CHILE'S COPPER EARNINGS: OUTLOOK AND IMPLICATIONS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001500220046-8
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 17
• Document Creation Date: December 16, 2016
• Document Release Date: December 27, 2004
• Sequence Number: 46
• Publication Date: May 1, 1968
• Content Type: IM

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Confidential
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Chile's Copper Earnings: Outlook and Implications
Confidential
ER IM 68-44
May 1968
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP I
E.cluded from aulomolfc
downgrading and
declauifcarion
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
May 1968
INTELLIGENCE MEMORANDUM
Chile's Copper Earnings: Outlook and Implications
Summary
The outlook in Chile is for continued high
copper revenues in 1968, a sharp decline in
revenues in 1969, and a partial recovery in 1970.
Total Chilean export earnings are likely to be
lower in 1969 and 1970 than in 1967, in contrast
to an increase of about 40 percent during 1965-67.
In consequence, imports probably will I.ave to be
severely restricted. Under these conditions there
will probably be a slowdown in economic growth and
an acceleration of inflation. The Christian Demo-
crats, the party in power, thus are in danger of
approaching the congressional elections of Aarch
1969 and-the presidential election of September
1970 in an atmosphere of heightened popular dis-
satisfaction with economic conditions.
The US copper strike that began in July 1967
led to price increases that substantially increased
the value of Chile's copper exports and strengthened
its foreign trade position. The rise in Chilean
copper prices above the pre-strike level made the
value of exports about $70 million higher and gov-
ernment revenues nearly $40 million higher during
the period August 1967 - February 1968 than they
would have been otherwise. An expansion in export
Note: This memorandum was produced solely by CIA.
It was prepared by the Office of Economic Research
and was coordinated with the Office of Current
Intelligence.
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volume brought further benefits. However, these
gains in export earnings and.. government revenues
-- like the gains arising from the high prices of
1966 -- were partly offset by a. reduction in foreign
aid from the United States because Chile had less
need for budgetary support.
The settlement of the copper strike in the
United States and the resumption of full-scale
production probably will begin to exert heavy pres-
sure on copper prices in the last months of 1968.
For the year as a whole, however, Chile is expected
to receive an average price of 45 cents per pound,
about the same as in 1967. During 1969 and 1970
the price is expected to drop to an average of about
35 cents. Output from new mines is likely to boost
the volume of . copper. exports substantially in 1970,
but their value probably will remain lower than in
1968.
If the value of exports, develops as expected,
the Chilean government will have to drastically re-
duce the growth of imports, which. averaged 20 percent
per year during 1966-67. ,The direct and indirect
effects of a pinch on imports on the supply of goods
seem likely to set the stage for rampant inflation --
particularly since the administration probably
will be unwilling, and-perhaps unable, to crack down
on union demands fc.large wage increases. The im-
pact of reduced copper earnings on tax revenues also
will intensify inflationary pressures and promises
to seriously restrict the government's. maneuvera-
bility in economic matters in 1969-70.
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Background
1. Chile made encouraging economic progress
during 1965-66, the first two years of the in-
cumbent Christian Democratic administration, headed
by Eduardo Frei. Growth rates were high, the
foreign payments position was strengthened, and
the chronically high rate of inflation was slowed.
The economy slumped in 1967, however, and diffi-
culties are looming for the next few years. One
of the most important elements in the progress of
1965-66 and in the unpromising outlook for 1969-
70 is the changing level of earnings from copper
exports.
2. Copper prices in the world market are of
vital interest to Chile because of the metal's
great importance in the economy. Chile has been
a leading exporter of copper for many years, and
copper typically makes up more than 70 percent of
the total value of the country's exports. Copper
exports in 1967 amounted to 615,000 tons* -- about
one-fourth of world exports -- and were valued at
some $615 million.** Copper production, which
usually represents about 15 percent cf production
in the Free World, amounted to 665,000 tons in
1967. In that year the copper industry provided
_3arly one-sixth of the total current revenues of
the Chilean government, originated 8 percent of the
gross national product (GNP), and employed about
5 percent of the industrial labor force. At the
1967 level of output and exports, a 1-cent change
in the price of copper would cause an annual change
of $15 million in the value of production and gross
profits, $14 million in foreign exchange earnings,
and about $9 million in government revenues.
Tonnages are in metric tons.
Export data in this memorandum include direct
exports of refined copper, blister copper, and
concentrates. Fabricated copper is excluded.
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3. The industry is dominated by three large
companies -- referred to in Chile as the Gran
Mineria (Large Mines) -- which produced 85 percent
of the total output in 1966. Two of the companies,
owned by the Anaconda Mining Company, operate the
Chuquicamata and Salvador mines. The government of
Chile and the Kennecott Copper Corporation jointly
own the third company, which operates the El Teniente
m'.ne.
