MercoPress. South Atlantic News Agency

Copper year but also fears of the Dutch disease

The current prices of copper have eluded all forecasts and 2005 will be remembered in Chile as the “copper year”.

Strong demand from China, the rebuilding spree in several regions of United States following the destructive hurricane season and open speculation from huge roaming funds looking where to invest pushed the red metal international price close to 2 US dollars per pound.

However there are also concerns in Chile about the future of copper markets if prices remain at its current level. Two are the main reasons looking back into distant history and some more recent experiences in other countries.

Chile with vast natural deposits in the north of the country was once the world's main supplier of saltpetre. However price speculation led to other substitutes and options, virtually killing the industry by the late XIX century.

And more recently is the experience of the "Dutch disease" which has more immediate and significant impacts on any economy. The name of the disease comes from Holland when in the seventies huge deposits of natural gas were discovered, causing an export boom of the fuel, but at the same time strengthening the Dutch currency, guilder, to such an extent that it virtually eliminated the competitive edge of other export industries, mainly manufacturing.

Therefore Chilean authorities although pleased with the extraordinary price of the red metal, (each extra cent means an additional 100 million US dollars for the exchequer), the medium and long term effect for the non-copper export industries could be devastating with an overvalued currency.

Even when good economics indicates that strong prices will attract more investments, therefore helping to "normalize" the situation, it will inevitably diminish resources for other industries, limiting Chile's development potential as copper prices begin moving at a more long term stable range.

Another example of Dutch disease happened with Colombia and coffee in the seventies. Prices soared five times, exports tripled, the US dollar collapsed in Colombia and non-coffee industry competitiveness almost disappeared.

The latest news from world copper markets indicates that China, as consumer of 20% of the world production, is involved in operations to bring down the price by announcing its intention to sell reserves.

The articulator is China's State Reserves Bureau, (SRB) which manages metal stocks, and has announced the sale of 20,000 tons of copper. However apparently SRB's main operator in the London's Metals Exchange has been sent back to China following miscalculated operations that could have left the Bureau exposed to a future repurchase of anywhere between 150.000 and 200.000 tons.