Plunging Copper Prices bear on Latin American Economies

With the price of copper decreasing once again at the end of last week, the red metal has slumped more than 11 percent so far this year and is on track for its sixth week of declines. The setback was in part due to pressure from a strong dollar which made commodities priced in the U.S. currency more expensive for foreign traders. In addition, gloomy expectations for the slowing Chinese demand also put downward pressure on the commodity. Accounting for roughly 40 percent of global copper consumption, China has experienced tremendous growth of demand for copper in recent years , thanks to the surge in its domestic consumer goods manufacturing and power industry. In fact, copper’s broad usage in both consumer and industrial sectors earned itself the reputation as an indicator of economic well-being, capable of signaling the turning points in global economies. . From looming deflation and possible Greek exit to the Russian ruble rout and China’s slowdown, the recent dramatic decline in copper prices perhaps reflect the economic problems that exist in today’s global economy. Even more significant, however, is the impact that a downturn in copper prices could have on economies that depend on copper as their main source of revenue and driver of growth.

Within Latin America, the two countries impacted most by the decline in copper prices are Chile and Peru. Accounting for roughly 20 percent of GDP and 60 percent of total exports, copper is undoubtedly vital for Chile’s economy and has contributed to the economy’s rapid expansion in recent years.  While domestic output in Chile has stayed more or less constant throughout the years, demand from China inflated the prices and fueled a copper boom for the exporter. Adding to the complexity of the issue is the fact that falling ore grades at aging mines will result in the closure or reconversion of about 20 percent of the mines in Chile by 2025. Fortunately, the country’s sound fiscal and macroeconomic policies coupled with low public debt and significant resources in its stabilization funds can serve as effective buffers against negative revenue shocks, but lower copper prices may nonetheless entail risks to investment and growth.

Peru is also looking to take a hard hit from the falling copper prices. Copper is the country’s biggest export component, accounting for more than 20% of the total value of its shipments abroad. Released data has already shown a sharp decline in Peru’s growth rate since the end of last year. The Data has been equally disappointing in the private sector, and contractions in the fishing and manufacturing industries exacerbated the situation, leading to a slowdown in 2014 after a decade of robust growth.. Analysts forecasted a rebound in mid-2015 with the onset of new mining and infrastructure

projects, but the sharp decline in copper prices could significantly undermine any possible recovery of growth levels.

The decline in copper prices is merely one example of how dependence on commodities can have adverse effects on exporting economies. The sharp drop in oil prices recently has also had major impacts on oil exporters in Latin America. Dr. Copper seems to be predicting a glum future for the Latin American countries that choose to continue relying on commodities. The negative consequences of declining copper prices on both the Chilean and Peruvian economies are not unique cases in Latin America. In fact, the majority of Latin American countries have commodity-led growth models that contribute to the boom and bust cycles that are ultimately unsustainable. The slowdown in China is a prime example, as the shrinking demand would send several Latin American economies reeling.

In countries such as Peru, there exists concrete evidence that commodity dependence has led to natural resource curse effects. In other words,  countries and regions with an abundance of natural resources, specifically point-source non-renewable resources like minerals and fuels, tend to have less economic growth and worse development outcomes due to causes such as volatility in revenues, poor management of resources, as well as a decline in the competitiveness of other sectors. It is therefore urgent for countries in Latin America to adopt structural change agendas that place an emphasis on diversifying the economy and reduce their reliance on commodity exports. Only then will these countries be able to achieve the sustainable long-term growth that they need to become more powerful players and leaders in today’s globalized world.