March 14, 2005

Things are heating up in Latin America

Here in the cone of South America as in many parts of the world, one of the major issues is energy. What with the Andes and all, there are plenty of hydroelectric plants and underground thermal energy but the tricky one is, you guessed it, oil and gas. Sunday the 13th of March, Argentine President Nestor Kirchner visited the centre-left President of Chile; Mr. Lagos. Top of their agenda is energy. In particular, cheap gas supplies from Argentina for Chilean electricity generation.

Chile has become used to a dependable and cheap gas supply from their Argentine neighbor which helps to keep their electricity prices down. Bolivia, Chile’s other gas-rich neighbor refuses to export gas to Chile as a means to bring the Chilean government to the table to negotiate a passage for land-locked Bolivia to the Pacific Ocean. When Bolivia plays football with Chile the Chilean team chants, “Vamos a la playa,” referring to the Bolivia coastline that became part of Northern Chile after the Bolivian defeat in the War of the Pacific just over a hundred years ago. With Argentina strapped for gas and oil, and Bolivia steadfastly refusing to export to Chile, Chile finds itself gas starved and has to import from Argentina. Argentina in turn, of course, imports more and more of its supplies from Bolivia thereby creating a back-door supply route for Chilean gas.

Argentina has become incredibly dependent on a cheap supply of gas. It intends to build another gas pipeline from Bolivia to bring in supplies to its northeastern region when things cool down politically in Bolivia. When Bolivia President Mesa offered his resignation to congress last week, the first President on the phone to offer his country’s support was Mr. Kirchner. Cheap energy in the form of natural gas (CNG by its spanish initials) is essential to the poorer Argentine driver as about 40% of their cars are converted to work on gas. One cubic meter of gas will allow a driver to drive farther than a liter of gasoline and the price is less than half for the gasoline. But, back to Mr. Kirchner and Mr. Lagos in Chile. Lagos wants Mr. Kirchner to prioritize gas supplies to Chile, a touchy subject right now. Chile has become rather dependent on this supply for cheap electricity supplies locally. Argentina has been supplying less and less gas to Chile prioritizing its own national needs. This has meant that the Chilean government has been forced to purchase diesel on international spot markets to make up the deficit pushing up their costs. Threats of escalating energy costs especially for electricity generation for the mines and cities of Chile are making Lagos unpopular and he needs a favor from his neighbor.

Speaking of favors Mr. Kirchner has made himself very unpopular with international oil concerns (especially Royal Dutch Shell) by advocating a boycott of their products in Argentina. He went on record saying that not a liter of oil would he buy for the Presidential limousine in a Shell garage citing their 4% price hike as the main reason for the boycott. In the first quarter of 2005, Argentina registered a 3.5% inflation rate which is making it difficult for the government to renegotiate their loans with the IMF hence Kirchner’s sensitivity to price hikes, or so it seems. It could be argued that Kirchner’s targeting of Shell may have more to do with the generous purchase of the Argentine government bonds by Venezuela’s President Chavez last month. Only weeks back Hugo Chavez was in Buenos Aires where he made a buy-out offer for Shell Argentina. Though Shell claim that their Argentine operation is unprofitable, they refused the offer saying that it represented only 20% of their estimated market value. Shell was very indignant insisting that a presence, even an unprofitable presence, in Argentina is better than no presence at all. Chavez wanted Shell’s infrastructure for his Petrosur project and he returned to Caracas a tad miffed. If there is one way to reduce the price of an international oil company’s assets, the president advocating a national boycott might be it.

Shell and all ‘Western’ oil concerns are not fond of the Petrosur project. A Latin American oil infrastructure project based on nationalized oil companies with subsidized prices for Mercusor members is hardly their cup of tea. It is hardly surprising that they are loathe to sell their private infrastructure to become part of it, especially to Hugo Chavez. The Financial Times of London wrote a scouring lead-editorial against the boycott saying that Kirchner would do well to learn lessons from Chile’s corporate-friendly attitude. They supported their threat by saying that a country starved of capital by a debt that amounts to 75% of GNP has little reason to discourage international private investment (by pissing off Shell).

In a strange coincidence President Bush announced, the same day, that he would be taking measures to reign in Mr. Chavez. In what amounts to a serious threat possibly involving sanctions, another coup attempt or even assassination (as Mr. Chavez and Mr. Castro have been predicting); Bush is out for blood. Chavez has been counter threatening that if his country stopped supplying 17% of US national oil supplies, oil prices could rise to USD$100 a barrel. The guns are out of their holsters. One hopes that diplomacy will support a democratic and amiable solution, possibly Chavez’s recent visit to President Chirac of France may help but in this world of unilateral military strikes, anything might happen.

Posted by Tony Phillips at 06:42 PM

March 03, 2005

A Question of Royalty

By Latin American standards, Chile is an industrialized nation par excellence. Their exports are on a par with Venezuela's, ranking a close third to Brazil and Argentina. But, when it comes to the primary industries, like the huge mining industry, in many cases only extraction and transportation is industrialized.

