensify their efforts to secure critical minerals and diversify sources. The US Inflation Reduction Act of August 2022 increases requirements for critical minerals to be sourced from countries with a free trade agreement with the US. Although the Inflation Reduction Act does not class copper as a “critical mineral”  — the definition varies across jurisdictions — Chile and Peru have free trade agreements with the US, increasing the likelihood of them being favored by US investors. Latin America also has huge lithium potential, with 60% of global reserves; see "Critical minerals: Illuminating the path to an electric future."

Despite the increased need for copper and the two countries’ well-established mining industries, there are multiple challenges to expanding output in Chile and Peru.

Challenge 1: Regulatory uncertainty in Chile

Planned changes to Chile’s constitution are likely to slightly increase the state's role in the development of natural resources, although conservative dominance will guarantee property rights and limit state intervention. A new process to write a new constitution started March 6 with the installation of a 24-member expert committee, after a previous draft was rejected in 2022 in a referendum. The committee is preparing a blueprint for use by an elected 50-member constitutional council, which will write a final draft. Elections for the council members took place May 7 ahead of the council's installation June 7. A final draft will be submitted to a referendum Dec. 17. The conservative Republican Party (Partido Republicano) obtained 23 seats in the council while the government block Unity for Chile (Unidad para Chile) got 16. As conservative parties will dominate the council, they will be able to pass policy, enshrining property rights and private investment in the mining sector under a potential new constitution. However, the council will be bound by set principles, including respecting nature and establishing a “social” state that is likely to slightly expand the state's role in the economy, including in natural resources.

Companies investing in Chile’s copper will face higher taxes, including a new royalty. After Congress rejected in March a tax package proposed by President Gabriel Boric’s administration, the government is preparing a new proposal, which is likely to remove tax exemptions and raise the overall tax burden. In the meantime, to fill the fiscal gap, the government made concessions to the opposition, which led to the legislative approval of a mining royalty bill May 17. The government accepted further reductions to the proposed tax cap for the royalty to 45.5%-46.5%, down from the original proposal of 50%, and will integrate a flat tax on sales (ad valorem tax) of 1% on production above 50,000 metric tons per year.

Pending changes to Chile’s mining code are likely to free land for new concessions from 2024, but they will increase demands for minerals development. The structure of Chile’s concession system has hindered the expansion of the mining sector, blocking the entrance of new companies, particularly junior and small miners. To date, concession holders have not been obliged to develop copper or make investments. Moreover, concession holders can maintain concessions indefinitely, subject to paying an almost symbolic annual fee amounting to less than US$10 per hectare for exploration and exploitation. This leads to permit holders hoarding and speculating with mining concessions; Chile’s mining ministry estimated that while 36% of the country is covered by concessions, less than 10% is exploited. Law 21,240, promulgated by former President Sebastián Piñera in February 2022, increases the cost of acquiring mining concessions and introduces penalties for holders that fail to develop resources, while removing some mining-sector tax breaks, effectively opening the sector to new concessions. The law's implementation has been postponed from February 2023 to January 2024 because of inconsistencies related to land delimitations. Despite the delay, changes to the mining concession system are highly likely to be implemented from 2024, increasing the likelihood of investment targets being established and concessions being revoked if holders fail to develop them. Chile’s economy is highly dependent on copper exports, which contribute approximately 10% to the GDP, and Boric and future governments are likely to prioritize freeing land for new projects.

Challenge 2: Political instability in Peru

The Peruvian president’s reliance on center-right legislative support will prevent passage of structural changes to mining law. The likelihood of an early election in 2023 has declined significantly as Congress has repeatedly failed, after the impeachment of President Pedro Castillo, to pass legislation to bring the election forward from April 2026. As nationwide protests against President Dina Boluarte have receded, Congress is unlikely to quickly pass enabling legislation for an early poll, reducing scope for a general election in 2023 or even 2024, given the extensive timetable needed to organize a poll. Although Boluarte had originally formed part of Castillo’s liberal Free Peru party (Perú Libre), she now relies on the support of center and conservative parties to pass policy and avoid impeachment, having left the Perú Libre party and lacking backing from a formal coalition. The Perú Libre party and other liberal parties are demanding her resignation and will try to impeach her. However, as in April with the first impeachment motion against Boluarte, the parties are unlikely to gather the required 87 votes in Congress, out of 130, to do so. To avoid alienating her fragile center-right support base in Congress, Boluarte is unlikely to seek structural changes. These include a new constitution demanded by the Perú Libre party or amendments to the mining law to strengthen prior consultation with local communities, as demanded by governors of the southern regions of Tacna, Moquegua, Cusco and Arequipa, which hold 35.5% of mining exploration and are hotspots for anti-mining protests.

Peru’s government will focus on streamlining procedures to initiate mining investment, but it is unlikely to loosen environmental requirements for exploration permits. Boluarte will focus on simplifying procedures to start extractive activities, which require an estimated 400 steps. Changes can be made either by decree or through measures that obtain the required support from center and conservative parties in Congress. The government will maintain corporate tax rates at 29.5% and incentives for the mining sector but is unlikely to revert or loosen a 2017 Supreme Decree for Environmental Protection Regulation, which tightened environmental requirements for exploration permits and gave greater oversight to the Ministry of the Environment. Changing the decree would trigger further opposition by local communities — which are already demanding Boluarte’s resignation — particularly in the south, where many mining operations are based. If future elections result in a left-of-center government with a majority in Congress, which Castillo lacked, regulatory changes such as more oversight powers for local authorities, more exhaustive community consultation and a higher share of the mining canon are likely.

