Antofagasta sounds warning on Chile copper industry

Chile's copper industry risks losing its competitiveness, as productivity declines to levels last seen in the early 1990s due to ageing mines and higher labour costs, miner Antofagasta has warned

Chile, the world's biggest copper producer, has invested roughly the same amount in its mining industry since 2004 as it did in the previous decade, yet there has barely been any growth in production, Diego Hernandez, chief executive officer of UK-listed Antofagasta, said in an interview at an industry gathering in the country's capital.

Between 1990 and 2004 production grew by 9.2 per cent annually while productivity almost doubled, he said.

"Fifteen years ago Chile still had a competitive advantage in terms of labour as a component of our cash costs," Mr Hernandez said, noting that labour at the time was cheaper than developed countries such as Australia, Canada, and the US but less productive.

"Today we have similar salaries but we kept the same productivity we had before. Now we have a competitive disadvantage," he said.

The fate of the copper industry is key for Chile, whose economy last year grew by the slowest pace in five years as demand weakened from its biggest customer, China. Chile alone produces about a third of the world's copper, and in addition to Antofagasta, companies including BHP Billiton, Anglo American and Japan's Sumitomo Corp all have operations in the country.

If increasing amounts of capital are needed to produce the same amount of output, that could hobble the industry's ability to grow - especially as price declines shrink revenue.

Although the price of copper, used in wiring and electrical goods, has recovered from a January slump, it remains near five-year lows below $6,000 a tonne.

Codelco, Chile's state-owned copper miner and the world's largest producer, plans to invest over $20bn in the next five years just to maintain current output.

Chile's president Michelle Bachelet, who was re-elected in 2013 on promises to tackle inequality, is in the midst of an ambitious reform agenda that will include a bill on labour reform. Critics say the bill, due to be debated later this year, will enhance the power of trade unions and reduce flexibility.

Mining is the most unionised industry in the country, according to Antofagasta.

The loss in productivity since 2004 is the result of a decline in the ore grade - the quantity of copper per unit mined - and growth in the workforce, Mr Hernandez said. A shortage of qualified labour and strong unions have driven an increase in salaries, he added.

In 2009 a shovel operator earned $47,000 and last year $69,000, a 47 per cent increase, according to his data.

Many of the country's largest mines are ageing, meaning there is less copper per unit extracted, forcing miners to go ever deeper underground. The country's El Teniente mine has been producing copper since 1904 and now has more than 2,400km of tunnels, making it the largest underground mine in the world.

When copper prices were high, Chile focused on increasing production rather than costs, said Mr Hernandez, noting that the industry now needs to make fuller use of automation and increase training.

"We need to work hard first to improve the quality of our people; secondly we need to look and change our working practices," he said.

Antofagasta, founded in 1888 as a railway company, is part-owned by Chile's Luksic family, who purchased its holding in 1980.

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