In fact nearly 80% of exports by value are primary, unprocessed or simple manufactured items such as copper ingots or wooden planks. Most of the metals are smelted abroad, from ore shipped in bulk from Chile’s network of ports. This is even the case with copper. Chile is the world’s largest source of copper. The nationalized ‘Codelco’ mines who also ship ore abroad for processing, leaving Chile in the ludicrous position of having to import some metals for domestic use. The Chilean mining industry represents a large and important sector of the economy in terms of export figures but things could be better.

Apart from Codelco and a few smaller operations Chilean mining is largely owned and operated by trans-nationals, even the Bush family has gold mining interests here. Most mines are described as mid-sized (large industrial operations representing one one to ten thousand tonnes of production per day) with up-to-the-minute explosives and equipment excavating large open-face mines.

Driving around Chile’s dusty Northern deserts (where most of the mining operations are to be found), it becomes quickly evident which areas have the economically important mines; they’re the ones with the good access. Some of the country’s best and newly-paved roads service these mines, enabling US contractor vehicles to speed in-and-out in the V8 Chevys. When it comes to shipping ore, the roads supplement the network of narrow gauge railways transporting ore from the leaching pits to the ports. In a country where many local roads are rough sandy tracks, this is a major structural advantage, provided, in many instances, at the expense of the Chilean tax-payer. One would hope that the vast mining industry appreciates this industry-friendly gesture, but they don’t seem to be returning the favor.

Chile’s largest mining company had a turnover of about USD$4 billion in 2004. That turnover is greater than the annual taxation that comes from all of the mines in the country! Not just greater, very much greater. Between 1990 and 2003, the total amount of taxes paid to the Chilean government by companies mining on national soil was $1.9 billion dollars. The socialist-leaning government believes that they can do better.

The Lagos government, under the auspices of house secretary Nicolás Eyzaguirre, has offered to enter into negotiations with the powerful mining interests to change matters but they don’t want to listen. Mr. William Hayes, the President of the Consejo Minero (the large mining owners club) explained in an interview in the March 1st edition of Chile’s daily “Finance Daily” that his organization “… had no plan to negotiate with the [Chilean] government”. The topic: Royalty II, the Chilean government’s attempts to supplement the puny taxes from companies mining Chilean deposits.

Speaking about the Royalty II project, Mr. Hayes described the governments plans to augment income from the mining sector as a “discriminatory tax”. When asked about bumper earnings in 2004, the University of San Francisco graduate explained away the record mining profits last year, as the reward of a decade of investment, skewed by global commodity price highs.

Let’s face it, the mining industry is not used to such impositions from the Chilean Governent. Only 30 years back Chile experienced a CIA assisted coup leaving them in the iron fist of dictator (General Pinochet), his laissez-fair economists, a dead President: Salvador Allende, and more than one thousand other ‘disappeared’ citizens.

The reason for this coup was, of course, the protection of foreign investment interests, though it was couched as an intervention against the ingression of communism. Or in Henry Kissinger's terminology the act was justified by saving the country from its own 'stupidity' (read Democracy).

In '73 it was not just the re-nationalization of the copper mines that disturbed the Chilean oligarchy and their foreign investor friends, but curtailments of the 'freedom' of the infamous US-based telecommunications company ITT (now ironically replaced by Spain's Telefonica).

Nor was this coup an isolated incident. History shows that there have been many other coups and, worse still wars to protect foreign investment interests. For example, at the late 18th. century was a particularly profitable one for Guano mining in the northern deserts. Threats of increased taxation lead to direct intervention. The mines, mostly English owned, used their influence to lead Chile to war with its neighbors in the so-called War of the Pacific.

When Bolivia re-asserted their territorial claims, thus threatening the British fertilizer mining companies with higher taxes, the Chilean navy was brought in to attack Lima. Their success ensured Chile’s victory in the war against Bolivia and Peru. The result: an extended Chile, the annexation of Bolivia’s coast and some of southern Peru’s and (most important) mining-as-usual for the British. All this to protect foreign corporate mining profits? Hell, I’d be smug too.

In a country with this kind of corporate arrogance, the initiation of the Royaly II program is a bold step. It represents a considerable ‘concession' from mining companies who hate paying taxes, but especially hate to pay royalties, as these cannot be as easily hidden by accelerated depreciation etc. The Royalty II program is expected to become legislation by May 2005, however it is likely to meet with stiff opposition. It has already become an issue in the upcoming Presidential election with the mining interests likely to fall in behind ultra-conservative candidate Joaquín Lavín .

Chile is one of Latin America’s most (neo)liberalized economies (a legacy of the billionaire ex-dictator of the country one Senator for Life Mr. Augusto Pinochet Ugarte). It has yet to be proven that Pinochet's huge personal wealth can be attributed even particaly to a low taxation regime for the mining industry. However, it is hard to believe that his fortunes could have accrued without some generous donation. I mean he did lead the coup to depose Allende and that has got to be worth something.

In the words of William Hayes: “… we shall see. One day at a time. … The parliamentarians have their work cut out for them and we do ours. They need to make decisions as to what is right for the country. It is obvious that it isn’t good for the Mining Sector.”

This is definitely one to watch.

Posted by Tony Phillips at 05:03 PM