Energy, copper and their orders of magnitude in Chile

Perhaps never before in its history, Chile (US$ 275 billion GDP, 19.5 million inhabitants) has been simultaneously bestowed with an upward trend in copper prices and a downward trajectory in energy prices, both under solid structural conditions. Chile produces 5.8 million tons of copper per year, which at today´s prices would represent over US$ 50 billion in exports; 75% of its primary energy, available under oil, natural gas and coal, is imported, whereas its remaining 25% comes out from domestic renewables and hydroelectricity.

For a non-pandemic and sustainable fiscal expenditure around US$ 80 billion, tax revenues associated to copper industry amounting to over US$ 10 billion per year under these higher prices are quite relevant, beyond the obvious economic impact of a reinvigorated mining industry itself.

As for energy imports, in 2019 Chile spent US$ 11.2 billion in oil, gas and coal, whereas in a disruptive   2020 those expenditures were US$ 7.5 billion. Back in 2011, when oil prices averaged US$ 125 per barrel in present dollars, Chile imported US$ 20.7 billion in fossil fuels – also in present dollars -. In other words, in inflation adjusted dollar terms, Chile has already halved the value of its energy imports within a decade, and this is only the beginning …

The falling costs in renewables, particularly solar, have already elicited an electrification process across the world, well beyond electromobility. Given supply restrictions to easily expand copper production and a present 24 million ton copper consumption to be stressed under this electrification path, copper prices will stabilize around US$ 10.000 per ton for a long time, until substitutes slowly come along.

As for energy prices, photovoltaic plants in Saudi Arabia were recently allotted Purchase Power Agreements (PPA) at US$ 10 per MWh. Under these conditions, there is no oil, natural gas or coal that could even closely compete. We are in fact witnessing peak oil and from now on it will enter into a transitional phase where almost 70% of it – currently used in transportation – will gradually vanish. Short term price fluctuations, OPEC theatrical meetings and shale announcements will not be able to change this trend; they will just blur it. Battery developments are well underway to make up for intermittencies at competitive costs. TESLA´s is just one of many of them. And by the way, northern Chile has the best solar irradiation in the world.

Water scarcity? It so happens that desalination processes have dramatically lowered their investment costs, and their operation is highly intensive in energy. Israel, with a desalination capacity approaching 600 million m³ per year, awarded in 2020 a concession for a new 200 million m³ plant at US$ 0.41 per m³, half the price it got in 2011 for an equivalent unit. Chile has at present a total desalination capacity close to 200 million m³ per year, mainly associated to mining processes. Next desalination steps will not only substitute continental waters that might be faltering but also guarantee our population of water needs, and in a nearer future than expected, enable agricultural developments in valleys with comparative advantages.

Finally, it is interesting to note that total primary energy consumption in Chile, which includes all residential, industrial and transportation needs and the generation of electricity with its accompanying 60% efficiency losses using fossil fuels, and which is around 450 million MWh, could be theoretically generated by 170 GW capacity of photovoltaic plants deployed over 3400 km², a square of almost 60 km by 60 km. Present electricity capacity is 28 GW.

Could we imagine a future total cost – including transmission and distribution costs – of US$ 10 per MWh or less under this fascinating energy trend? That would involve a total annual energy cost for every need imaginable, transportation included, around US$ 4.5 billion, at present energy consumption levels, or almost irrelevant relative to GDP. And yes, we could imagine this scenario.

These are enormous and challenging changes, feasible indeed given technology developments, but taking shape in our particular case in a country whose institutions and leaders have shown disconcerting “abilities” that could derail it from benefiting from this extraordinary set of events that are happening beyond us and irrespective of us.     

The bet for our structural conditions is clear-cut; the bet for our institutions and leaders, far less so.

It would be unforgivable if we were unable to stand up to this unique opportunity, which is also advancing along productivity developments across all activities and enabling more flexibility in human capital allocation – a fifth of Chilean population has university or technical higher education and life expectancy at birth is 80 years – than ever before. Entrepreneurial spirits are flourishing. Let them be.

And allow us not to forget: we are not alone in this competitive world. Many others are also facing equivalent revolutionary breakthroughs.    

Manuel Cruzat Valdés

July 23rd, 2021

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