Chile's Fuel Price Spikes Affect Mining, Pressures Kast

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Written by Amir Richani for IIR News Intelligence (Sugar Land, Texas)

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Summary

Chile's government scaled back fuel price cushioning amid the war in the Middle East, triggering a significant price increase. The mining sector is among those affected by the measure.

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Prices as High as the Andes

Chileans were hit with a significant fuel price increase in the domestic market starting March 26, after the government scaled back the cushioning effect on its fuel price stabilization, amid soaring global oil prices linked to the Middle East conflict.

The newly elected government of Jose Antonio Kast adjusted the Stabilization Mechanism of Fuel Prices (MEPCO), which had kept fuel prices in check amid higher international prices to protect Chileans, but also had impacted public finances.

On March 26, 93-octane gasoline rose by about 372 Chilean pesos (about US$0.40) per liter, while 97-octane gasoline increased by 391 Chilean pesos (US$0.42) per liter. Diesel recorded the largest spike at 580.3 Chilean pesos (US$0.62) per liter.

Chile is particularly exposed to international oil and fuel prices, as it relies entirely on imports of fuel or crude to meet domestic demand.

According to the Ministry of Finance, Chile has spent US$220 million in keeping fuel prices under control since the war began. Only in the week between March 19 and March 25 did the government spend US$140 million.

The government forecasted that up to US$4 billion could have been spent over the full stabilization period.

Kast's government has come under pressure following the decision, with protests erupting against him. However, Kast has followed through with the decision. "We will act with the urgency it deserves," he said.

As a result, the government has implemented a relief package that includes a freeze on public transport prices in Santiago through the end of the year; a monthly subsidy of 100,000 pesos (US$107) for taxis and other transport sector operations for up to six months; and the stabilization of kerosene prices, among other measures.

"We are facing an international situation that will not normalize in the short term, so we have opted for targeted measures that allow us to protect people in essential aspects of their daily lives, such as heating and mobility, while safeguarding the responsible use of public resources," said Minister of Finance Jorge Quiroz.

Mining Under Pressure

The impact on mining can be substantial. Diesel is central to Chile's large-scale mining industry, especially for operations that rely on heavy-haul trucks and mine equipment. According to a presentation by Consejo Minero, fuel costs account for 6% of the components of copper mining's operational expenditure. Therefore, a sudden increase in diesel prices can directly lead to higher production costs in Chile.

Chile accounts for close to a quarter of the world's copper production, while the mining sector represents one of its key industries. Industrial Info has mapped 150 mining plants in Chile, excluding brick and ceramic plants, as well as cement and glass plants. From those, 62 pertain to copper ore mining assets.

At the same time, Industrial Info is tracking more than 470 mining projects in Chile, excluding bricks and ceramics, as well as cement and glass plants, totalling investments of US$100.87 billion. Of those, 257 pertain to copper projects with investments of US$70.16 billion.

As part of the government's measures, the diesel tax recovery available to non-transport companies, including mining firms, has been reduced. This means mining companies must now absorb more of the tax burden on diesel.

On the changes in diesel tax recovery, Joaquin Villarino, the president of Consejo Minero, told Chilean newspaper La Tercera: "While we appreciate the effort to mitigate fuel prices, it is not equitable to alter a tax to selectively burden strategic sectors, thereby affecting their competitiveness. Therefore, we trust that the search for additional public resources can be directed toward mechanisms that safeguard the economic signals necessary to foster investment and growth in the country."

Key Takeaways

• Chile's government stops cushioning fuel prices, triggering a spike.
• The government has implemented policies to shield the population from the increase.
• The mining industry could be among the most affected.

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About IIR News Intelligence
IIR News Intelligence is a trusted source of news for the industrial process and energy markets, powered by Industrial Info Resources' Global Market Intelligence (GMI).

About Industrial Info Resources
Industrial Info Resources (IIR News Intelligence) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking more than 250,000 current and future projects worth $30.2 trillion (USD).