4. The major Chilean copper companies operate
efficiently under favorable natural conditions and
earn high profits, although periodic strikes and
large wage boosts have increased production costs
during recent years.
Recent Trends in Copper Prices
5. The average annual export price received
by Chilean producers for their copper remained
* Money wages of the copper workers have risen
an average of about 40 percent per year since 1963,
but the impact of these gains on real production
costs and profits has been partly offset by suc-
cessive devaluations of the escudo that cut its
value from 2.15 escudos per US dollar at the end
of 1963 to 5.79 escudos per US dollar at the end
of 1967.
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relatively steady during 1959-64, ranging between
29 and 32 cents per pound.* Chilean copper prices
during this period were strongly influenced by the
controlled US wholesale price. The Chilean price
moved somewhat higher in 1965, reflecting the ad-
vance in world copper prices resulting from a rapid
growth of demand and the disruption of exports from
Zambia and Chile. To take advantage of the strong
market in late 1965 and early 1966, the Chilean
Copper Corporation -- the government agency that sets
the producers' price** for copper -- raised this
price in January, April, and July 1966. In August
1966 the agency abandoned the practice of fixing the
producers' price administratively in favor of a sys-
tem of producers' prices based on daily quotations
for wire bars on the London Metal Exchange (LME).
Since October 1966 the producers' price has been tied
to the asking price for three-month futures contracts
for wire bars on the LME.***
* These are unit values on an f.o.b. basis for
Chilean exports of refined copper, blister copper,
and concentrates. In 1966, refined copper and
blister copper accounted for 54 percent and 40 per-
cent, respectively, of the total value of these ex-
ports. Differences among Chile's export prices, the
export prices of other major exporters, and wholesale
prices in world markets reflect such factors as (1)
the specific form (or relative importance of various
forms) of copper being priced; (2) the cost (or
differences in cost) of transportation, insurance,
and handling of copper moving to market; and (3) the
specific contractual arrangements made concerning the
determination of export prices.
** Little or no copper is actually exported or
sold domestically at the producers' price. This price
is merely a base to which one of several complicated
formulas may be applied in determining prices for
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6. The strong demand for copper in 1966 and
the change in the Chilean pricing system brought
an increase in the average export price from 36
cents in the first quarter to 44 cents in the
second quarter and 51 cents in the third (see
Figure 1). A decline to 45 cents in the final
Chile: Export Prices for Copper, 1958-February 1968
Quarterly
Averages
Monthly Averages
(estimated)
Figure 1
01_ I 1 1 1 1 I 1 I 1 I 1 I I 1 1
co a, 0-~~ in I II III IV J F M A M J J A S 0 N D J F
rn - C) M - - rn rn rn
1966 --.- 1967 -~ 1968
quarter resulted in an average price of 44 cents in
1966, compared with 35 cents in 1965. The price de-
clined further through early 1967 and leveled out at
about 42 cents from April through July, when the US
copper strike began. The shortages of copper caused
by the strike, which restricted operations by all of
the major producers, induced a rise in the Chilean
export price to an estimated 56 cents a pound in
November 1967 and 62 cents a pound in February 1968.
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Effects on the Balance of Payments
7. These trends in copper prices combined with
a steady rise in the volume of copper exports pro-
duced a large increase in the value of copper ex-
ports in 1966 and a smaller, but still considerable,
increase in 1967. The rise in copper earnings in
1966 -- amounting to $150 million -- gave a strong
boost to the economy. The increase in export earn-
ings permitted a 30-percent increase in imports over
the 1965 level. Capital goods and foodstuffs and
other consumer goods registered the largest increases.
The imports of foodstuffs probably contributed to the
downturn in the inflation rate in 1966, while the
machinery and equipment imports raised productive
capacity. Chile also was able to boost reserves of
gold and foreign exchange by 25 percent, to $172
million.
8. In 1967 and early 1968, Chile benefited con-
siderably from the US copper strike, even though
part of the gain was offset by a reduction in US aid.
Reliable estimates of export expansion attributable
to the strike are not yet available, but the effect
of the higher level of prices on the value of Chilean
copper exports can be estimated. Based on an esti-
mated average Chilean export price of 42 cents during
the four-month period before the strike, Chile re-
ceived a windfall averaging about 9 cents per pound
for exports from August 1967 through February 1968.
Exports were averaging about 50,000 tons monthly
during the year before the strike, and the increase
in prices thus raised their value by about $70 mil-
lion.
