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Peru and Chile amid copper slump: how will volatility impact them?

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This week, the price of copper reached its lowest level in 19 months and increased the level of uncertainty experienced in countries such as Peru and Chile, which are among the main producers of the mineral in the world. Although, last Thursday, the metal rebounded 3% while China discusses a stimulus package above US$220,000 million, copper futures are trading at US$3.55 a pound: a level not seen since the beginning of the 2021.

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The downward trend in the price of the red metal is part of a massive drop in asset values ​​due to fears of an economic recession, according to Juan Carlos Guajardo, director of Plusmining.

Global uncertainty, expectations of an economic recession in the United States and doubts about the reactivation of Chinese demand could continue in the short term, which would continue to impact various commodities and assets in the stock markets.

“For this reason, the new support level is at US$ 7,500 per ton, but since we are very close to reaching that level, the next one would already be at US$ 7,000 per ton,” Guajardo said. In addition, he believed that returning to the price of US$4 per pound will depend on whether the recession scenario is avoided and if China manages to stimulate its economy.

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The tax collection and economic growth of Chile and Peru are greatly impacted by their mining production and by how the international price of copper is maintained, and the fall of the price supercycle, which had been enjoyed since the end of the first quarter of the year above, has curbed current prospects.

Copper fundamentals haven’t changed

Although the current scenario is not positive, the specialists consulted by Bloomberg Online agree that despite these current conditions, the fundamentals of the red metal remain. This would allow the demand for copper to be sustained over time, which makes it more likely that a price path of US$4 per pound can be resumed.

“For now, we think a price of $4 a pound and a return to that outlook is entirely possible as long-term fundamentals are favorable,” said Daniela Desormeaux, director of research at Vantaz Group.

Katherine Salazar, Economic Studies analyst at Scotiabank Peru, explained that what has been seen in recent months is a dichotomy between the fundamentals and prices of copper.

“On the one hand, inventories are low, near historical lows. June stocks were below May volumes and imports of concentrates from China, which is the largest importer, increased in May from April. These fundamentals should withstand drops or keep copper high. However, we are seeing that the falls are due to the macroeconomic situation,” he added.

According to Salazar and Desormeaux, either by the end of this year or by 2023, there should be a greater Chinese demand for post-lockdown copper due to COVID-19 infections, and the impulse from this market is something that cannot be discounted. Added to this is the global scenario of transition towards cleaner energies, which supports the value of copper in the long term.

However, Guajardo, from Plusmining, warned that if the downward trend is consolidated in a recessive scenario in the price of copper, the price estimates with which the budgets were built in both Peru and Chile would be overestimated “and with it after variables, such as tax revenues, would be lower than anticipated.

“Chile and Peru have stabilization mechanisms in the face of this type of circumstance; however, the recent political crises have generated a high use of accumulated resources, so it is not clear how much of it can be used if the recessive scenario is confirmed,” the specialist specified.

With information from Bloomberg Line.

Source: Larepublica

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