CESCO-Rising power costs threaten Chile's mining prowess

SANTIAGO, April 11 Fri Apr 12, 2013 3:49am BST

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SANTIAGO, April 11 (Reuters) - The high cost of energy in Chile is threatening the competitiveness of the country's copper industry and poses a major challenge for new development, industry executives at a copper convention in the Andean nation said on Thursday.

Electricity costs in Chile, the world's top copper producer, have risen 11 percent per year since 2000, making it one of the most expensive places in the world to secure energy for mining projects.

With regulatory gaps making it difficult to permit new power infrastructure, the situation could get critical, Diego Hernandez, chief executive of Antofagasta Plc, said at the CESCO/CRU copper conference in Santiago -- the world's biggest gathering dedicated to the metal.

"I think Chile can continue to have a huge advantage in mining," he said. "We have the deposits, but if we don't solve, among other things, the fundamental issue of making energy happen at a competitive price, it's not going to succeed."

Chile has the world's richest reserves of copper, which is used in construction and wiring, among other things. It expects to produce some 5.58 million tonnes this year, up 2.6 percent from a year ago.

But grades are falling at the country's massive copper mines, making it difficult to maintain output and putting pressure on costs. The problem has been compounded by high labor costs and a steep increase in power rates.

While copper mining costs around the globe rose 30 percent on an average from 2007 to 2012, it climbed 60 percent over the same period in Chile, according to data from metal consultancy group CRU.

High energy prices, caused by delays in bringing new capacity online, play a major role in boosting costs. The mining sector consumes about a third of Chile's power.

"The big issue today, that we did not see a few years back, is the difficulty in permitting new electricity projects," Hernandez said.

Mining firms and power producers are pushing the government to resolve the regulatory issues. They warn of major output problems if the issues are not resolved.

Power demand on Chile's northern grid, home to many copper projects, is expected to rise by 8.4 percent over the next 10 years, but no major new plants are set to come online until 2016, according to data from CRU.

The central grid, used by mining projects and the city of Santiago, is expected to see demand increase by 5 percent, with new supply coming online this year.

Part of the delay with new plants is an unclear regulatory process for approving new developments, whereby projects can be derailed by lawsuits from local communities who do not want the infrastructure built in their backyards.

To combat that issue, the industry needs to do a better job of getting communities on board with developments by involving them in the process, said Jose Antonio Valdes, chairman of the Generators' Association of Chile.

"Let's be proactive, that is the task of the industry," he said. "This problem needs to be solved among all of us, it cannot be solved behind closed doors."

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