9. The spurt in copper prices in 1967 helped
to boost the value of copper exports for the year
as a whole to $615 million, or 9 percent more than
in 1966 and 70 percent more than the average for
1960-65. Exports other than copper weakened some-
what in 1967, however, holding the increase in total
exports to less than 3 percent (see Figure 2).
Continuing rapid growth of imports -- especially
of foodstuffs and capital goods -- held the trade
surplus to $25 million compared with $85 million
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in 1966. Moreover, holdings of foreign exchange
declined during the year from $172 million to
$126 million. This decline was mainly the result
TOTAL
EXPORTS
SURPLUS
Figure 2
of large repayments of credits from the IMF and other
foreign institutions. Also, payments for imports
accelerated following the government's decision to
release foreign exchange for this purpose 50 days
rather than 70 days after shipment of the goods.
Effects on Government Revenues
10. The sizable increase in the government's
copper revenues in 1966 enabled it to greatly ex-
pand public investment, which constitutes about
three-fifths of total investa:ent and is particularly
important in agriculture, transport, and construc-
tion. At the same time, the Chilean government
Chile: Trends in Exports and Imports, 1960-67
1960 1961 1962 1963 1964
*Refined cooper. blister copper, and concentrates only
58898 4-68 CIA "Provisional
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was able to reduce its chronic budgetary deficit
to 11 percent of expenditures compared with 17 to
19 percent in the preceding three years. In De-
cember 1966, President Frei declared that Chile's
budgetary improvement and need for fiscal discipline
made budgetary support from the United States (which
amounted to $80 million in 1966) and standby credits
from the IMF unnecessary during 1967. Frei indicated,
however, that US project and sector loans would still
be requested and that budgetary support would be
? asked at a later date if the price of copper declined
drastically.
11. Frei's decision concerning US aid proved to
be hasty. The weakening of Chile's export prices
in. the first half of 1967 and the government's de-
cision to forego budgetary support from the United
States forced the curtailment of plans for public
investment in that year. The rate of growth of
public investment consequently declined from an
average of 25 percent in 1965-66 to only 8 percent in
.1967. Investment outlays for transport and housing
were actually smaller in'1967 than in 1966, and this
drop contributed to the decline in construction activi-
ty. Reduced construction activity and lagging agri-
cultural output were the main factors in the decline in
the growth rate for Chile's GNP from nearly 7 percent
in 1966 to about 3 percent in 1967.
12. A windfall in government revenues during
August 1967 - February 1968 of about $40 million was
generated by the price rise that followed the US
copper strike. This increment was not necessarily
a net gain, however. The government of Chile antici-
pated budgetary support from the United States of
about $45 million for 1968, but it has not yet been
authorized because of the high copper prices. Al-
though US-Chilean discussions in early 1968 focused
on a scaled-down request of about $15 million to
$20 million, the outcome is as yet uncertain.
Outlook for Copper Prices and Export
Earnings in 1968-70
13. The outlook for copper prices and Chilean
export earnings is favorable for the remainder of
1968 even though the US copper strike has been
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settled. it will take a number of weeks for US
producers to resume the normal flow of copper to
customers and a number of months to rebuild stock-
piles to their normal levels. US defense require-
ments for copper in 1968 are. running well ahead of
last year's requirements.. Demand probably will
remain strong relative to available supplie,, through
most of 1968, and prices are not likely to weaken
seriously before the last quarter of the year.
Chile's average export price in 1968 consequently
is expected to approximate the 45-cent average of
1967. At this price., the expected expansion in the
volume of copper exports will boost their value in
1968 to some $650 million, or 6 percent more than
in 1967 (see the table)
14. However, full recovery from the effects of
the US copper strike and substantial increases in
production capacity are expected to weaken seriously
the world market prices for copper, beginning in
late 1968. All of the major world. producers have
large expansion. programs under way; world mine
capacity is expected to increase by about 40 percent:
between 1966 and 19 72 . This scheduled expansion of
output -- averaging nearly 6 percent per year -- prob-
ably will cause. prices to drop, because demand nor-
mally does not grow that rapidly. The 42-cent price
for refined copper that was. recently announced by
Phelps-Dodge and Anaconda probably cannot be main-
tained in 1969-70 if world output progresses as
now expected. On the other hand, the substantially
increased wage rates provided in the US producers'
new agreements with the labor unions are likely to
establish a higher level of copper prices in the
future than in the early 19 6G 's . Under these cir-
cumstances, it seems reasonable to anticipate an
average Chilean export price of about 35 cents in
1969-70.
