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China's Economic Slowdown May Hit Chile's Mining Sector

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"China's increasingly restrictive monetary policy may restrict copper demand."

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Chile's mining sector may be hit by a slowdown in Chinese economic growth, dictated by the country's increasingly restrictive monetary policy, which threatens to restrict demand for copper and other raw materials.

However, the mining industry is primed for substantial growth over the next few years and expects a substantial increase in silver, copper and especially gold output over the forecast period to 2015. Growth is likely to peak in 2012 and 2013 as several new expansion projects come to fruition.

Copper remains the most important sub-sector within Chile's mining landscape, accounting for 42% of the country's total export revenues in 2009. Over the short term, we warn that Chile's copper production is likely to be restricted by falling grades at some of the largest mines, leading us to revise our output forecast downwards in Q311. However, we expect a significant boost in output over the medium term as several expansion plans come online.

The long-term prospects for copper production look positive, however, with several expansion projects expected to come online over the medium-term. Overall, we expect Chile's copper production to grow at annual average rate of 4.9% over the forecast period, reaching 6.87mnt in 2015, up from 5.42mnt in 2010.

Chile has the rare combination of a very favorable business environment and substantial mineral reserves. The increased mining tax from 4%–5% of operating profit to 4%–9% has so far been met by little opposition from miners, either local or overseas.

In addition, Chile's reserves of copper and gold are likely to outweigh any concerns over tax rates. Overall, Chile will remain a highly attractive country for foreign investment as the center-right government is eager to maintain foreign direct investment flows into the country. That said, we expect Chile to tighten its safety laws.

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