Chile and Peru’s copper for energy transition

Chile and Peru — the world's largest copper producers with significant unexploited potential — are likely to play an important role in adjusting commodity supply chains, given the increased demand for minerals for energy transition alongside the US and European countries seeking to diversify mineral sources away from mainland China.

Chile and Peru face the challenge of rapidly expanding the output capacity for their well-established mining industries. In addition to regulatory and political uncertainty, new investors in Chile are likely to struggle to access concession land, while in Peru, they face lengthy procedures to obtain permits.

Challenge 1: Regulatory uncertainty in Chile

A new constitution that is being prepared in Chile is likely to increase the role of the state in the development of natural resources. It would continue to allow private sector involvement with tighter environmental scrutiny and higher taxes, including a new royalty.

The structure of Chile's concession system has hindered the expansion of the mining sector, blocking the entrance of new firms, particularly junior and small miners. To date, concession holders have not been obliged to develop the mineral or make investments. They can maintain concessions indefinitely, subject to paying an almost symbolic annual fee (USD10 per hectare for exploration and exploitation). Chile's mining ministry estimates that while 36% of the country is covered by concessions, less than 10% is exploited.

A law promulgated by former president Sebastián Piñera in February 2022 increases the cost of acquiring mining concessions and introduces penalties for holders who fail to develop resources while removing some mining sector tax breaks, effectively opening the sector to new concessions. The implementation of the law has been postponed from February 2023 to January 2024 because of inconsistencies related to land delimitations.

Changes to the mining concession system are highly likely to be implemented from 2024 onwards, increasing the likelihood of investment targets being established and concessions being revoked if holders fail to develop them. Chile's economy is highly dependent on copper exports, which contribute approximately 10% to the GDP, and President Gabriel Boric and future governments are likely to prioritize freeing land for new projects.

Challenge 2: Political instability in Peru

As nationwide protests against President Dina Boluarte have receded, Congress is unlikely to pass enabling legislation for an early poll quickly, reducing scope for a general election in 2023 or even 2024, given the extensive timetable needed to organize a poll. To avoid alienating her fragile center-right support base in Congress, Boluarte is unlikely to seek structural changes to the mining law.

Peru's government is unlikely to loosen environmental requirements for exploration permits, as this would trigger further opposition by local communities — who are already demanding Boluarte's resignation — particularly in the south, where many mining operations are based. Instead, Boluarte will focus on simplifying procedures to start extractive activities, which require an estimated 400 steps. Changes would likely be made either by decree or through measures that obtain the required support from center and right-wing parties in Congress.

If future elections result in a left-of-center government with a majority in Congress, regulatory changes such as more oversight powers for local authorities, more exhaustive community consultation and a higher share of the mining canon are likely.

Challenge 3: Stricter application of ESG standards

Increased awareness of environmental, social and governance standards (ESG) standards and criteria in both countries will make it harder to obtain the social license to operate. Mining projects that are perceived to cause environmental damage, not conducting proper prior consultation with local communities or indigenous groups, or breaching labor and human rights face reputational risks, delays in obtaining permits, protests and/or lengthy court challenges. They are also likely to face growing difficulties in accessing financing, as financial institutions are tightening their ESG exclusion.

Chile's President Boric is promoting changes to the environmental impact assessment system, which would tighten the requirements to obtain environmental permits and raise fines in case of non-compliance with the threat of project cancellation in cases of significant environmental damage.

Biodiversity protection will also restrict areas for mining activity. In Peru, mining companies are banned by law from operating on or adjacent to protected areas or nature reserves, with provinces and regions entitled to establish ecological and economic zoning within their jurisdiction. The protection of nature is already included in Chile's new constitution, as it is one of the agreed basic principles, while a bill to create a Biodiversity and Protected Areas Service is being debated in the legislature.

Water scarcity threatens increased restrictions for mining companies. The long-running drought in northern and central Chile has become an increasingly critical hurdle for mining projects. A glacier protection bill in Congress would ban operations at glaciers and severely restrict it in permafrost areas.

Requirements for prior consultation are likely to expand, with enforcement to be strengthened. Prior consultation in indigenous land is obligatory and binding in Peru. In Chile, government officials have suggested starting consultation with communities prior to an environmental impact assessment (EIA), as it is now. With local communities and nongovernmental organizations (NGOs) becoming increasingly aware of the legal and political instruments and mechanisms available to hinder project development, they are likely to demand stronger consultation, expanding this to a wider range of affected parties (not only indigenous groups) and to make the outcome binding.

Regional political dynamics are likely to exacerbate anti-mining activism and decisions over land use. Anti-mining activism is likely to increase because of political instability in Peru. Many regional governors are demanding Boluarte's resignation and an early election. They are, therefore, likely to support anti-government protests to pressure the national government, particularly affecting mining operations in the southern regions. Some regional governors appear likely to encourage anti-mining protests directly.

Note: This report includes input from the Price and Purchasing team of S&P Global.

Roger Padierna, Research Analyst, Latin America country risk, also contributed to this report.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.