Challenge 3: Stricter application of sustainability standards

Increased awareness of sustainability standards and criteria in both countries will make it harder to obtain the social license to operate. Mining projects that are perceived to cause environmental damage, not conduct proper prior consultation with local communities or Indigenous groups, or breach labor and human rights face reputational risks, delays in obtaining permits, protests and/or lengthy court challenges. The projects are also likely to face growing difficulties in accessing financing as financial institutions are tightening their sustainability exclusion criteria.

Environmental concerns, biodiversity protection and labor disputes are likely to hinder project development through delays, suspensions or unrest. Chile’s President Boric is promoting changes to the environmental impact assessment system (Sistema de Evaluación de Impacto Ambiental), which would tighten the requirements to obtain environmental permits and raise fines in cases of noncompliance with the threat of project cancellation in cases of significant environmental damage.

In March, Congress approved the closure of the Ventanas smelter, reflecting Boric’s pledge to end “sacrifice zones,” which are areas with heavy pollution due to economic activities. This signals that Boric will be rigorous regarding compliance with environmental standards; Boric’s compliance with environmental standards is likely to lead to more extensive inspections and regulatory assessments of plants or projects involved in environmental conflicts, which increases the likelihood that projects that severely damage the environment will be closed.

Contaminating industries, such as smelters and refineries located in sacrifice zones — which include Coronel, Huasco, Mejillones and Tocopilla — are likely to face higher threats of closure because of excess pollution. Smelters and refineries are needed in Chile and Peru to obtain the value-added benefits from the countries' domestic resources and to avoid exporting unprocessed raw materials.

In Peru, anti-mining protests over environmental issues are particularly disruptive in the southern mining corridor, which connects the regions of Cusco, Apurimac and Arequipa with the Matarani port, where about 30% of Peru’s copper production is shipped. Mines in the area are a particular target of anti-mining protests, with supply chain disruption lasting for months at time. In Chile, disruptive unrest comes from labor issues, with influential mining unions demanding pay increases and bonuses, particularly during collective negotiations. Protests generally include roadblocks and blocking entrances to the premises and tend to last approximately two weeks, but sometimes longer.

Biodiversity protection will also restrict areas for mining activity. In Peru, mining companies are banned by law from operating on or adjacent to protected areas or nature reserves, with provinces and regions entitled to establish ecological and economic zoning within their jurisdiction. The protection of nature is already included in Chile’s new constitution as it is one of the agreed basic principles, while a bill to create a Biodiversity and Protected Areas Service is being debated in the Legislature.

Water scarcity threatens increased restrictions for mining companies. The long-running drought in northern and central Chile has become an increasingly critical hurdle for mining projects; see "Water scarcity in Latin America: Operational challenges." The government is prioritizing the use of water for human consumption, sanitation and preservation of ecosystems over economic activity.

To counterbalance this, almost all new mining projects are designed to use desalinated seawater by operating their own plants or outsourcing the process. Desalination plants have faced little resistance from local residents but are likely to become a focus of opposition from local communities if they see the plants as threatening their livelihoods by affecting activities such as fishing or damaging the landscape or because of demands to access the water for community use rather than to serve mining projects. A glacier protection bill in Congress would ban operations at glaciers and severely restrict it in permafrost areas.

In Peru, violent protests over water can cause indefinite suspension of operations. A Water Users Organizations Law was approved by Congress in January 2023, giving greater oversight to civil society groups, namely the Board of Water Users (Juntas de Usuarios del Agua), over major water infrastructure, potentially restricting mining companies’ access to water. However, the government opposes the new legislation and is likely to attempt to amend it to exclude nonagricultural users, such as mines, from Juntas de Usuarios del Agua oversight.

Requirements for prior consultation are likely to expand, with enforcement to be strengthened. Carrying out prior consultation with Indigenous communities is obligatory and binding in Peru. Failure to do so threatens permit cancellations. In Chile, government officials have suggested starting consultation with communities prior to an environmental impact assessment, as it is now.

Rights of Indigenous groups are also likely to be strengthened as the recognition of Indigenous peoples is a basic principle of the constitutional rewrite, but the change is unlikely to give the groups veto powers over projects, as was the case with the rejected draft. Failure to follow the appropriate consultation process or not respecting its results, even if nonbinding, is likely to trigger legal challenges and protests against projects, causing operational disruption and delays, sometimes even if environmental approvals are obtained successfully.

With local communities and nongovernmental organizations becoming increasingly aware of the legal and political instruments and mechanisms available to hinder project development, these groups are likely to demand stronger consultation, expanding consultation to a wider range of affected parties, not only Indigenous groups, and are likely to demand that the outcomes of these consultations be binding.

Regional political dynamics are likely to exacerbate anti-mining activism and decisions over land use. Anti-mining activism is likely to increase because of political instability in Peru. Many regional governors are demanding Boluarte’s resignation and an early election. Thus, they are likely to support anti-government protests to pressure the national government, particularly protests affecting mining operations in the southern regions. Some regional governors appear likely to encourage anti-mining protests directly.

Local-level corruption is a further operational challenge for mining projects in Peru. In Chile, regional governors were elected for the first time in mid-2021, and their power has been diluted by the ongoing presence of delegates appointed by the president. S&P Global Market Intelligence assesses that after the next regional elections, scheduled for 2025, governors will gain greater authority over the presidential delegates. Although governors will not be able to review contracts or cancel or grant concessions, their territorial planning responsibility would give them power to ban mining activity in certain areas.

Note: This report includes input from the Price and Purchasing team of S&P Global