15. A decline in Chile's export price to 35
cents would substantially reduce the value of cop-
per exports in 1969. Even if a 7-percent rise in
the volume of copper exports in 19610 is assumed,
the value of exports would decline by about one-
sixth, or some $110 million. In 1970, however, the
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volume of production and exports is expected to
increase more rapidly. Two new joint companies,
one pairing the Chilean government with Anaconda
and the other with the Cerro Corporation, are
scheduled to begin production at new mines under
the "Chileanization" copper agreements of 1966.
This program calls for a doubling of copper pro-
duction over the 1966 level by 1972. The newly
established companies were given significant tax
reductions as an inducement for the private foreign
participants to invest about $500 million. By 1970
the value of copper exports is expected to regain
the level of 1967 (some $610 million). It would,
however, remain about $40 million below the level
anticipated for 1968.
Economic and Political Implications
16. Although copper earnings may hold up well
for several more months, the general outlook for
the Chilean economy during the next two and one-
half years is distinctly unfavorable. Serious
difficulties now confront the Frei administration,
which is eager to forge a strong economic record in
preparation for the congressional elections of
March 1969 and the presidential election of Sep-
tember 1970. Frei may be able, through various
expedients, to avoid any marked deterioration in
the economic situation this year. But if he ex-
ercises these options, he will aggravate the
problems that his administration will be trying to
cope with in 1969-70 -- possibly in the face of
even stronger political opposition than at present.
17. After having benefited from an export boom
during the first three years of the Frei government,
the Chilean economy will soon have to adapt itself
to a sharply reduced level of exports. The value
of exports other than copper (principally iron ore
and nitrates) seems to be leveling off after an
impressive expansion during 1964-66 and probably
cannot be counted on to offset much of the prospective
loss in copper revenues. Whereas the total value of
exports rose by more than 40 percent (or about $265
million) from 1964 to 1967 and may rise several
more percentage points this year, it probably will
decline by some $100 million in 1969 and recover
only partially in 1970.
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18. Imports can hardly continue to grow at the
average annual rate of 20 percent of 1966-67.
Indeed, even a 10-percent increase in 1968 would
threaten a small trade deficit in contrast to the
average surplus of $53 million during 1964-67.
Such an increase nevertheless might be feasible
if the administration drew on its small foreign
exchange reserves , made increased use of short-
term foreign credit, and obtained substantial
economic ass !_5tance from the United States.
19. Further increases in imports in 1969 and
1970 will be even more difficult -- perhaps im-
possible -- in view of the expected lower level of
copper earnings and continuing debt servicing ob-
ligations that will average about $150 million
annually in 1969-70. The Frei administration con-
sequently may be compelled to tighten restrictions
on imports, which would tend to depress the rate of
economic growth. Under these conditions, failure
to curb union demands for higher wages probably
would lead to rampant inflation.
20. The administration also will face the
problem of continuing budgetary strain -- especially
during 1969-70. In its budget projections for 1968,
the Chilean government assumed a copper export price
of 38 cents and consequently anticipated a decrease
in its copper revenues to some $175 million, com-
parec: with revenue exceeding $200 million in each of
the preceding two years. The 45-cent price average
that is now judged likely for 1968 will yield reve-
nues of some $220 million. A large budgetary deficit
still is probable in 1968, however, because of the
slow growth in other revenues and rapidly rising ex-
penditures.
21. The anticipated drop in the value of copper
exports in 1969 would, in itself, cut government
revenues from copper by nearly $100 million (or
more than 40 percent) and total government revenues
by about 5 percent. Revenues from copper probably
will rise in 1970 but will remain much lower than
during 1966-68. The Frei administration will have
no easy way of adjusting to this fiscal stringency.
Cutbacks in public investment would undermine efforts
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to stimulate production and provide more jobs.
Reduction of current expenditures would require
cuts in government employment and services and/or
subsidies, prompting adverse reactions from those
affected. But the political risks of growing budget
deficits financed with credit from the Central Bank
would be no less real. Added to the pressures that
have given Chile an average annual increase in prices
of about 30 percent during the past five years, a-
long with the prospect of stagnant or declining im-
ports, an expansionary policy could well set off a
still more severe inflation that would be detrimental
to the 'hristian Democrats' electoral prospects in
1970.
22. Even if production and consumption grow at
modest rates, the administration may receive few
political benefits if inflation accelerates. Gains
in real income probably would be distributed in such
an irregular and capricious way and would be so
obscured by the average person's concern to keep up
in the wcye-price race that the government would be
given little credit for maintaining economic momen-
tum. Hobbled by a weak foreign payments position,
reluctant to resist the wage demands of the unions,
prevented from taking decisive stabilizing action
-by .the opposition-controlled Senate, divided and un-
certain about what should or can be done, the Frei
government appears to have few alternatives to choose
from -- and none that can be depended on to make the
economic situation an asset rather than,a liability
during 1969-70.
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